New Guidance on Applicable VAT Rate for Domestic Goods Entering Bonded Warehouses

Introduction

On 17 February 2025, the Ministry of Finance (“Ministry“) issued an official letter in response to inquiries from the People’s Committee of Dong Nai Province and the Dong Nai Tax Department. This letter provides critical guidance on the applicable value- added tax (“VAT“) rate for transactions where a domestic enterprise sells goods to a foreign trader with a presence in Vietnam, who then directs their delivery to a third-party Vietnamese enterprise via a bonded warehouse. The Ministry’s stance has significant implications for businesses relying on bonded warehouses as an alternative to the on-spot export-import mechanism.

Growing Trend: Bonded Warehouses as Substitute for On-Spot Export-Import

The on-spot export-import mechanism has long enabled businesses to secure a 0% VAT rate under Circular 219/2013/TT-BTC by classifying goods as exported and imported without leaving Vietnam. Legally, this applies when a domestic company sells goods to a foreign trader, who then designates a third-party Vietnamese entity as the recipient—provided the foreign trader lacks a commercial presence in Vietnam, such as a subsidiary or representative office. For foreign traders who are ineligible to rely on the on-spot export-import mechanism for having a commercial presence in Vietnam, bonded warehouses have historically offered a practical workaround. Once goods enter a bonded warehouse and clear customs, they might be deemed outside Vietnam’s customs territory, potentially qualifying for the 0% VAT rate reserved for exports.

Recently, this mechanism has come under review, with the General Department of Customs and the Ministry signaling its potential abolishment. Although no formal regulation has been issued, customs authorities in key regions like Ho Chi Minh City and Hanoi have already paused approvals, awaiting further guidance. The core issue is that on-spot transactions fail to meet the legal definition of “export,” which requires goods to physically exit Vietnam or enter designated customs zones, risking their reclassification as domestic sales. Amid this uncertainty, bonded warehouses have gained renewed traction, not only among foreign traders with a commercial presence in Vietnam but also among businesses previously dependent on on-spot export-import, who now turn to this alternative to preserve tax efficiency.

Ministry of Finance’s Guidance: Bonded Warehouses Under Scrutiny

The Ministry’s official letter dated 17 February 2025, directly addresses this practice, stating:

“When a domestic enterprise sells goods to a foreign trader with a presence in Vietnam and is instructed to deliver the goods to a third-party Vietnamese enterprise via a bonded warehouse, such transactions do not meet the conditions for goods exported to organizations or individuals abroad for consumption outside Vietnam, nor for goods sold to organizations or individuals in non-tariff zones for consumption within those zones. Therefore, these transactions do not qualify for the 0% VAT rate under Clause 1, Article 9 of Circular 219/2013/TT-BTC.”

Key takeaways from this guidance include:

1. 1. Narrow Definition of Export: The 0% VAT rate requires goods to be consumed outside Vietnam or within non-tariff zones. Delivery to a Vietnamese entity without such consumption, even via a bonded warehouse, disqualifies the transaction as an export.
   2. Alignment with On-Spot Export-Import: The Ministry effectively treats these bonded warehouse transactions as akin to on-spot export-import activities, classifying them as domestic sales subject to the standard VAT rate (typically 10%).
   3. Practical Precedents: Similar cases in other localities have reportedly resulted in the cancellation of export declarations and the issuance of domestic sales invoices, reinforcing this interpretation.

Implications for Businesses

This clarification has profound implications for manufacturing companies and traders in Vietnam:

1. 1. Loss of Tax Advantage: Transactions routed through bonded warehouses in this manner will not enjoy the 0% VAT rate, increasing operational costs.
   2. Strategic Reassessment: With on-spot export-import facing potential repeal and bonded warehouses losing their tax appeal in such scenarios, businesses must rethink supply chain and tax planning strategies.
   3. Compliance Risks: Companies that have applied the 0% VAT rate to similar transactions may face audits, reassessments, or penalties from tax authorities aligning with this guidance.

Conclusion

The Ministry’s guidance marks a pivotal shift, signaling that bonded warehouses may no longer serve as a reliable substitute for the tax benefits historically tied to on-spot export-import.