Net-of-tax contracts and gross-up clauses: turning a foreign supplier's price into taxable revenue

If a contract says the foreign supplier receives its price net of all Vietnamese taxes, the price on the invoice is not the revenue on which foreign contractor tax (FCT) is calculated. The Vietnamese payer must first convert the net amount into the gross revenue the supplier would have needed to earn to be left with that net amount after tax, then compute the CIT and VAT components on that gross figure. The tax is paid out of the payer's own pocket, on top of the invoice.

Get the conversion wrong and the error runs through every payment under the contract: tax is understated, late-payment interest builds up, and the input VAT credit is smaller than it should be. The arithmetic itself is simple. The mistakes come from contract wording that nobody in Vietnam read before signing, from mixing up which component is grossed up first, and from using the wrong exchange rate. This guide works through all three.

Why the gross-up exists

Under the withholding method, FCT is levied on the revenue the foreign contractor is entitled to, including any Vietnamese tax that the Vietnamese party agreed to pay for it. That is the principle set out in the Ministry of Finance guidance on foreign contractors, applied with Law 67/2025/QH15 for the CIT component and Law 48/2024/QH15 for the VAT component. Registration, declaration and payment follow the Law on Tax Administration (Law 38/2019/QH14) and its 2026 guidance (Decree 252/2026/NĐ-CP and Circular 89/2026/TT-BTC).

The logic is straightforward: a tax that the payer bears on the supplier's behalf is an extra benefit to the supplier, so it forms part of the supplier's revenue. If the payer simply computed tax on the net price, the state would be collecting tax on less than the supplier actually received in value.

Three ways a contract can state the price

Group templates and overseas suppliers' standard terms very often use the third form, frequently through a general clause such as "all payments shall be made free and clear of any withholding". That sentence alone is enough to put the Vietnamese payer in gross-up territory. Read the tax clause in every foreign contract before the first payment, not after the first audit query.

How the conversion works in principle

The guidance converts in two steps, one per component. We use symbols rather than figures because the percentages depend on the activity and must be taken from the current text:

1. CIT step. If the price excludes CIT, the revenue for CIT is the net amount divided by (1 − c), where c is the CIT percentage for the activity.
2. VAT step. If the price also excludes VAT, the revenue for VAT is the amount after the CIT step divided by (1 − v), where v is the VAT percentage applied to revenue for that activity. The CIT and VAT components are then computed on their respective bases.

Two practical notes. First, the order matters: the CIT gross-up comes first and the VAT base is built on it when the contract excludes both. Second, if an item is exempt from VAT or outside its scope — as some financial and technology items can be — the VAT step drops out, but the CIT step still applies. Confirm the treatment of each item in the current VAT law and guidance before you assume a zero.

Hypothetical example. Suppose a Vietnamese subsidiary owes an overseas firm a net fee of 100,000 in the contract currency for technical support used in its Vietnamese plant, with all Vietnamese taxes for the payer's account. The payer grosses up to find the CIT base, then grosses up again to find the VAT base, computes both components, pays the supplier the full 100,000, and pays the two components to the state from its own funds. In the books, the cost of the service is the net fee plus the CIT component the payer bore; the VAT component, if conditions are met, becomes creditable input VAT.

Exchange rates and payment dates

Foreign contracts are usually priced in foreign currency, while FCT is declared and paid in Vietnamese dong. The conversion has to follow the exchange rate rule set in current tax and accounting regulations for the relevant date — typically tied to the bank through which the payment is made and the date the tax obligation arises. Do not use a month-end or budget rate for tax purposes because it is convenient.

Keep three dates visible in the payment file: the contract date, the invoice date and the date of payment. The tax obligation for withheld FCT is generally tied to payment, but prepayments, offsets against amounts the supplier owes and payments through a third party can shift the relevant date. A group netting arrangement, where intercompany balances are settled against each other without a bank transfer, is still a payment for FCT purposes.

Building the gross-up into the payment run

Most errors happen because the gross-up is done by hand, once, and then forgotten. A payment run that handles foreign invoices reliably has a few fixed steps:

1. Contract flag. Each foreign supplier record in the accounting system carries a flag for the price basis — gross, net of CIT, or net of all taxes — taken from the signed contract, with the clause reference.
2. Activity code. Each invoice line is mapped to an activity category before approval, because the percentages depend on it; a single invoice can mix a service, a licence and a reimbursement.
3. Calculation sheet. The gross-up is computed in a standard sheet that shows the net amount, both steps, the exchange rate and the source of each percentage, and it is attached to the payment voucher.
4. Declaration in the same cycle. The FCT return is prepared in the same run as the payment, not collected for month end.
5. Review of changes. When a contract is amended or renewed, the flag and the mapping are reviewed again, since renewals often change the tax clause without anyone in Vietnam noticing.

For instalments, retentions and milestone payments under long contracts, apply the same basis to each instalment. A prepayment to a supplier is a payment, and the FCT obligation around it does not wait for the final invoice.

Deductibility of tax the payer bears

When the payer bears the supplier's CIT component under a net-of-tax contract, that amount is part of the cost of the service. Earlier CIT guidance allowed the payer to deduct FCT it bore when the contract clearly stated that the foreign party's revenue excluded that tax. Whether and on what conditions the same treatment continues under Law 67/2025/QH15 has to be confirmed in the current implementing guidance; do not rely on older practice without checking.

The VAT component works differently. It is not a deductible expense but, where the conditions for input credit are met and the tax payment documents are held, a creditable input VAT amount. Booking it as an expense is a common error that both overstates cost and loses the credit.

For related-party payments, a net-of-tax clause also has transfer pricing consequences: the total cost to the Vietnamese company, including the tax borne, is what the tax authority compares against an arm's-length price. Decree 255/2026/NĐ-CP now governs tax administration for enterprises with related-party transactions from 1 July 2026.

Negotiating the clause, and checking your own figures

A Vietnamese company has more leverage before signing than after. Points worth negotiating or at least clarifying:

• State explicitly whether the price includes Vietnamese VAT and the CIT component, rather than relying on a general "free and clear" clause.
• If the supplier is resident in a treaty country, agree who prepares the treaty notification file and by when; a treaty reduction lowers the CIT base but only if the procedure is followed.
• Ask the supplier to describe services in its invoices precisely enough to classify the activity, since the percentages depend on it.
• Agree what happens if the tax authority later assesses more tax — who bears it and whether the price is adjusted.

To check your own figures, reconcile three sources every quarter: overseas payments in the bank statements, the FCT returns filed in the company's e-tax account on the tax authority's portal, and the expense accounts where the services were booked. A payment that appears in the bank but not in a return, or a return whose base equals the invoice amount on a contract that promises a net payment, is the first thing to correct. Confirm the managing tax office in the taxpayer information lookup before filing any supplementary return.