We discuss the key points of tax audits for representative offices in Vietnam, considering that these entities rely entirely on their parent companies without the ability to generate profits or enter into contracts independently.
Representative Offices (ROs) in Vietnam must undergo a tax audit to determine their payable tax. This audit examines all expenses during the tax term to establish the basis for tax declaration and payment. ROs must additionally send reports of its activities of the previous year to the Department of Industry and Trade (DIT) before January 30 of each year.
The tax approach for ROs is unique as they do not generate revenue. And, since they are prohibited from generating taxable income, ROs are not subject to corporate income taxation (CIT) in Vietnam. ROs are dependent on their parent company and are not allowed to generate their own profits or enter directly into contracts.
They are also prohibited from issuing invoices. Such entities are permitted to engage only in specific activities, such as conducting market research, acting as a liaison office for their parent company, and promoting the activities of their head office through meetings and other engagements that may lead to business at later stages.
According to Article 07 of Decree 07/2016/ND-CP, a foreign business entity that has been duly established and operating for at least one year under the laws of its home country is eligible to apply for the establishment of a resident RO in Vietnam. The foreign company is entitled to establish ROs in any province within Vietnam, and there is no limit to the number of ROs a foreign company can have in the country.
Tax audit and declaration for ROs in Vietnam
1) An RO will be subject to a tax audit when closing its tax code.
2) During the RO’s operation, it must declare Personal Income Tax (PIT) returns:
- According to Article 8, Decree 126/2020/NĐ-CP, RO declares PIT on a monthly and annual basis only. (An official letter is required to be submitted to the tax authority where the RO is located to seek a confirmation on whether the RO can declare PIT returns on a quarterly basis or not.)
- Under the expatriate’s tax code if they receive income from a foreign company, not the RO in Vietnam, on a quarterly and annual basis, and make tax payments to the tax authority.
Vietnamese tax codes or tax identification numbers (TINs) are 10 or 13-digit codes assigned to individuals and firms to determine the scope of their tax liability.
Additional tax requirements
PIT rate
- For Vietnam tax residents: Progressive tax from 5 percent to 35 percent on taxable employment incomes.
- For Vietnamese tax non-residents: A flat tax rate of 20 percent on taxable employment income.
PIT filing and payment
- Monthly basis: The deadline for monthly PIT return and payment is by the 20th day of the subsequent month.
- Quarterly basis: The deadline for quarterly PIT return and payment is by the last day of the first month of the subsequent quarter.
- Annually (Finalization): The annual PIT return must be filed and submitted no later than the last day of the third month after the fiscal year-end. The outstanding tax payable must be paid at the same time.
Although the RO does not generate revenue and is not required to maintain an accounting book, it is suggested that the RO maintain a comprehensive expense report and keep sufficient supporting documents, such as VAT invoices, financial policies to support each expense reimbursement by the RO’s employee, approved expense reports, and copies of bank payments.
This helps avoid any unnecessary challenges raised by the tax authority in a future tax audit for tax code closure.
Preparing your Vietnam entity for tax compliance
Tax audits are a top priority in the tax enforcement program administered by Vietnamese authorities. The number of tax audit cases and corresponding tax collections have increased substantially, particularly in areas such as indirect tax, transfer pricing, and personal income tax.
Additionally, tax regulations are becoming increasingly complex and unclear, making the audit process more daunting due to the frequent data requests and inquiries from tax authorities.
Consequently, many taxpayers end up settling for unreasonably high taxes and penalties because they lack the resources to manage the audit process effectively and do not have a clear strategy for defending their tax position. This situation often arises from a lack of understanding of the technical issues being challenged due to regulatory changes and complexities, as well as a lack of awareness of their rights and obligations during the audit proceedings.
Dezan Shira & Associates can provide comprehensive support to Representative Offices in Vietnam with their tax compliance and reporting obligations. For queries and professional advisory, please reach out to our experts at vietnam@dezshira.com
