Increase In VAT For Foreign Services: What Challenges For Businesses From July 1, 2025?

From July 1, 2025, foreign service providers operating through e-commerce platforms and digital platforms, when providing services to organizations and individuals in Vietnam, will be subject to a Value Added Tax (VAT) rate of 10%, replacing the current rate of 5%. This is an important step to increase budget revenue and create a level playing field in tax obligations between domestic and international businesses, while also promoting the sustainable development of the Vietnamese economy.

In the context of a strongly developing digital economy, Vietnam has witnessed a significant boom in digital services from foreign providers in the last three years. Revenue from digital services provided by foreign businesses to the Vietnamese market has grown at an average rate of 35% per year, reaching approximately USD 2.5 billion in 2023 (source: Vietnam Digital Market Report, 2023). Dominant sectors include online advertising (Google, Facebook), cloud computing services (Microsoft Azure, Amazon Web Services), and digital entertainment platforms (Netflix, Spotify). This growth reflects the increasing trend of digital service consumption in Vietnam, especially in the context of strong digital transformation.

The increase in the VAT rate from 5% to 10% will certainly create significant impacts on the use of foreign services, especially for businesses that rely on online advertising to reach customers, which will be heavily affected. This forces businesses to adjust their marketing budgets and optimize operating costs.

In addition, foreign service providers will have to declare and pay taxes in Vietnam through the electronic portal of the General Department of Taxation, requiring an understanding of the legal system and tax declaration procedures, increasing compliance costs and potential legal risks.

What Are The Opportunities And Challenges When Applying The New VAT Rate?

The application of the 10% VAT rate opens up many significant opportunities for the Vietnamese economy. Firstly, state budget revenue is expected to increase by approximately USD 500 million per year (Source: General Department of Taxation of Vietnam, 2024), making a significant contribution to balancing revenue and expenditure. At the same time, this policy also creates a more level playing field between domestic and international businesses, helping Vietnamese businesses to compete fairly. Furthermore, the increase in the tax rate also encourages domestic businesses to develop alternative products and services, reducing dependence on imported services.

However, alongside these positive opportunities, this policy also poses considerable challenges for businesses. Domestic businesses, especially SMEs, will face increased operating costs when using foreign services. This could affect business efficiency and market expansion capabilities. In addition, foreign service providers may reconsider their investment strategies in Vietnam due to increased legal compliance costs and tax obligations. Managing and collecting taxes from companies without a physical presence in Vietnam will also be a major challenge for tax authorities, requiring a more modern and efficient management system.

To adapt effectively to this change, Vietnamese businesses need to proactively renegotiate service contracts with providers to share tax costs, while prioritizing the use of domestic services to minimize risks and optimize costs. In addition, developing a flexible financial plan will help businesses adjust budgets to suit increased costs (Source: Vietnam Business Council, 2024).

On the part of the management agency, upgrading the electronic tax system is essential to support foreign providers in making tax declarations and payments conveniently. At the same time, it is necessary to strengthen international cooperation to monitor and collect taxes more effectively. In addition, organizing seminars and training sessions will help provide information and detailed guidance for businesses, ensuring compliance with legal regulations.

Overall, the regulation can be a major challenge for businesses, especially small and medium-sized enterprises, as operating costs increase. To adapt, businesses need to proactively re-establish financial plans and management processes to optimize costs and seek domestic service solutions. At the same time, timely support from management agencies through a transparent tax system, along with supporting policies, will help businesses reduce pressure and create momentum for sustainable development.