Being a dependent unit of a foreign company to conduct a number of limited commercial promotion supporting activities permitted by Vietnam laws, a Vietnam-based representative office without carrying out any profit-making activities seems to be quite simple to manage, save cost and simplify the compliance procedures during operation, i.e. no Value Added Tax (VAT), no Corporate Income Tax (CIT), no requirement to maintain the stipulated accounting books, no independent audit required by laws, etc. However, Vietnam tax authority still conduct tax audit on the representative office in order to inspect its tax compliance in Vietnam, especially for unusual administrative activities such as closing an office, extending an operation license, requesting a tax refund or even according to the tax authorities’ audit plans. The representative office therefore should well prepare for the Personal Income Tax (“PIT”) audit not only at the time of receiving the tax authority’ notification on tax audit but also during the operation to minimize any unexpected tax risks and additional tax exposures upon tax audit.
With an aim to help the foreign companies as well as their representative offices to well prepare for a tax audit and minimize tax exposures and penalties resulting from tax violations, we will highlight in this article the key tax risks, discuss proper actions for planning and implementing the tax audit based on our practical experience.
POTENTIAL TAX RISKS LIKELY TO BE CHALLENGED BY TAX AUTHORITY IN VIETNAM
Given that a representative office is only allowed to conduct a number of commercial promotion activities permitted by Vietnam laws without directly generating income and only maintains a number of employees to carry out its supporting function, it is only required to declare and pay PIT liabilities to the local tax authority. Accordingly, during the tax audit, the tax authority normally pays high attention on some common PIT areas as follows:
- Compliance status in the calculation and declaration of the employees’ PIT liabilities incurred from their remuneration package;
- Compliance status in the calculation of the severance/ redundancy allowance and any other compensation paid to the employees for their employment termination as well as the PIT declaration (where applicable);
- Any under-declaration on incomes or benefits/ allowances paid to individuals (i.e. both employees and non-employees);
- Sufficiency of documents proving the employees’ benefits (e.g. labour contract, internal policy, collective labour agreement, etc.);
- Sufficiency of legitimate invoices and supporting documents for the representative office’ operating expenses as stipulated by laws.
Among these, the last point is the most remarkable as in practice the local tax authority bases on the provision of CIT and VAT regulations to identify the legitimation of the representative office’ expenses and deem tax in case of having any tax violation. In this regard, given that the representative office is not required to declare CIT and VAT and record accounting books according to Vietnam Accounting Standards (VAS), it seems not to pay high attention on recording the legitimate invoices and documents for the expenses during operation. Taking business expense as an example, the representative office is required to obtain/ maintain legitimate invoices for travel/ accommodation fees, boarding pass or e-ticket for air ticket fee, travel request issued by the board of management or the parent company, internal policy for per diem, non-cash payment order for any payment over VND20 million, etc.; otherwise, the tax authority has rights to deem 10% PIT on the expenses lacking of legitimate supporting documents with the viewpoint that these expenses are not related to the representative office’s business function and hence considered as individuals’ benefits.
Apart from the PIT, the tax authority may inspect Foreign Contractor Tax (FCT) if the representative office makes any payment to foreign contractor as well as inspect to ensure the representative office does not conduct any profit-generating activities in Vietnam.
Consequently, non-compliance on PIT will result the following tax exposures and penalties:
- PIT arrears on the under-declared incomes and benefits;
- 20% administration penalties or from 1 to 3 times the evaded PIT liabilities for tax fraud/ evasion; and
- Late payment interest on the outstanding PIT obligations per overdue days at 0.03% which is applied from 1 July 2016 onwards.
HOW TO PREPARE FOR TAX AUDIT PROCEDURE
Understanding how the tax audits work can help the representative office to reduce PIT exposures, especially in the difficult situation of current Covid-19 pandemic. A tax audit takes the following phases in Vietnam:
Prior to tax audit/ inspection phase
The tax authority will send a notification on requesting explanation, information and documents to the representative office as well as assigning authorized representatives to work with tax officer in-charge at the tax office. Accordingly, upon receipt of such notification, the representative office is recommended to review the documents to identify potential tax risks and non-compliance areas which might be challenged by the tax authority as discussed above, and have proper actions. At this stage, the representative office should consider:
- Reviewing the accuracy of PIT calculation for employees according to the monthly payrolls and PIT returns;
- Reviewing the compliance in PIT filing (e.g. whether the representative office has declared monthly/ quarterly/ finalization PIT in timely manner and whether the representative office has paid PIT liabilities according to the submitted PIT returns, etc.).
- Adjusting the relevant PIT returns in case of having any under-declared PIT and paying PIT obligations and penalties (if any);
- Reviewing cash and bank books to ensure the consistency of opening balance and ending balance upon receiving funds from the parents company and paying expenses during the operation;
- Reviewing all expenses recorded in cash and bank books to ensure they are supported by legitimate invoices and sufficient supporting documents;
- Being aware of the tax exposures for having proper explanation to the authority upon tax audit.
Accordingly, the representative office is recommended to assign persons in-charge who understand clearly about their PIT filing and business activities for developing an appropriate strategic plan for the upcoming tax audit, and directly working with the tax authority at the next step.
During tax audit/ inspection phase
At this stage, face-to-face meeting between the authorized persons of the representative office and the tax authority is required for documents submission and explanation. During the tax audit, the tax authority normally requests the following information/ documents related to the inspection period for assessment:
- Initial and amended establishment licenses of the representative office;
- List of Vietnamese employees and expatriates working at the representative office in the inspection period;
- Labour contract/ Assignment letter and Termination agreement of the employees;
- Submitted PIT finalization returns of the representative office and the expatriates;
- PIT payment vouchers to the State Treasury;
- Monthly payroll calculation;
- Bank statement and cash/ bank book of the representative office;
- Submitted annual reports on operation of the representative office; and
- Other supporting documents related to the representative office’s expenses.
Post tax audit/ inspection phase
Upon completion of the tax audit, the tax authority will issue working minutes on data record after reconciliation on PIT finalization documents for summarizing the tax filing status of the tax payer for outlining the findings together with the PIT exposures (if any). Accordingly, in the event if the representative office does not agree with the tax authority’ opinion and PIT liabilities arrears in the minutes, it is able to appeal for expressing the opinion with the tax audit result.
In spite of the disagreement with the tax audit result, upon the issuance of notification on supplementary declaration on the additional PIT liabilities arrears, the representative office should declare and remit the additional PIT liabilities and late payment interest to the State Treasury within the prescribed timeline in parallel with continuing the tax appeal in order to avoid any additional late payment interest.
In order to mitigate tax risk, the representative office should have good understanding and preparation for tax audit. In particular, the below actions should be take into consideration:
- Periodically self-reviewing to identify any potential tax risk and exposures for having proper actions in advance. The reason being there is some circumstances that the tax authority does not agree with the postpone of documents submission upon issuance of notification on information request/ tax audit;
- Developing an appropriate plan and assigning a suitable personnel to work with the tax authority during tax audit;
- Further to unclear tax matters, we would recommend the representative office to research the official letters providing guidance on the similar cases; otherwise, a ruling letter addressed to the local tax authority is highly recommended to avoid challenge in the future; and
- In the event if the representative office does not agree with the decision of the local tax authority, the representative should consider a proper appeal plan to obtain the appropriate decision.
Grant Thornton Vietnam hopes that the above highlights are useful for the foreign companies and their representative offices to be well prepared for the tax audits and minimize any unexpected tax risks. Should you require any further information or support, please contact our experts.