Ministry of Finance Circular No. 133/2004/TT-BTC dated 31 December 2004

This Circular was replaced by Ministry of Finance Circular No. 205/2014/TT-BTC dated 24 December 2013 effective 6 February 2014.


Guiding the implementation of the agreements on double taxation avoidance with respect to taxes on income and on capital between Vietnam and other countries and in force in Vietnam

 


Extract: 

 

III. Income from international traffic
 
1. Definition of international traffic
  Under the Agreements, international traffic means activities of carrying cargoes, passengers by ship or aircraft (some cases specified in each particular Agreement may also include means of road transport, inland waterway transport, hereinafter referred collectively to as transport means), conducted by enterprises of the Contracting State, except for the case these transport activities take place only between two places in Vietnam or in the Contracting State to an Agreement concluded with Vietnam.
  Example 9: A Japanese company transports cargoes and passengers in Vietnam. The following passenger and cargo transport activities of this enterprise shall be regarded as international traffic:
  - Carriage of cargoes and passengers from a place in Vietnam to a place in Japan (including also the carriage of cargoes and passengers from Hai Phong via Ho Chi Minh City and Osaka to Tokyo);
  - Carriage of cargoes and passengers from a place in Vietnam to a place outside Vietnam (for example, Singapore);
  In cases where a ship of the above-mentioned Japanese enterprise carries tourists on a package tour of Ho Chi Minh City - Singapore - Hai Phong; it departs from Ho Chi Minh City and calls at the Singaporean port, after visiting Singapore, all passengers return to the ship for Hai Phong. In Singapore, this ship does not receive any more passengers. So, the passenger transport on the above-said voyage shall not be regarded as international traffic (because its departure point and final arrival point are in Vietnam, though the ship’s voyage consists of a trip occurring outside Vietnam).
2. Identification of beneficial owners
  Depending on each Agreement, international traffic enterprises of the Contracting State shall be identified according to the following criteria:
2.1. Enterprises are managed by residents of Vietnam or of the Contracting State to an Agreement concluded with Vietnam, or
2.2. Enterprises have a place of effective management in Vietnam or in the Contracting State to an Agreement concluded with Vietnam.
  Provided that these enterprises own or have the right to use at least the whole of a transport means and use such means for cargo and/or passenger transport on international traffic routes (called transport means directly operated by enterprises).
3. Determination of the application scope
  Depending on the provisions of each Agreement, income derived from international traffic by the persons stated at Point 2 above shall enjoy tax reduction or exemption in Vietnam or in the Contracting State to an Agreement concluded with Vietnam.
  The scope of application of tax exemption or reduction in Vietnam to enterprises of the Contracting State to an Agreement concluded with Vietnam covers:
3.1. Income from international traffic by transport means of directly operated by enterprises and from auxiliary activities closely connected to such operation of international traffic, specifically:
3.1.1. Turnover from international traffic by transport means directly operated by enterprises which issue transport documents (tickets, bills of lading or passenger and cargo transport manifests).
3.1.2. Turnover from the charter of part of transport means (also called space charter) or from time-charter of the whole of transport means by shipment directly operated by enterprises.
  Example 10: Japanese shipping company A agrees to transport cargoes of company C from Vietnam to the Netherlands with the freight of USD 300. As shipping company A has no ship under its direct operation, it charters a space aboard a ship of shipping company B of Thailand at the freight of USD 250. Apart from the above-said carriage of cargoes for shipping company A, shipping company B also directly transports cargoes of other customers on the same trip with the freight of USD 200. In this case:
  - For shipping company A, the amount of USD 300 earned from the transport of cargoes for Company C or the amount of USD 50 earned as a difference from its transport of cargoes for Company C and charter of a space aboard the ship of company B shall all not be regarded as income from international traffic by ship to claim tax exemption or reduction under the Vietnam-Japan Agreement because Company A does not directly operate the ship (just buying a space aboard the ship of shipping company B). Therefore, it is still liable to full payment of business income tax.
  - For shipping company B, the freight of USD 450 shall be regarded as income from international traffic entitled to tax reduction under the Vietnam-Thailand Agreement (a 50% reduction of business income tax, i.e. a reduction of 0.5% of business income tax over 3% of payable freight tax).
3.1.3. Turnover from the carriage of cargoes or passengers when the enterprises enter into partnerships to operate on international traffic routes, provided that the enterprises enter into the partnerships on the basis of contributing transport means directly operated by the enterprises or contributing funds for the operation of the transport means directly operated by the partnerships and the involved parties use separate transport documents. In this case, turnover shall be determined on the basis of transport documents issued by the enterprises of the partnerships but must not exceed the space limits of the transport means which the enterprises may exploit in accordance with the partnership agreements.
3.1.4. Turnover from the carriage of passengers or cargoes by transport means operated by other enterprises, with international traffic documents issued by the enterprises under either of the following two conditions:
  a/ Such carriage stage is part of the international traffic trip by ship or aircraft directly operated by the enterprises and is stated in the transport documents issued by the enterprises themselves;
    Example 11: Using example 10 above, Japanese shipping company A agrees to transport cargoes of company C from Vietnam to the Netherlands with the freight of USD 300. Yet, shipping company A has ship A1 under its direct operation and this ship transports cargoes at the second stage from Singapore to the Netherlands. For the first stage from Vietnam to Singapore, company A has to hire shipping company B of Thailand to transport the cargoes with the freight of USD 50.
  - For shipping company A: the amount of USD 250 (300 - 50) earned from the direct carriage of cargoes in international traffic shall be eligible for tax reduction under the Vietnam- Japan Agreement (a reduction of 1% of business income tax over 3% of payable freight tax).
  - For shipping company B: the freight of USD 50 shall be regarded as income from international traffic eligible for tax reduction under the Vietnam- Thailand Agreement (a 50% reduction of business income tax, i.e. a reduction of 0.5% of business income tax over 3% of payable freight tax).
  b/ That carriage is effected on the basis of the agreement on the arrangement of slot-exchange (called slot-exchange) directly operated by an enterprise for a corresponding space aboard another transport means operated by another enterprise. In this case, turnover shall be determined on the basis of transport documents issued by the enterprise itself but must not exceed the space limit the enterprise is allowed to exploit free of charge aboard the means of the counterpart company in accordance with the slot-exchange agreement.
3.1.5. Income from the short-term lease (detention) of containers as an auxiliary activity closely related to the operation of the transport means directly operated by enterprises, if prescribed in the Agreements.
The nature of auxiliary activity closely related to the operation of transport means of the short-term lease (detention) of containers shall be determined to be containers accompanying extensively the transport means entering a Vietnamese port, containers currently containing import cargoes and the container use charge is included in the freight; income from the short-term leasing of containers arises because the goods recipients keep containers beyond the time limit for free-of-charge use.
3.1.6. Turnover from the charter of bare ships or aircraft (called bareboat charter) which is auxiliary to the international traffic operation of the transport means directly operated by the enterprises, if it is specified in the Agreements and fully meets the following three conditions:
  a/ The transport means is being used by the enterprise in international transport; and
  b/  The total chartering time is shorter than the time the transport means is operated for international traffic by the enterprise itself within 12 months starting or ending the calendar year; and
  c/  The charterer must not change the name and call signs of the transport means.
  Bareboat charter means that the charter of a ship whereby the charterer is fully responsible for the management and control of the operation of the chartered ship, including pilot, manpower, fuel, repair, operation, insurance premiums and other expenses for the operation of the ship in accordance with maritime and aviation regulations. The charteree shall not be responsible for any expenses or obligations towards the operation of the ship.
  Turnover mentioned at Points 3.1.5 and 3.1.6 above shall not be regarded as turnover from auxiliary activities attaching to international traffic for application of the Agreements if enterprises do not derive any turnover items stated at Point 3.1.1, 3.1.2, 3.1.3 or 3.1.4.
3.2. Where two or more enterprises carry on partnership activities in order to create a partnership without legal person status to carry on international traffic activities with transport means directly operated by the partnership and transport documents issued in the name of such partnership, the identification of the scope of tax exemption and reduction under an Agreement shall be made separately for each party to the partnership under the Agreement concluded between Vietnam and the country of which the party to the partnership is a resident or in which the party to the partnership has its place of effective management. The bases for determination of turnover entitled to tax exemption or reduction shall be similar to those stipulated at Point 3.1 and such turnover shall be apportioned according to the percentage of turnover divided to the party to the partnership in accordance with the partnership contract or agreement.
  Example 12: The Scandinavian Airlines (SAS) partnership is engaged in transporting international passengers from Vietnam to Nordic European countries. Therefore, the airlines’ turnover arising in Vietnam shall be apportioned to the parties contributing capital to, and managing, SAS, which are residents of Norway, Denmark or Sweden for application in accordance with each relevant Agreement.
  When declaring their tax obligations, the above-said enterprises must separately account the aforesaid income items for consideration of business income tax exemption or reduction in accordance with the provisions on income from international traffic. In all cases, turnover considered for tax exemption or reduction must not exceed the business income tax-liable turnover of international traffic in accordance with relevant regulations.
  Where an Agreement (like the Agreements with Thailand and the Philippines) stipulates only a percentage of income tax reduction, enterprises shall have to pay income tax on income from international traffic according to the non-reduction percentage. Enterprises engaged only in transporting cargoes and/or passengers between two places in Vietnam shall have to pay tax in Vietnam in accordance with Vietnam’s tax law.
  The above-said provisions on taxation on income from international traffic are included in the Article on International Traffic (usually Article 8) of the Agreements.

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