Amendment to the Singapore-Vietnam Double Taxation Agreement
By Tom McClelland
Posted: 3rd October 2012 08:44Singapore has historically been a favoured holding company location for investment into Vietnam. The Singapore-Vietnam Double Taxation Agreement (“DTA”) has been a major reason for this. In September Singapore and Vietnam signed a second protocol to amend certain Articles of the Singapore-Vietnam Double Taxation Agreement (“DTA”). In this article, the principal changes are discussed and in particular how the amendment to Article 13 (Capital Gains) may affect Singapore tax residents investing in Vietnamese companies.
Overview of Capital Gains Tax in Vietnam
Based on current tax regulations in Vietnam, gains from the disposal of shares and capital interests held in a Vietnamese company by an offshore entity are subject to the corporate income tax rate of 25% on the net gain. If the share disposal relates to shares in a Vietnamese public joint stock company, a tax rate of 0.1% may apply on the gross sales proceeds instead of the 25% tax on the net gain.
Exemption of Capital Gains under the DTA
Currently, gains derived by Singapore tax resident investors from a sale of shares in a Vietnamese company would generally be exempted from capital gains tax in Vietnam under Article 13(4) of the DTA, which reads as follows:
“Gains from the alienation of any property other than that referred to in paragraphs 1, 2 and 3 shall be taxable only in the State of which the alienator is a resident.”
Accordingly, where the Singapore investor is a Singapore tax resident, Singapore tax residents will generally be exempted from Vietnamese capital gains tax on gains from sale of shares in Vietnamese companies. This provided a favourable platform for Singapore investors looking to acquire and hold shares in Vietnamese companies including Vietnamese companies owning real estate in Vietnam through setting up a special purpose vehicle in Vietnam to hold such property.
Amendment of Capital Gains Article in the DTA
On 12 September 2012, Vietnam and Singapore governments signed a Protocol amending the DTA. The Protocol has not been ratified and will be effective in respect of capital gains in the calendar year following ratification.
Once the protocol becomes effective, relief from Vietnam capital gains tax will no longer be available unconditionally under the DTA. In particular, where the shares in the Vietnamese companies derive the greater part of their value directly or indirectly from immovable property (i.e. real estate), relief from Vietnam capital gains tax will not be available under the DTA.
Once effective, Articles 13(4) and 13(5) of the DTA will read as follows:
“4. Gains derived by a resident of a Contracting State from the alienation of shares, other than shares of a company quoted on a recognised stock exchange of one or both Contracting States, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident.”
On the other hand, if the value of the Vietnamese company falls below the threshold stipulated under the DTA (i.e. is 50% or less of the value of the Vietnamese company is derived directly or indirectly from immovable property), Singapore resident investors may continue to enjoy the capital gains exemption under the DTA.
The fact the words “deriving 50% of their value directly or indirectly from immovable property” have specifically been used shows a specific intention that the amendment will also apply to multi-tier shareholding structures.
Implications for Singapore Tax Resident Investors
With this amendment, Singapore tax resident investors deriving gains from the sale of their investments in Vietnam would need to review carefully whether they might be exposed to capital gains tax in Vietnam on the sale of such investments.
It should be noted that the term immovable property is defined under Vietnam law to include land, structures attached to land and property attached to those structures and the amendment provides no exception for business premises. Accordingly, this amendment could have implications beyond the real estate industry.
Various strategies may be available to manage any adverse tax implications before as well as after this amendment become effective.
The protocol introduces the concept of service PE which similar to the UN Model tax treaty. Under Article 5 of the DTA a PE will now be created even though the enterprise has no fixed establishment in the other country by:
3. (b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period;”
Introduction of Transfer Pricing Adjustment
In this protocol, Associated Enterprises (Article 9 of the tax treaty) refers to the concept of transfer pricing adjustments if arm’s length principles are not followed. The adjustment would be agreed by tax authorities of both Contracting States.
This is a new addition to the framework for implementing transfer pricing adjustments under the current Vietnamese transfer pricing regulations (i.e. Circular 66) and also the new provisions on Advance Pricing Agreements in Vietnam’s draft Law on Tax Administration.
Improvement of Coordination on Exchange Information between Vietnam & Singapore
Consistent with Singapore’s move to amend its existing DTAs to include exchange of information provisions in this protocol, Exchange of Information (Article 27 of the tax treaty) is amended to widen the types of and circumstances in which information can be exchanged between the tax authorities of Vietnam and Singapore.
Information that is “foreseeably relevant” to tax administration and its enforcement in the other country is required to be provided. The information may not be necessary for the tax authority of, for example Singapore but it is required to obtain it for the tax authorities of Vietnam on request. This will have implications from personal income tax to transfer pricing and is consistent with the new widened information exchange provisions under Vietnam’s draft Law on Tax Administration.
Significantly this change will be effective immediately after the protocol is effective and not the following calendar year.
Other changes which may directly or indirectly impact Singapore enterprises with income arising from Vietnam include:
- Dividends (Article 10 of the tax treaty) (if taxed under Vietnam domestic law) will not be exempt if paid to the Government of Singapore from carrying on commercial activities.
- Interest (Article 11 of the tax treaty), the source country may tax up to 10% or at a lower rate if there is any agreement with any other state in which a lower rate exists.
- Royalties (Article 12 of the tax treaty) in “all other cases”, the source country can tax up to 10%. This has been reduced from the current rate of 15%.
Tom McClelland is one of Vietnam’s most experienced tax specialists, having advised a wide range of businesses, both international and domestic on all areas of Vietnam taxation since 1998. Tom has over 20 years of international tax experience, originally commencing his career in New Zealand.
Tom has led the corporate income tax advisory and structuring for many offshore investors in a diverse range of industries in Vietnam from oil and gas, consumer goods and financial services to media, information technology and real estate. He was the principal tax advisor to foreign investors seeking to acquire stakes in two of the three largest SOE equitisations in Vietnam and to the purchaser in Vietnam’s largest private equity transaction.
Tom is heavily involved in tax policy in Vietnam and contributing to the development of Vietnam’s tax regime. He is also the Chairman of the Taxation Committee of the European Chambers of Commerce in Vietnam, and the Co-Chair of the Tax Working Group of the World Bank sponsored Vietnam Business Forum, the main platform for structured dialogue between the Government and business.
Tom is the co-author of the first published guide to Vietnam Taxation: CCH Taxes in Vietnam – An Overview.
Tom McClelland can be contacted by phone on +84 8 3911 0727or alternatively via email at Tmcclelland@Deloitte.Com