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Points to note regarding foreign tax credits for Personal Income Tax (PIT)

2023/11/24

  • US CPA
  • Masaya Sakasai

Introduction

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

a. Principles

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.

  • (1) Original tax payment certificate issued by a foreign tax office
  • (2) If the tax office cannot issue (1) above in accordance with foreign laws and regulations, a copy of the bank voucher for the amount of tax paid in the foreign country (signature of the taxpayer is required)

    • c. Procedure

    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

    a. Principles

    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:

  • (1) Exemption Application Form No.02/HTQT（Giấy đề nghị khấu trừ mẫu số 02/HTQT）
  • (2) Copy of foreign PIT return (signature of taxpayer is required)
  • (3) A copy of the bank voucher for the amount of tax paid in a foreign country (signature of the taxpayer is required)
  • (4) Original confirmation of tax paid from foreign tax authority

    • 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.

    c. Procedure

  • ・Submit the deduction application documents to the tax office as soon as you have prepared the necessary documents according to the tax treaty.
  • ・The tax office will confirm the deduction application documents within 10 to 40 days from the day it receives all documents. If it is determined by the tax office that the taxpayer satisfies the conditions for the deduction, the tax office will issue a notification of sufficiency for the deduction in accordance with the tax treaty.
  • ・Taxpayers must declare a PIT Final Tax Return within the deadline and receive a credit for the amount of tax paid abroad. After that, submit the PIT Final Tax Return, deduction application documents, and notification of deduction sufficiency conditions to the tax office(The normal deadline is the last day of April of the following year).

    • 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:

  • ・Before 2022: In many cases, a credit for the amount of tax paid abroad is applied in accordance with item 1 above. Additionally, the tax office does not require you to submit a tax treaty deduction application pursuant to item 2 above.
  • ・From 2022 onwards: In addition to the documents pursuant to Item 1, the tax office is likely to additionally require the submission of a tax treaty deduction application pursuant to Item 2.

    • 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.

  • ・If a taxpayer pays tax to a country with which there is no tax treaty, there is a risk that the amount of tax paid in that country cannot be deducted in Vietnam.
  • ・In order to reduce the risk that your application will not be approved when requesting a credit for the amount of tax paid in a foreign country, we recommend that you follow the procedures in accordance with the provisions of Item 2.
  • ・If you wish to apply for a credit for the amount of tax paid abroad in accordance with the provisions of Item 1 without applying a tax treaty, we recommend that you obtain a written opinion from the tax office.

    • 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.

    [Example]
    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.

  • ① Total income: 700,000,000VND.
  • ・Vietnamese taxable income: 400,000,000VND
  • ・Japanese taxable income: 270,000,000 + 30,000,000 = 300,000,000VND
  • ② Total deduction items
  • ・Compulsory social insurance premium: 20,000,000VND
  • ・Basic deduction and dependent deduction: (11,000,000×12) + (4,400,000×12×2) = 237,600,000VND
  • ③ Taxable income = 700,000,000 – 237,600,000 = 462,400,000VND
  • ④ Monthly taxable income = 462,400,000 VND ÷ 12 = 38,530,000VND
  • ⑤ Annual personal income tax amount = (38,530,000 x 25% – 3,250,000 VND) x 12 months = 76,600,000 VND
  • ⑥ Foreign personal income tax amount equivalent to foreign income = 76,600,000 × (300,000,000 ÷ 700,000,000) = 32,830,000VND

    • →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.

    References:
    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.

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