The General Department of Taxation and the Ho Chi Minh City Department of Taxation have recently issued alerts highlighting common infringements that they have identified when undertaking reviews of enterprises in Vietnam. The findings are focussed on a number of sectors where the compliance issues are more regularly identified, namely enterprises operating within trading, import/export, real estate and e-commerce areas, along with entities that have related party transactions.
Enterprises in Vietnam should review these common infringements published by the tax authorities as they highlight matters that will almost certainly be reviewed when they undertake their next inspection. However, they also serve as a good checklist for enterprises to undertake their own review for internal governance and compliance purposes.
Summaries of significant and common infringements identified and highlighted are:
Trading & import/export enterprises
Value Added Tax (VAT)
- Imports made through entrusted foreign individuals who are not in business in order to avoid tax.
- No indication of an entrusted/authorized organization on the customs declaration and no authorization contract available so as to be treated as self-trading goods to avoid tax.
- Cancellation of output invoices without cancellation minutes or without a valid reason.
- Incorrect tax rates applied in the declaration for goods sold, and conducting unregistered promotional schemes.
- Failure to allocate input VAT proportionally/appropriately against non-taxable revenue.
- Declaration of deductible input VAT for invoices that were not related to production or business activities, or duplicate invoices used.
Corporate Income Tax (CIT)
- Depreciation of fixed assets that are not used for production or business, and depreciation of assets exceeding the prescribed caps.
- Paying salaries without labour contracts.
- Salary and financial expenses without vouchers, salary costs higher than recorded in the payroll, and bonuses paid but not specified in contracts.
- Use of “illegal” invoices, paying cash for invoices exceeding VND 20 million, and failure to obtain sufficient invoices and vouchers.
- Expenses for advertising, marketing, promotion and brokerage commissions exceeding the prescribed cap.
- Recording of interest expenses for non-business activities.
- Declaration of expenses not related to production and business activities.
- Declarations using incorrect exchange rates.
- Welfare expenses exceeding the stipulated one-month average salary.
Personal Income Tax (PIT)
- Failure to declare PIT for capital investments, personal loan interest, and commissions paid to individuals.
- Failure to declare PIT for agents’ staff.
Foreign Contractor Withholding Tax (FCWT)
- Failure to declare tax paid on behalf of foreign contractors for payments to the contractors.
Enterprises with related party transactions
- Transfer Pricing by increasing input costs, including self-valuation of machinery and equipment, capital contributed by assets and purchasing raw materials within the group with higher prices to increase cost of goods leading to losses or lower profits.
- Transfer Pricing through output factors, such as selling goods and services to parent companies at prices lower than market prices.
- Transfer Pricing through using services (eg. marketing, advertising, and consulting management), but there is no support that the services were in fact provided.
- Where the costs of parent companies are allocated to subsidiaries, payments made on behalf of others in the group which are not transparent and lacking proof for actual services provided.
- Payment of trademark, copyright and training expenses which cannot be certified.
- Interest rates on loans to related parties higher than the interest rate of commercial banks or interest-free loans to transfer the interest to the enterprises incurring loss or those entitled to tax incentives (exemption and reduction of CIT).
- Trading with companies with preferential tax rates or companies based in “tax havens”.
The Ho Chi Minh City Department of Taxation has stated that it will promote tax inspections and undertake examination of companies having related party transactions and that have the attributes indicated below:
- Reporting losses for numerous consecutive years, or having incurred the loss of owners’ equity, but still continuing operations.
- Reporting high income during preferential periods but income decreases gradually when the tax incentives for the enterprise start expiring.
- Reporting continuous profit margins lower than the average margin in the industry.
Construction & real estate enterprises
Infringements relating to the time invoices are issued and recording of revenue
- Real Estate companies that fail to declare VAT and pay provisional CIT when collecting payments according to payment schedules in contracts.
- Construction companies not issuing invoices, or delaying issuing invoices to wait for input documents to be obtained, thereby reducing taxes payable.
- Construction companies issuing invoices for advance amounts upon investor requests (for the investors’ VAT deduction purposes) which are not in accordance with the related accounting regulations.
- Failure to issue invoices (and record revenue) at the time of hand-over, and only issuing when the entire project is completed.
Infringements relating to using conversion methods to avoid taxes
- Transferring properties to individuals at a recorded price lower than the market price to reduce tax obligations (CIT is taxed at 20% on profit), with the individuals selling back the same properties to the investor at the true market price (PIT is taxed at 2% of the sales price).
Infringements related to profit transfer activities.
- Trading with affiliates that do not follow market prices, or carrying out transactions to transfer profits to enterprises entitled to tax incentives, or to transfer profits to enterprises that are incurring losses in order to reduce taxes.
- Entering into loan agreements at 0% interest rate with real estate enterprises, where the interest expense would be otherwise capitalized and included in expenses to calculate CIT deductions many years later (when the project is completed and starts generating revenue). This was for group enterprises that lend to avoid (interest) income being earned by one enterprise in a period, and deferring income in the other enterprise for later periods.
- Income from lending activities must be declared and subject to CIT in the year earned. Enterprises cannot use timing differences to facilitate the taxable income of the lender when the deductible costs of the borrower are higher.
- Borrowing and lending enterprises cannot use methods of profit transfer (the transfer of profits from lenders to borrowers) to avoid tax.
Tax fraud
- Establishing a chain of businesses to raise costs and deductible VAT from subcontractors, main contractors, project enterprises, and subcontractors using “illegal” invoices.
Infringements relating to incorrect accounting treatments for tax declarations
- Enterprises that borrow money and record the interest as a deductible expense, but where the enterprises have not yet fully contributed charter capital or have contributed capital “virtually”.
- Enterprises providing cash advances to individuals, but unable to verify the purposes of such advances.
E-commerce enterprises
- Receiving payments for goods through bank accounts not registered with tax authorities.
- Failure to record cash payments collected on behalf of the seller by shipping agents.
For these infringements, the authorities’ approach is to seek to detect these by:
- Obtaining the bank account of the seller from the e-commerce site and verify revenue generated by that seller through such bank account.
- Inspecting shipping agents records to verify payments collected on behalf of the sellers.
For individuals and businesses that generate revenue from providing outbound services to foreign social websites (such as Google, Facebook and YouTube), infringements include:
- VAT: enterprises providing advertising services to foreign organizations for social networks in Vietnam (services being consumed in Vietnam) but declaring as exported services subject to 0% VAT tax rate, while the correct VAT tax rate is 10%.
- CIT: enterprises providing advertising services, input services and data processing services, but which self-determine as software production as their software production would be entitled to a CIT incentive rate of 10%, whereas the standard CIT rate of 20% should be applied.