Don’t kill the goose that lays the golden eggs

As Vietnam’s tourism is strongly developing, with a rise in tax revenue. However, are foreign online hotel booking services subject to tax in Vietnam? Fred Burke and Nguyen Thanh Vinh from law firm Baker & McKenzie delves into this issue.

Fred Burke & Nguyen Thanh Vinh

There has been a lot of controversy lately about cross-border digital commerce, specifically how and where it should be taxed. New technologies have made it possible for business transactions to go beyond traditional limitations.

The digital economy plays a more and more significant role around the world, and Vietnam is not an exception and the country will continue to benefit from these new developments in many ways.

One question that has come up in almost every country is the real or perceived loss of tax revenue from e-commerce companies. Both tax authorities and business players in this sector face a real challenge: how to create a business environment and tax mechanism that balance economic growth and tax revenue.

This is an emerging area of international tax law. It is not simple, and before law makers leap to simple but risky conclusions, they should proceed carefully to make sure not to damage one of the country's key economic drivers – tourism – by cutting off the web-based services that bring tourists to the country.

Tourism is hugely important to Vietnam’s economy. Directly and indirectly, the industry contributes 13.9 per cent of Vietnam’s GDP according to World Travel and Tourism Council. In 2015, the sector contributed $8.5 billion in export value. The industry directly employs 2,783,000 people, and when measured for indirect benefits to employment, it is responsible for 6,035,000 jobs.

This area of the economy is not only large - it is growing fast. According to the Tourism Working Group position paper at last year’s Vietnam Business Forum, Vietnam welcomed 7.94 million international visitors in 2015. In addition, 57 million domestic travellers enjoyed visits to Vietnam’s travel destinations.

In 2016, about 10.01 million international tourists visited Vietnam, representing an increase of 26 per cent from 2015. Another marker of the industry’s growing contribution to the national economy:  the stock of 4- and 5-star rooms has nearly doubled since 2011.

One of the most important contributors to all this growth is foreign online hotel booking services. There have been debates over whether these services are subject to tax in Vietnam. Let’s take a closer look from the Vietnamese tax perspective.

The main tax regulation governing the taxation of foreign companies abroad having Vietnam-sourced income is Circular 103/2014/TT-BTC of the Ministry of Finance.  

According to the circular, foreign companies that derive income from, or conduct business in, Vietnam will be subject to value-added tax and corporate income tax, and local entities are required to withhold these taxes upon payments to foreign companies.

This tax withholding obligation, however, does not apply to non-business individuals, and taxes under this circular do not apply to services supplied and consumed outside of Vietnam.

Do, then, foreign online booking services have tax obligations in Vietnam? Let’s look at the two different streams of hotel booking: inbound and outbound. For inbound hotel booking (that is, when foreign tourists make bookings at hotels in Vietnam via foreign online booking services), the transactions are between two offshore entities, and the brokerage service is performed outside of Vietnam.

This type of transaction between foreign tourists and foreign online booking services are between two offshore entities, and the corresponding brokerage service also occurs and is performed outside of Vietnam.

In such context, foreign online booking services with respect to inbound hotel booking could not be seen as liable to taxation in Vietnam in light of Vietnam's tax regulations.

When Vietnamese tourists make outbound bookings (that is, bookings at hotels outside of Vietnam via foreign online booking services), Vietnamese tax regulations do not require Vietnamese tourists to withhold tax in such transactions if they are non-business individuals.

Furthermore, when the hotels are outside of Vietnam, there is no legal ground for claiming tax liability since the outbound hotel service is consumed entirely outside of Vietnam.

Tax revenue is important, which is all the more reason not to "kill the goose that lays the golden eggs" as they say. Vietnam should take care not to sacrifice an even greater national good – namely, the growth of the tourism and hospitality industries.

Vietnam should take appropriate action and implement policies that ensure sustainable growth and follow international tax principles and Vietnam's own tax laws.