Reinsurance activities are being conducted more nowadays by Vietnamese insurance companies as a mechanism to manage and share risks. Reinsurance is a type of insurance whereby risks are managed by transferring such risks from an insurer to a reinsurer. The reinsurer and the insurer will enter into a reinsurance agreement and agree on conditions which the reinsurer would pay the insurer’s losses. A reinsurance premium would be paid by the insurer to the reinsurer.
With the rise of reinsurance activities in Vietnam, understanding the tax implications and benefits under a double taxation agreement (“DTA”) can help foreign reinsurers minimize their tax burdens. In this Tax Pointer, we highlight the general tax implications, including value added tax (“VAT”) and corporate income tax (“CIT”), of reinsurance activities, as well as tax impact under a DTA to which Vietnam is a signatory.
General Tax Implications
The Law on VAT classifies reinsurance activity as a non VAT-able activity (i.e., not subject to VAT), including in the case where reinsurance activities are provided by offshore entities. Note that the local insurer or the offshore reinsurer is not allowed to claim back its input VAT (if any).
With respect to offshore entities who act as reinsurers, they will be subject to withholding tax under the foreign contractor tax (“FCT”) regime with respect to payments from the local insurer. Under the FCT regime, reinsurance activities are subject to FCT at the rate of 2% (only CIT), unless an exemption under a DTA applies. The Vietnamese party (i.e. insurer) has the responsibility to withhold, declare and pay taxes on behalf of the foreign insurance company (i.e. reinsurer) on a quarterly basis.
The tax declaration dossiers under the FCT regime include:
– Tax return to be prepared according to set form 01/TBH;
– Copy of the reinsurance contract with certification of the taxpayer; and
– Copy of the business registration or certificate of independent practitioner with certification of the taxpayer.
Impact under applicable DTA
With respect to foreign reinsurers who are subject to FCT, such tax may be reduced or exempt under an applicable DTA. Income generated from reinsurance activities are classified as “business profit” under Article 7 of the DTA. In other words, the existence of a permanent establishment (“PE”) of the reinsurer will be a factor to determine if Vietnam has the right to tax the income related to such PE. Generally, a PE exists under the following scenarios:
– If the reinsurer has a fixed place of business in Vietnam (such as branch, office, a place of management), then a PE would be deemed to exist;
– If the reinsurer has a dependent agent in Vietnam, then a PE would be deemed to exist.
Under most DTAs to which Vietnam is a signatory, Vietnam has taxing rights on reinsurance income if such income is attributable to the PE. Therefore, if there is no PE in Vietnam, then Vietnam does not have taxing authority over the income. One notable exception, however, is Australia. Under the Australia-Vietnam DTA, Article 7 provides as follows:
“1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
7 Nothing in this Article shall affect the operation of any law of a Contracting State relating to tax imposed on profits from insurance with nonresidents provided that if the relevant law in force in either Contracting State at the date of signature of this Agreement is varied (otherwise than in minor respects so as not to affect its general character) the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.”
Thus, in principle, under the Australia-Vietnam DTA, Vietnam has the right to tax income generated from insurance activities, including reinsurance activities, of an Australian resident regardless if such activities constitute a PE. For example, an Australian insurance company signs a reinsurance agreement with a local Vietnamese insurance company. Assuming that the negotiation and signing of the contract does not constitute a PE in Vietnam, Article 7 of the DTA between Vietnam and Australia would allow Vietnam to tax the income even if there is no PE.
Exemption under a DTA is not automatic in Vietnam. Rather, in order to enjoy the benefits of the DTA exemption, the foreign reinsurer must apply the DTA exemption procedures under Vietnam domestic law.
We note that the Ministry of Finance recently issued Circular 28/2011/TT-BTC (dated 28 February 2011) (“Circular 28”) to replace Circular 60 with respect to guidance on tax administration. Under Circular 28, the offshore reinsurer is allowed to submit one annual notification of DTA exemption status for all re-insurance contracts signed or contemplated to be signed with Vietnamese insurance companies for that year. This is a positive change under Circular 28 because under the prior Circular 60, separate notifications were required for each contract signed with the Vietnamese insurance company.
The offshore reinsurer may authorize its tax agent, representative office or the Vietnamese insurance company to submit the dossiers on its behalf.
The notification dossiers shall include two sets of procedures: (i) the scheduled notification and (ii) the official notification.
(a) With respect to the scheduled notification, the procedures are as follows:
The offshore reinsurer will submit the notification dossiers at the provincial tax department: (i) where its representative office is located or (ii) where its tax agent is registered or (iii) where the Vietnamese insurance company is located. With respect to item (iii), the reinsurer is only expected to file at the location of the first Vietnamese insurance company with whom the reinsurer signed a reinsurance agreement for the year; in other words, if the reinsurer signs an agreement with many local insurers, the reinsurer does not have to file in every single location of each local insurer.
The dossiers shall include:
– Form 01/TBH-TB – the notification of tax exemption;
– A legalized residence certificate issued by the tax authorities of the country of residence (for the year prior to the year of notification);
– Form 01-1/TBH-TB – list of the re-insurance contracts which are signed or intended to be signed.
The deadline for submission of the notification is the earliest of the following points of time: (i) 5 days before the date of signing the contract; (ii) 5 days after the date of carrying out the contract; or (iii) 5 days before the date of payment.
After receiving the dossier from the offshore reinsurer, the tax authorities will issue a confirmation letter on full receipt of the documents within 15 working days from the date of submission. The offshore reinsurer can deliver this certified copy of the confirmation to its Vietnamese partners for the application of tax exemption under the DTA.
(b) With respect to the official notification, the procedures are as follows:
The dossiers shall be submitted to the same tax authorities who receive the scheduled notification (see (a) above) and shall include the following:
– Form 02/TBH-TB – the official notification of tax exemption;
– A legalized residence certificate issued by the tax authorities of the country of residence for this tax year;
– Copies of all re-insurance contracts which were carried out in the year;
– Form 02-1/TBH-TB – list of contracts classified subject to each category.
This official notification dossier must be submitted to the tax authorities within the first quarter of the following year.
Note that the Vietnamese tax authorities will inspect the eligibility of the DTA exemption and notify the taxpayer in case the dossiers are not properly prepared or if the offshore reinsurer does not meet the qualification for the DTA exemption.