FCT exercises - June 2020 - ACE-converti.docx - EXERCISE 1...

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EXERCISE 1 – DETERMINE FCT LIABILITY The Tusho Construction Company (Tusho Japan) is a large Japanese resident engineering company, contemplating submitting a tender to Nam A Co Ltd (Nam A), a company incorporated and resident in Vietnam for the construction and assembly of Nam A’s new bottle production line in Ho Chi Minh City. The tender price is expected to be in the region of USD20 million. If the tender is successful, Tusho Japan is planning to sub-contract a part of the actual construction and assembly work to its subsidiary in Vietnam (Tusho Vietnam). All of the engineering design works will be carried out by Tusho Japan outside of Vietnam. Tusho Japan will also supply equipment to Nam A at Ho Chi Minh City Port and Nam A will import this equipment under its name. Three engineers of Tusho Japan will be sent out to Vietnam to supervise the construction and assembly for approximately four months. The following are the estimates for the project (all values are stated gross of any applicable taxes ): USD’000 Design fee 2,000 Supply of equipment (CIF, Saigon Port) 10,000 Supervision service fee 2,000 Construction and assembly works (sub-contracted to Tusho Vietnam) 6,000 ––––––– Total 20,000 ––––––– Required : Compute (in USD) all the Vietnam tax liabilities arising on the Tusho Construction Company in respect of the proposed tender, giving explanations of your treatment of each of the items included in the project estimate. Note: you are not required to convert your answer to VND. Answer: Deemed VAT: The supply of equipment will only be subject to VAT at the import stage by Nam A. As Tusho Japan will enter into a contract with a Vietnamese sub-contractor for the construction and assembly works, the VAT-taxable turnover of Tusho Japan will not include the value of the work to be implemented by the sub-contractor (Tusho Vietnam) of USD6 million. Therefore, the VAT-taxable turnover of Tusho Japan will comprise: – Design fee: USD2,000,000 – Supervision service fee: USD2,000,000 The deemed VAT payable is therefore: – Design service: USD2,000,000 x 50% x 10% = USD100,000 – Supervision service: USD2,000,000 x 50% x 10% = USD100,000 Deemed CIT As the supply of equipment is accompanied by services provided in Vietnam, the CIT-taxable income of Tusho Japan will be the total value of the equipment and services. However, as Tusho Japan will enter into a contract with a Vietnamese sub-contractor the CIT- taxable turnover of Tusho Japan will not include the value of the construction and assembly work to be implemented by the sub-contractor (Tusho Vietnam) of USD6 million.
As the proposed tender separates out the value of equipment and other services, CIT will be calculated separately at different deemed tax rates on the value of each item. Therefore, the CIT-taxable turnover of Tusho Japan will comprise : – Design fee: (USD2,000,000 - USD100,000) – Supervision service fee: (USD2,000,000 - USD100,000) – Supply of equipment: USD10,000,000 The deemed CIT payable is therefore: – Design service: (USD2,000,000 – 100,000) x 5% = USD95,000 – Supervision service: (USD2,000,000 – 100,000) x 5% = USD95,000 – Supply of equipment: USD10,000,000 x 1% = USD100,000

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