Points to note regarding foreign tax credits for Personal Income Tax (PIT)
- US CPA
- Masaya Sakasai
Vietnamese residents who receive income in a foreign country may be required to pay both PIT tax in Vietnam and in the foreign country. Many residents avoid double taxation complying with the law. Under Vietnamese law, PIT tax paid abroad can be deducted if the specified conditions are fulfilled. We explain this issue in this article.
I. Procedures for deduction of tax paid in foreign countries
The deduction of the amount of tax paid abroad from the amount of tax paid in Vietnam is stipulated by Vietnamese laws and tax treaties. Details are as follows.
1. Vietnam laws and regulations
Article 26, Paragraph 2 of Circular No. 111/2013/TT-BTC (a notification regarding cases where taxes paid abroad are incurred) explains as follows:
“e.1) If a Vietnamese resident has income overseas and pays PIT according to foreign laws and regulations, the tax paid abroad will be deducted. The deductible tax amount shall not exceed the tax amount according to Vietnam’s tax rate table allocated to foreign income. The allocation rate is determined by the ratio between the amount of income generated abroad and the total taxable income.”
b. Required documents
According to Article 12, Paragraph 1 of Decree 126/2020/ND-CP, and 9.2 points and 9.9 points of Clause b of Appendix I issued by Decree 126/2020/ND-CP, the required documents regarding the amount of tax paid abroad in the PIT tax return documents are as follows.
When declaring a PIT Final Tax Return, the amount of tax paid abroad will be deducted from the PIT tax return. Then, submit the PIT Final Tax Return and the documents listed in (b) above to the tax office within the deadline (The normal deadline is the last day of April of the following year).
2. Legal provisions regarding application of tax treaties
Article 48 of Circular 205/2013/TT-BTC on methods for eliminating and reducing double taxation explains as follows:
“If a Vietnamese resident has foreign income and pays tax in a country that is a party to a tax treaty with Vietnam, and if Vietnam undertakes to implement tax credit measures under the treaty, when a resident files a PIT declaration in Vietnam, the income is included in Vietnam taxable income according to Vietnam’s current tax law. In addition, the amount of tax paid in a contracting country will be deducted from the amount payable in Vietnam.”
b. Required documents
According to Article 62, Paragraph 3a of Circular 80/2021/TT-BTC, which guides the application documents for the deduction of taxes paid abroad based on tax treaties, the required documents are as follows:
In practice, document (1) is necessary. Regarding documents (2), (3), and (4), depending on the opinion of the Vietnam Tax Office, there are cases in which all of the documents are required, and there are cases in which only one of the three documents is required, so the response differs. Although there are many cases where documents (4) or (3) and (4) are requested, it is recommended to check with the competent authorities before actually proceeding with the procedure.
3. Recent trends in PIT deduction and practical points to keep in mind
Based on Vietnam’s laws and tax treaties, deductions for taxes paid abroad can be applied according to the procedures in Item 1 or 2 above. In other words, if a taxpayer pays tax in a foreign country, and that country does not have a tax treaty with Vietnam, or has a tax treaty but does not make deductions according to the treaty, the taxpayer should proceed according to item 1. On the other hand, if the country has a tax treaty with Vietnam, the taxpayer should follow item 2.
Currently, deductions for taxes paid abroad in Vietnam are applied as follows:
Based on the above, we believe that the tax authorities are gradually reducing the number of deductions for tax paid abroad to only one item based on the application of the provisions in item 2 above. Therefore, please keep the following points in mind in your future actions.
II. Calculation of the deductible amount
In accordance with the provisions of items 1 and 2 above, the deductible tax amount does not exceed the tax amount according to the Vietnamese tax rate table allocated to foreign income. The allocation rate is determined by the ratio between the amount of income generated abroad and the total taxable income.
Mr. A, a Japanese citizen, has become a resident of Vietnam and works for a foreign company in Vietnam. Mr. A pays personal income tax on his worldwide income (gross income, income that is not net guaranteed).
Japan has concluded a tax treaty with Vietnam. Information on Mr. A’s income for the tax year 20XX is as follows.
Income for 10 months working in Vietnam:
・Taxable income: 400,000,000 VND
・Compulsory social insurance: 20,000,000 VND
・Mr. A has two children under the age of 18 and has registered for dependent exemption according to regulations.
Income for 2 months working in Japan:
・270,000,000 VND (personal income tax 30,000,000 VND is withheld at source*)
The calculation method for the maximum amount that can be deducted from Mr. A’s foreign tax in Vietnam in 20XX is as follows.
→Comparing with the withheld personal income tax of VND 30,000,000* and the foreign personal income tax amount corresponding to foreign income in ⑥ above, the maximum amount that can be deducted from the tax paid abroad is 30,000,000VND.
① Circular 111/2013/TT-BTC
② Circular 205/2013/TT-BTC
③ Decree 126/2020/ND-CP
④ Circular 80/2021/TT-BTC
⑤ Official letter 4740/TCT-CS published October 13, 2017
*This article was translated by Yarakuzen.