When a
VAT-registered enterprise performs services for a non-resident, must it charge
VAT on this supply? Can the VAT be applied at 0%? Whether or not VAT applies to
services that are provided to foreign recipients is a significant tax issue for
cross border supplies. The foreign recipient is often not able to offset any
VAT that is charged by the service supplier, and the VAT thus becomes an actual
cost. Whether with respect to providing technical services, telecommunication,
hire of work or consulting, the VAT issue is crucial for parties to
consider.
In any VAT system,
the supply of services by a VAT registrant to a recipient that is based abroad
demands special attention. On the one hand, export of services is usually
zero-rated for VAT, just as the export of goods. But unlike with the export of
goods, it may be difficult in practice to determine when a service has actually
been exported. For the export of goods, most VAT systems will simply refer to
the customs document that proves that goods have in fact been exported. That
will suffice to entitle the exporter to 0% VAT. With services, this cannot be
organized in exactly the same manner. To some degree, what is an “export of a
service” will have to be determined by means of legal provisions or regulations.
As there is no one obvious way to define export with regard to services, as is
the case with goods, countries may adopt different definitions.
As a case in point,
the rules with respect to the export of services in the VAT systems of
Cambodia, Laos and Vietnam are remarkably different in terms of their practical
application.
Cambodia: “use
abroad”
Cambodia introduced
VAT in 1999, in following of its major tax reform of 1997. At the time, the
decision was made not to fully implement the VAT in cross-border transactions.
Service supplies made overseas by a non-resident to a recipient in Cambodia are
not subject to VAT. There is no system of reverse charge. However, a non-resident who performs
services in Cambodia will become a VAT-taxable person when the thresholds
stated in the Sub-Decree on VAT are exceeded (VAT Guide Leaflet 13, 18 May
1998, “Services”, p. 2). These thresholds are the same as for business activity
performed by unregistered sole enterprises in Cambodia. For example, for services
the threshold is 30,000 US$ per 3 months or 62,500 US$ per year.
Services
exported from Cambodia will liable to 0%VAT.
To qualify for zero rating, an exporter of services has to be able to
demonstrate that the service provided was used or consumed outside the
Cambodia. Based on the current practice, the TD will apply the 0%VAT on a case
by case basis.
Only the “supply of
services in Cambodia” is subject to Cambodian VAT under Art. 60 LOT. Import of
services is not subject to VAT.
The place where a
service is supplied is defined in Art. 63 LOT (2)
“2. The supply of a service takes place in the Kingdom of Cambodia if
the service is performed in the Kingdom of Cambodia, except that:
a. the supply of a service in connection with immovable property is
deemed to take place where the property is located;
b. the supply of a service in connection with transport is deemed to
take place where the transport occurs”.
Cambodia’s main implementing
regulations on VAT (Sub-Decree No. 114 and Prakas on VAT No 1031) do not add
much to the concept that the place of performance of a service is the place of
supply.
Under Art.64 of
LoT, the export of goods or services is subject to VAT at 0% under Cambodian
tax law. The VAT leaflets issued by the TD offer some additional guidance on
the interpretation of this provision.
“All services exported from the Kingdom of
Cambodia are liable to VAT but at the zero rate. This means that no VAT has to
be charged, but that you are entitled to reclaim the VAT on all the goods and
services used in your business to provide services which are exported.
To qualify for zero rating as an export, an
exporter of services has to be able to demonstrate that the service he has
provided was used or consumed outside the Kingdom of Cambodia (see VAT leaflet
07 “VAT Imports and Exports”). For
example a Cambodian architect may produce plans in the Kingdom of Cambodia for
a building to be built by the customer outside the Kingdom. This would involve an export of
services. You must therefore be able to
prove that the service was used in a foreign country. The evidence which will be considered to
substantiate this claim will be a contract which clearly specifies the place of
use or consumption of the service as outside the Kingdom of Cambodia or
evidence that the service was provided at or for a building or premises located
outside the Kingdom of Cambodia. The
evidence must be clear; otherwise, you will have to charge VAT”.
Based on the
current practice, the GDT will apply the VAT at 0% on a case by case
basis. There is no further official guidance
as to how “use outside Cambodia” is to be interpreted and it is thus possible
that in any particular case, the application of 0% by a VAT registrant would be
refused. There may be a particular exposure when the recipient of the service
has some dealings in Cambodia to which the service relates, as such might be
seen as a “use in Cambodia” by tax authorities.
Vietnam: “place of
business of the recipient”
Vietnam amended its
VAT law in 2008 (which came into force in 2009) to provide further
clarification on the problem of exported services. Art. 6 of VAT Decree 123-2008
provided the following new rules:
(b) Export services shall include services
directly provided to non-resident organizations and individuals or to
organizations and individuals in non-tariff zones.
A non-resident organization means an
organization without a resident establishment in Vietnam and which is not a value
added taxpayer in Vietnam. A non-resident individual means a person who is a
non-resident of Vietnam, a Vietnamese who resides overseas, or a Vietnamese
during the period while he or she is providing services. An organization or
individual in a non-tariff zone means any such entity which has registered
business or other cases as stipulated in regulations of the Prime Minister of
the Government.
(c) Export goods and services as stipulated
in sub-clauses (a) and (b) above must satisfy the following conditions in order
for the tax rate of 0% to apply:
– There must be a contract of sale or a
contract for processing goods for export or a contract authorizing processing
of goods for export, or a service provision contract signed with an non-resident
organization or non-resident individual or with an organization or individual
in a non-tariff zone;
– There must be vouchers for payment of the
export goods or services via a bank and other source vouchers required by law;
and there must be a customs declaration for exported goods.
Thus, under
Vietnam’s VAT rules the fact that the recipient of the service is not a
resident suffices for the services to be deemed “exported”, provided that the
recipient does not have a PE in Vietnam. There are a number of formalities to
be respected, such as a written contract and payment by means of a bank
transfer from overseas. On the whole, however, the place of business of the
recipient of the service (including branches or other types of a PE) will be
the most important criterion to decide whether services are exported. There is
no difference in terms of the nature of the services.
Despite the improvements of 2009,
there remain some questions related to the export of services. For example, the
requirement of the customer not having a permanent establishment (PE) in
Vietnam may lead to uncertainty. A PE is (in corporate tax law) defined as
means a production [and/or] business establishment via which a foreign
enterprise conducts part or all of its production, and includes a branch and an
agent (Art. 2 (3) Law CIT).
The service
performer might not always be aware of the customer’s PE, and one is not
certain what kind of evidence will be accepted by the tax authorities that
there is indeed no PE in Vietnam.
Laos: “place of
business of the recipient” with exceptions
Laos has issued its
first VAT law in 2006, and started with the implementation on 1 January 2010. “All supplies of goods and
services and all transactions assimilated to supplies of goods and services
that are made for a consideration within the Lao PDR by a Registered VAT Taxpayer” are within the scope of the VAT system. The
supply of services which is not “within” the Lao PDR is not subject to Lao VAT.
Thus, rather than offering rules on the “export” of a service, a service may
not be deemed to “take place” within Laos and is therefore outside of the scope
of Lao VAT.
As the Instruction
on VAT explains:
In order to determine
where a particular service takes place:
first, it is necessary to
establish the exact nature of the transaction within the service sector, for
instance, construction services, repairs, designs, transportation ...;
then, it must be
determined whether that particular service is a service that is found in
Article 10, paragraph 2 (items 1 to 6) of the Decree on the Implementation of
the VAT Law. If that is the case, the
specific provision of that paragraph 2 designates where the service takes
place;
if the particular service
is not found in Article 10, paragraph 2, items 1 to 6 of the Decree on the
Implementation of the VAT Law, then the general rule established by the first
paragraph of Article 10 of the Decree on the Implementation of the VAT Law
applies, which means that the service takes place where the receiver of the
service is established or has his usual residence.
If it is determined,
following the steps outlined above, that a service does not take place in the
Lao PDR, no Lao PDR VAT can be payable on that service and it is therefore not
necessary in such case to establish whether or not that service is exempt or
zero-rated in accordance with the VAT Law”.
Lao VAT uses the place of business of the recipient of a service as the
default rule to determine the place of supply. In other words, unless one of
the exceptions applies, Lao VAT will not apply when a Lao VAT registrant
supplies a service to a non-resident recipient because the place of business of
the recipient is not in Laos. Lao VAT regulations further provide that for the
interpretation of the place of supply in any situation, the receiver of the
services is deemed to be established or to reside in the Lao PDR if he is registered as a
Value-Added Taxpayer in the Lao PDR. If the receiver of the services has
business establishments in both the Lao PDR and another country, the place of
supply of the services is in the other country if the receiver can prove that
these services have been supplied to his business establishment in that other
country.
It is not entirely clear whether other conditions and
principles will still apply. Art. 19 (3) Decree VAT refers to the export of
goods and services and provides in some additional conditions including a
“certification” of the exported service by authorities:
The amount of input VAT of goods and
services for export including VAT exempted goods and services for export,
allowed to be deductible shall proceed as follows:
a.
Goods and services exported shall be certified' by the Industry Commerce,
Customs and other concerned sectors;
b.
Availability of export contracts consistent with regulations;
c.
Payment through bank.
The following table gives an overview of the rules on place of supply of
services in Lao VAT:
|
Service
|
Place
|
|
General
services
|
Place of
business or residence of recipient
|
|
Design,
construction, maintenance, repair, supervision, real estate agents, experts
for property, hotel
|
Place
where the property is situated
|
|
Rental of
movable goods
|
Place of
main use by recipient
|
|
Transport
|
Place
where the transport is carried out
|
|
Cultural,
artistic, sports, scientific, education, entertainment, organization,
restaurant, catering, tourism services, loading and unloading, valuation and
work on movable property, logging, extraction of natural resources
|
Place
where the service is carried out
|
|
Telecommunication
|
Place of
establishment of the telecommunication company
|
|
Tourism,
tours
|
In Laos
unless all elements are outside of Lao
|
Consultancy
services
When a local VAT
registrant provides consultancy services to a non-resident customer, the VAT
implications may differ considerably depending on the country where the
consultant is established. A service provider in Cambodia will be allowed to
charge VAT at 0% only if it is clear that the recipient used the service
outside Cambodia. Since this notion is not further defined, there may be an
exposure for the service provider if he does not charge the VAT. In Vietnam,
the rules on the subject are clearer. If the customer does not have a PE in
Vietnam, a contract was drafted and the payment made by bank, the VAT can be
charged at 0%. For a service provider that is established in Laos, the place of
supply of a general consulting service is the place of the recipient (offshore)
so that no Lao VAT must be charged. It is not clear in Laos whether additional
conditions apply as well, such as bank transfer.
Inspection services
Let us assume that
parent company PARCO has assigned subsidiary SUBCO to inspect goods in SUBCO’s
country before these goods are shipped to PARCO. SUBCO provides a service to
PARCO and invoices accordingly. The essential difference with consultancy
services is that in the case of inspecting tangible goods, the service is used
in the country of the service provider.
If SUBCO is
resident in Cambodia, it will be allowed to charge VAT at 0% only if it is
clear that the recipient used the service outside Cambodia. Since this notion
is not further defined, there may be an exposure for the service provider if he
does not charge the VAT. In this case it seems difficult to argue that the
service is used outside Cambodia. In Vietnam, the rules on the subject do not
refer to place of use. If the customer does not have a PE in Vietnam, a
contract was drafted and the payment made by bank, the VAT can be charged at
0%. When SUBCO is established in Laos, it is not entirely clear whether
inspection services should be seen as general services (place of the recipient)
or as “work on movable goods” (place where service is carried out). In the
second case, Lao VAT would have to be applied.
Construction work
In this final
example, we assume that foreign contractor CONCO has a project onshore for the
construction of infrastructure. CONCO hires local subcontractor CONSUBCO to
complete a part of the work.
If CONSUBCO is
resident in Cambodia, it will be allowed to charge VAT at 0% only if it is
clear that the recipient used the service outside Cambodia. In this case it
seems difficult to argue that the service is used outside Cambodia. In Vietnam,
the rules on the subject do not refer to place of use. If the customer does not
have a PE in Vietnam, a contract was drafted and the payment made by bank, the
VAT can be charged at 0%. However, CONCO will almost certainly have a PE in
Vietnam for this project under Vietnam law. Again it thus seems that local VAT
will have to apply. When CONSUBCO is established in Laos, construction services
should not be seen as general services (place of the recipient) but fall within
the category of services that are deemed to be supplied on the place where the
immovable property is situated. Lao VAT would have to be applied.
Some notes on
comparing Cambodia, Laos and Vietnam
Each country has
chosen its own rules on the issue of export of services. In many situations,
the result of the different rules is similar. For example, if the recipient has
a local PE (Vietnam) it is also likely that the same service would not be
deemed “exported” in Cambodia (the PE may likely have “used” the service) or
Laos (because of the Lao provision on having a place of business within Lao and
abroad). Or, if work is performed on constructing a building overseas or
repairing a machine abroad, this would likely not only be seen as export of
service in Laos, but also in Cambodia. So, even though the rules are different,
the outcome may often be the same in practice.
One could say that
the VAT laws of Cambodia and Laos are less likely to result in a 0% VAT rate
than in Vietnam. Laos favors export of services because it has adopted a
default rule in favor of the place of business of the recipient of the service.
Of course, this will work in favor of the Lao treasury with respect to incoming
services.
The situation is
more challenging in Cambodia, where the largely undefined criterion “use
abroad” creates some uncertainty in practice.
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