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Value-Added Tax Refunds in Vietnam

The coronavirus (Covid-19) outbreak has created major economic disruptions and the global economy is projected to contract sharply by -3% in 2020 (source: IMF World Economic Outlook 2020, April 14, 2020). Likewise, the economic impact has intensified in Vietnam due to social distancing, the stoppage in production, disruptions in business investments/operation resulting in losses and difficulties for investors and business communities.

The crucial issue for business continuity is the cash flow of investments. Key concerns for all businesses are to ensure their businesses can survive during the pandemic and there are sufficient resources for the recovery and development afterwards.

Getting a value-added tax (VAT) refund is necessary under a business continuity plan to refresh cash flow, particularly for investment projects located in Vietnam where the establishment enterprise is under the investment/construction phase and has yet reach to operation phase from the end of 2019 to 2020.

VAT Refund Regime

Businesses could apply for a VAT refund if one of the following conditions apply (but not limited to these):

  • adopt the credit method for VAT declaration and the project is manufacturing/selling the output goods/services subject to VAT;
  • currently under the investment phase and has commenced its operation; and
  • accumulated creditable input VAT on goods and services purchased for investment activities is 300 million dongs ($12,860) or above.

Despite the clear guidance, the procedure on VAT refund is not straightforward—enterprises may encounter potential risks and obstacles during the VAT refund process. Below is a summary of key potential risks.

VAT Refund Application

  • It is advisable for enterprises to consider the following common issues related to granted licenses, charter capital, doing business in some conditional business areas:
  • if the registered investment period is shorter than the actual completion time, the incurring input VAT out of investment time-frame shall be carried forward instead of being refunded;
  • investment projects are not qualified for the conditional business lines required by relevant laws/regulations or have not obtained the required sub-licenses as prescribed in prevailing regulations;
  • insufficient contribution to the registered charter capital, or failure to provide valid evidence on completion of capital contribution either in cash or in an asset.

Refunds under Investment Phase

Generating revenue from selling samples during the investment phase may be questioned by local tax authorities. In some cases, the tax officer will try to cut off the VAT refund period incurring testing revenue, and to reduce the total refund amount once the tax audit has taken place.

Input VAT from Purchases

It is common that the disallowed refund/credit input VAT due may neither comply with the legal regulations in terms of supporting documents for input purchases, nor fulfill the requirements for non-cash payment; incomplete payments for purchased goods-services using for an investment project would be one of the reasons for failing the non-cash payment requirements.

The same issue can occur in other cases where enterprises conduct business operations as well as investments in other projects without recording the input VAT on goods and services purchased to use for investment projects versus the input VAT of implemented production and business activities.

Common Mistakes

Some common mistakes on the VAT refund application include:

  • enterprises not blocking the VAT refund requested amount before officially getting into the business operation;
  • not registering the bank account receiving the refund amount or e-tax payment registration as regulated by laws;
  • non-compliance with VAT declaration forms; or
  • adjusting the tax return numerous times without proper reason for such revisions with the tax authority.

Timing

The funds for a VAT refund reimbursement are included in the annual state budget estimates decided by the National Assembly, and local managing tax departments are responsible for managing the allocated funds.

Local tax authorities are under pressure to manage the funds effectively, especially to meet the assigned tax collection targets/spending, or at calendar year-end. Hence, VAT refunds are more complicated than ever for businesses gaining the tax authority’s approval of the requested VAT refunded amount.

The government has taken several aid packages from the state budget to support people and restore businesses directly affected by the pandemic. Consequently, audits might be performed by the tax authority strictly in both quality and quantity in order to achieve the state budget by the end of 2020.

The tax authority can present unpredictable challenges, leading to a time-consuming completion of VAT refund procedures. It is recommended that experienced accountants be appointed to present well-prepared explanations to the tax authorities.

Planning Points

In an overview by the IMF, in 2020, the Covid-19 pandemic will peak in most countries in the second-quarter of 2020 with numbers reducing in the remaining half of the year. Based on this global outlook, Vietnam’s economy could be restored by the beginning of the third quarter of2020. Investors are therefore advised to pay close attention to cash flow issues and implement VAT refunds for investment projects (where applicable) as soon as possible.

An action plan for enterprises is outlined below:

  • set up a plan to review the eligible VAT refund opportunity of your business;
  • determine necessary and sufficient conditions for tentative VAT refund project and to start the preparation of the documents;
  • consider the appropriate timeline of the VAT refund application based on current available human resources, point of time to work with tax authorities to reduce other burdens of year-end local statutory book closing/financial statements preparation, etc.;
  • gain an overview of the specific opportunity, risks, and challenging points in the VAT refund process. Seek consultation from tax experts in advance to optimize a VAT refund application/number of refund requests; and
  • appoint a team of experienced accountants to prepare documentation/arguments based on the circumstances of the project to minimize negative challenges/opinion from the tax authority.

Last, but not least, enterprises established under new investment projects that have not conducted VAT refunds under the investment phase should:

  • seek the refund VAT for the investment period; and
  • apply for approval from the tax authority to extend the deadline for paying VAT payables incurred for the business operation period (if any and right after locking the request for the refund amount) according to Decree No. 41/2020 (in order to minimize tax expenses and utilize the cash flow).

Nguyen Thu Phuong is Tax Services Director and Nguyen Hung Du is Tax Services Partner at Grant Thornton Vietnam.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.