Vietnam | Employment Tax | Employer tax withholding obligation and preparation for payroll audit

Employment Tax

Vietnam | Employer tax withholding obligation and preparation for payroll audit

Summary

In a payroll audit, under withholding or wrong withholding of tax could result in interest on late payment of tax and penalty on under declaration of income. Income paying organization/individuals with taxable income that are subject to PIT should therefore be aware of the guidance and positions outlined by the Vietnam Ministry of Finance and General Department of Taxation when deducting withholding tax on payment made/benefits provided and/or when completing their tax return filing. This News Alert highlights some key points for the guidance and positions for employers and employees.

The detail

• Tax residency – The extent of tax payable in Vietnam would depend on whether an individual is treated as tax resident or tax non-resident. Tax residents are subject to Vietnamese tax on their worldwide income whereas tax non-residents are taxed on income relating to their Vietnam employment. An individual is treated as Vietnam tax resident if he/she expects to stay in Vietnam for more than 182 days. There are other rules for determination of tax resident status. Therefore, given the difference in tax treatment, it is crucial to review the rules on tax residence status to apply the correct withholding tax rate or pay the correct PIT for the individuals.
• Grossing up of income – If Vietnam taxes on taxable income (including taxes relating to taxable benefits-in-kind) are borne by the employer, the income must be grossed up to include the tax element. Therefore, ensuring grossing up of income is performed correctly is crucial for correct withholding and reporting of income.
• Withholding on certain insurance and pension schemes – Employer accumulated contributions to life insurance, non-compulsory insurance, and voluntary retirement pension schemes are taxable at the time of payout/distribution (depending on the type of income) with different tax rates. Therefore, ensuring the correct tax rate to withhold can minimize cost of revision.
• Payment to individuals other than employees – Payments to residents who do not sign a labor contract or sign a labor contract with a term of less than 3 months are subject to the 10% tax withholding if it reaches a certain threshold. For tax non residents, 20% tax withholding is applied. This is the case irrespective of whether the individual has a tax code. During a payroll audit, if the withholding requirement is not complied with, Vietnam income payer could be penalized for non­ withholding or under withholding of tax.
• Dependent relief– Only qualifying dependents are eligible for dependent relief claim. During a payroll audit, the tax authorities frequently check the eligibility of dependent relief claim and will reject the claim if sufficient document are not available. Note also that the eligibility of the claim include dependent having a tax code granted by the tax authorities. As dependent relief claim is a focus area of the tax authorities during a payroll audit, we strongly recommend a review of supporting documents to minimize additional tax costs, interest, and penalty.

In view of the above, payroll/finance/HR/global mobility program managers should review tax treatment and assess any resulting financial impact involving their employee/assignee population working in Vietnam. As an example, has the gross-up requirement been done correctly, whether taxable noncash have been included as part of the gross up and if not, whether the non-compliance results in increased employment/mobility program costs? Does the change to the tax residence status results in any potential cost savings? Vialto is ready to assist with respect to both PIT compliance and planning efforts.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Brittany Chong
Partner

Further information on Vialto Partners can be found here: www.vialtopartners.com

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