Key takeaways

• The OTS export and import arrangement with a Vietnamese recipient designated by a foreign trader without a presence in Vietnam is proposed to be treated as a domestic sale.
• The proposed amendments would trigger particular legal and tax implications.

In depth 

Current application of Article 35.1.c of Decree 08

Article 35.1.c of Decree 08 provides that the customs procedures for OTS exported and imported goods are as follows (emphasis added):

• The OTS export and import arrangement under Article 35.1.c of Decree 08 is subject to customs procedures, tax and customs treatment applicable to a normal export and import activity (i.e., 0% VAT applies to OTS export; refund of VAT and/or import duty of input materials for export; and import duty applied when conducting OTS imports).

MOF proposal to abolish Article 35.1 of Decree 08

• Under Official Letter No. 558/TCT-CS dated 20 February 2024 regarding VAT treatment for OTS export, Official Letter No. 2156/BTC-TCHQ of the MOF dated 29 February 2024, and other relevant guidance, the MOF and customs authorities refer to Article 3.2 of Decree No. 90/2007/ND-CP dated 31 May 2007 of the government regarding the import and export rights of foreign traders with no presence in Vietnam, and Article 3.5 of the Law on Foreign Trade Administration, to guide that foreign entities having a presence in Vietnam include those that either: (i) have a representative office, branch or business establishment in Vietnam; (ii) have a capital contribution/shareholding; (iii) have investment projects; (iv) are a party of BCC contracts; or (v) have investment forms and new economic organization types as prescribed in regulations. Specifically, according to the MOF, the OTS export and import arrangement with a Vietnamese recipient designated by a foreign trader that has a presence in Vietnam (as defined above) would not qualify as an OTS export and import transaction, as provided under Article 35.1.c of Decree 08, but would instead be regarded as a domestic transaction for tax and customs treatment (i.e., there are no applicable customs procedures, and the sale between two Vietnamese entities is subject to VAT at either 5% or 10%, as provided by law).
• Accordingly, the MOF has proposed abolishing Article 35.1.c of Decree 08 (according to Official Letter No. 2588/TCHQ-GSQL dated 29 May 2023 of the General Department of Customs and Official Letter No. 9133/BTC-TCHQ dated 25 August 2023 of the MOF).
• The MOF has not identified the timeline for this regulation to be promulgated.
• Currently, customs procedures for OTS imports and exports are still carried out according to Decree 08. 

Legal and tax implications of MOF's proposal

• If transactions under Article 35.1.c of Decree 08 are treated as domestic sales, Vietnamese sellers will not be eligible for 0% VAT or VAT refunds for conducting the OTS export and import arrangement under Article 35.1.c.
• As suggested by the MOF in Official Letter No. 9133/BTC-TCHQ, in cases where goods sold by a Vietnamese seller are produced from imported raw materials for export production and are exempt from import duty, parties may consider the following business arrangement so that these transactions qualify as an export-import relationship and accordingly apply the tax and customs treatment applicable for export-import transactions:
  • Vietnamese seller to export goods to bonded warehouse/separate customs area.
  • Vietnamese buyer to be converted into an export-processing enterprise.
• The proposed amendments may also raise issues around the definition of the international sale of goods in the context of international commitments. Furthermore, the treatment of the current OTS export-import scheme as trading rights subject to registration requirements under Decree No. 90/2007/ND-CP would be questionable in terms of consistency with WTO trading right commitment.

Please feel free to contact Baker McKenzie if you need assistance regarding the above issues.