Mr Nguyen Dinh Huy and Mr Nguyen Hung Du, of Grant Thornton Vietnam, explain how businesses need to prepare for a tax audit in Vietnam, looking at the common areas likely to be challenged by the tax authorities.
The Covid-19 pandemic is causing many financial difficulties for the Vietnamese business community, while the concerns of tax inspections, tax penalties and tax collections continue. When the costs of non-compliance with tax regulations could significantly affect the budget/cash flow of businesses, it is important that businesses are aware of the key tax risks and have suitable action plans in place.
According to recent statistics from the Vietnam Ministry of Finance (MOF), the collection budget of the first six months of 2020 accounted for 43.9%, a decrease of 11.1% compared to the same period in 2019. This figure is the lowest it has been in the last seven years.
The MOF has guided many local tax authorities and customs departments to strengthen the management of tax collection, prevent tax losses, transfer pricing, tax evasion, and reduce outstanding tax debts.
Tax enforcement/collection can be carried out via a tax audit. Normally, the tax collection amount from a tax audit/inspection depends on (a) how many key tax areas of a business are identified and remedied with action plans; (b) how a business manages the tax audit progress with the tax inspector; and (c) the appeal action against an unfavorable tax collection decision.
Common Tax Risk Areas Likely to be Challenged by Tax Authorities
The Vietnam tax system requires taxpayers to conduct a self-tax assessment/declaration/settlement; then tax exposure will be identified by the tax authorities upon the commencement of a tax audit.
A tax audit plan should prevent tax loss, transfer pricing, tax evasion and reduce tax debts; focus on potentially high-risk businesses; along with strict management of tax refund by applying information technology; and control with the purpose of ensuring that the company complies with the regulations.
The most common tax areas that might be challenged by the tax authorities are discussed below.
Corporate Income Tax (CIT)
- Incorrect CIT incentives applied to new projects and expansion projects (tax exemption/reduction and preferential tax rate);
- Offset profit and loss between business activities and losses carried forward;
- Inter-company services expenses (e.g. recharged management fees, shared cost, services fees, etc.);
- Technology transfer, franchise, royalty with requirements to register with the Science and Technology Department, where applicable;
- Interest expenses for companies having transactions with related parties;
- Inventory stock discrepancies after taking physical count, stock loss, damaged or expired inventories, etc.;
- Provisions, write-off of bad debts, the majority incurring in 2019–20;
- Recognition of discount/rebates/support; and
- Employment costs and other compensation costs due to employees being laid off.
Value-added Tax (VAT)
- Difference on revenue for VAT/CIT reconciliation;
- Incorrect allocation of input VAT corresponding to VAT-able and non-VAT-able revenue;
- Input VAT on inventory stock discrepancies, stock loss, damaged or expired inventories;
- Promotional campaigns without registering/notifying the Department of Industry and Trade;
- No output invoices issued for promotional goods/gifts; and
- VAT on discounts/rebates/support programs.
Personal Income Tax (PIT)
- Under-declared onshore and offshore income sources of resident individuals and benefits in kind/ in cash paid to employees;
- Not converting net income into gross income;
- Wrong determination of housing benefits and nontaxable incomes;
- Withholding obligations for any income paid out; and
- PIT withheld for the compensation paid to employees for the termination of employment due to a business restructuring plan/spin-off.
Foreign Contractor Tax (FCT)
- Determination of taxable revenues gained from supply of goods/goods with services which are delivered at bonded warehouse, inside or outside of Vietnam territory;
- Withholding tax on technology transfer fee/trademark fee/software; and
- Income generated from foreign contractors having a permanent establishment, or not, or application of double taxation agreement exemption/reduction.
Transfer Pricing (TP) Issues
- Incorrect determination of exemption from disclosure of TP transaction, exemption from preparation of TP documentation report or insufficient declaration in TP form;
- Lack of TP documentation to provide to the tax authorities upon the tax audit event;
- Unadjusted TP charges/allocation under Covid-19 pandemic creating a different business situation; and
- Challenge of TP documentation not being prepared by the deadline and timeline for submission to the tax authority.
The tax authorities may impose the following penalties:
- Tax obligations on such under-declared income;
- 20% administrative penalties or 1–3 times the evaded tax obligations for tax fraud/evasion; and
- Late payment interest at a rate of 0.03%/day on outstanding tax obligations.
Tax Audit Process
In the current difficult economic situation, any tax imposition also directly affects the business’s continuous operation and short-term cash flow. Hence, a good understanding of the tax audit process will help reduce the risks of tax imposition. The tax audit process is discussed below.
Prior to Tax Audit/Inspection Phase
This stage primarily involves reviewing the business operating process to identify potential risks and non-compliance areas which might be challenged by the tax authority. At this stage businesses should consider:
• Making necessary adjustments to reduce penalties and interest of late tax payment;
• Conducting proper implementation to mitigate the potential tax risk areas;
• Being willing to take the risks then trying to explain to the tax authorities should a tax audit occur.
In practice, without proper communication with a tax official in charge to discuss the tax audit plan in the tax year, the tax authority may suddenly inform the taxpayer of a tax audit, leading to unplanned workload and non-preparation or improper preparation for the tax audit. As a result, the tax audit may impact significantly on the financial position of the company.
Additionally, it is recommended that the company has a dedicated team which understands the company’s business activities, financial, and accounting position. Sufficient time should be arranged for the tax audit and proactively communicating with the tax inspection team to understand the scope and the review period, to develop an appropriate strategy for an upcoming tax audit.
During Tax Audit/Inspection Phase
At this stage, the tax authority will carry out the fieldwork at the enterprise’s site for the detailed review.
The communication channels, working atmosphere, and providing the tax inspectors with proper related tax information are all crucial for the tax audit project. It is advisable for the senior level or C-suite level (e.g. chief financial officer or chief accountant/finance manager) to be present on the first day of fieldwork to welcome the tax audit team, and introduce the company’s dedicated team members who will work closely and assist during the tax audit. A key member representing the team has an important role in answering any questions from the tax audit team’s side; communicating and negotiating with the tax audit team on related issues is always recommended.
Providing information/documents which are out of the scope of the tax audit can lead to unexpected challenges from the tax authority; hence, businesses should assess whether such issues/matters that the tax authority is challenging are really within the scope of the tax audit.
Businesses should carefully consider any explanations or documents that may contain potential risks that they may be linked to the underlying problems of the business. To minimize the number of times to be challenged by the tax authority the business may ask for an extension of time for preparation and submission later after reviewing carefully or consulting higher levels or tax advisers, since the tax inspection team only has a certain amount of time for fieldwork and to finalize any issues.
Post Tax Audit/Inspection Phase
Upon completion of the fieldwork phase, tax audit minutes will be produced to outline the findings, together with preliminary reassessments/tax exposures. The company will determine and evaluate the accuracy of such findings and exposures mentioned in the minutes. If the company does not agree with the minutes, seeking policy guidance from the General Tax Department/MOF or tax appeal should be considered at this stage.
In practice, there are many cases where businesses do not agree with the tax audit decision. The tax audit team may have been too aggressive and persistent with their point of view and rejected the company’s explanations, which will result in imposed tax and penalties. The tax appeal to a centralized authority can be considered (e.g. to the General Tax Department/MOF or the court, where applicable) on these occasions.
Whatever the outcome of the tax audit result, once the decision on the tax audit is issued, businesses should pay the additional tax and penalty within the prescribed timeline and follow the tax appeal procedure in parallel in order to avoid late payment interest. A timely meeting with the board of management to overcome the obstacles, possible exposures, and tentative appeal plans is suggested during this phase.
The tax audit work may need to run parallel to the business developments/business activities/function of finance team of the businesses.
In order to minimize the cash payout amount with relation to tax penalties/tax re-collection, where occurring, and whether or not the tax audit project has performed under the initial plan, it is necessary to pay attention and invest both time and effort, as described above.
In order to help the preparation for a tax audit, businesses should consider:
- Developing a clear strategy, preliminary timeline/schedule, and a strong supporting/dedicated team to work with the tax authority during the tax audit;
- Periodically self-reviewing to identify and assess key potential risk areas/issues, estimate in advance the tax exposures and determine the proper action plan to minimize any tax risks;
- For unclear tax matters/uncertain tax policies, researching the relevant official letters which are similar to the company’s case is recommended, or seeking the specific ruling which provides direct guidelines to the case for reference and protection if challenged by the tax authority; and
- If the company does not agree with the tax audit decision then consider a proper appeal plan to obtain the most appropriate decision/judgment.