Payrolls in Vietnam are complicated processes and are areas where mistakes can easily become the norm unless businesses registered and operated in Vietnam are careful, consciously monitoring and reviewing their processes, procedures and calculations.
At Vieter, we undertake compliance and payroll reviews for companies in Vietnam, and commonly identify errors and mistakes for management to correct and amend. Below are our ten most common errors we see in Vietnamese payrolls when undertaking payroll compliance reviews:
1. Probation periods longer than permitted
Probation in Vietnam is generally restricted to 30 days for most jobs, and 60 days for roles requiring university degrees. Any probation period longer than these periods is likely invalid and will usually result in employees to be deemed to have entered into an ongoing employment contract. Considering that the remuneration during the probationary period may constitute a minimum of 85% of the salary stipulated in the employment contract (with the employer disbursing the full 100% gross salary only upon the employee’s transition to a formal labor contract), coupled with the varying methodologies applied to tax and insurance deductions, this scenario can create inaccuracies in payroll computations. It is therefore imperative to exercise due diligence in these matters to ensure payroll accuracy.
2. Payroll records not matching with accounting records
Human resource teams processing payrolls are usually responsible for final payroll calculations, including calculating Personal Income Taxes, Social Insurances contribution that need to be remitted to the authorities. However, accounting teams need to record these figures into the financial records of the company, as well as remit the Taxes and Social Insurances. The issue is that the two teams commonly have different values for these in their records due to last minute changes or different interpretations. Companies need to have a process to reconcile and correct these differences between the human resource and the accounting teams, to avoid ongoing errors and resultant penalties.
3. Tax on benefits not included in the payroll calculations
Certain benefits including in-kind benefits provided by companies can have Personal Income Tax implications, and these are to be included in the Payroll Policies. For example, Vietnamese visas for foreign staff paid by their employer are subject to Personal Income Tax and the taxes on these benefits need to be included in the payroll calculations and remitted to the authorities.
4. Net salaries versus gross salaries
Vietnamese labour laws are structured around gross salaries being the default approach for employers. Taxes are withheld from the employee’s gross salary, and insurances are applied to the employer and employee based upon the gross salary. Where employers agree to apply net salary contracts for staff, calculations become significantly more difficult. Further, although personal taxes are being paid by the employer, any tax refunds will usually be returned direct to the employee despite the employer having borne these as costs.
5. No work permits for foreign staff
Labour Laws do not permit labour contracts to be entered into with foreign individuals unless they have a Work Permit (or a Work Permit Exemption Certificate). Engaging and contracting with foreign staff without a Work Permit can result in payments being non-tax deductible, along with risks of deportation for employees and Labour Law sanctions for employers.
6. “Insurance” salary concept
Historically, many companies in Vietnam creatively recorded very low base salaries (commonly referred to as the “Insurance salary”), paying the balance of the agreed salary to staff as bonuses and allowances. This process resulted in low Personal Income Taxes and payroll insurances being calculated. However, current laws make this approach generally ineffective and simply exposes employers to penalties and additional taxes. The law essentially states that all payments received by employees are taxable and subject to insurances, unless specifically excluded – and although there are some exclusions, available exclusions are often insignificant.
7. Failure to update tax/insurance rates – the “Excel trap”
Personal Income Tax rates, minimum salaries, salary for Social Insurance contribution caps and insurance rates can all change up to twice per year. As the vast majority of businesses in Vietnam use Excel to process their payroll, payroll staff are often unaware that they need to manually update the formulas within their Excel payroll templates – and it is not uncommon to see many years of changes having been ignored when undertaking monthly payroll calculations.
8. Payments and bonuses that are not included in contracts or internal policies
Unless labour contracts or internal policies detail and permit additional payments for staff, these payments may not be considered tax deductible expenses for Corporate Income Tax purposes, causing trouble for employers. In addition, mentioning these other payments or bonuses in the company policy is strictly required to legitimise them if they are processed through payrolls.
9. Failure to document or complete tax finalisations and annual payment (withholding) summaries for staff
Employers are able to complete tax finalisations for their staff where the staff do not have employment income from other employers during the year. This does require employers to have signed declarations retained on file permitting them to do the finalisations (i.e. Authorisation Letter for Personal Income Tax Finalisation, signed and provided by eligible staff). In addition, for those staff that do not provide their employer with such signed authorisation, the employer will need to issue annual payment (withholding) summaries – a set of income documents including Income Confirmation Letter and Personal Income Tax Withholding Certificate to their staff so that staff can finalise their own taxes.
10. Missing or incorrect overtime and night working salary calculations
Based on the employer’s business nature, overtime work and work performed during night hours can be required to ensure operational productivity and quality. As stipulated by the Vietnamese Labour Code, staff working overtime or at night are entitled to additional pay called overtime and night working salaries, which are calculated based on specific regulations relating to percentages of regular salary and tax deductions. Accordingly, employers, if not careful to consider this matter, may face the risk of missing or incorrect calculations in the payrolls, leading to underpayment or overpayment to the staff, as well as inappropriate Personal Income Tax amounts processed to the tax authority.
If you need any assistance with these or any other matters of HR and payroll in Vietnam, to ensure you are compliant and protected in the market, our experts are ready to support.