At the end of the year enterprises have a lot of works to do when itcomes to finalising tax. They may also get ready for inspections by thetaxman.
On the sidelines of Deloitte Vietnam’s TaxUpdate Seminar on November 26 where Deloitte experts shared experiencesin year-end tax finalisation and exposures from recent tax inspections,The Saigon Times Daily spoke with Phan Vu Hoang, Tax Partner of DeloitteVietnam, over some tax issues that might be of enterprises’ interest.
* What issues taxpayers should pay particular attention to in tax inspections and audits this year?
In 2013, in line with the newly amended Law on Tax Administration(“LOTA”) effective from July 2013, tax authorities have strengthened taxaudit and tax inspection activities. One notable issue in the amendedLOTA is that tax authorities will manage taxpayers through frequentanalysis of financial statements, assessment of compliance level, andconsequently classification of risk level with regard to tax compliance.Accordingly, tax authorities would more frequently investigate andaudit corporate taxpayers with high tax compliance risk than others.
From a closer look at Directive 02/CT-BTC issued on 8 August 2013 andDirective 04/CT-BTC issued on 6 November 2013 by the Minister ofFinance, some official letters issued by the Ministry of Finance andGeneral Tax Department, and from our experience of assisting ourclients, we would like to highlight the following cases that are viewedas indications of high compliance risk taxpayers, for which specialconsideration and preparation in advance for snap tax audit and taxinspections are highly recommended.
Firstly,enterprises with transfer pricing indications, for example, those havingsignificant transactions with related parties, or those repeatedlymaking losses but still expanding business continuously. Secondly,enterprises with tax incentives and investment expansion in the periodfrom 2009 to 2013. Thirdly, enterprises in some specific industries suchas credit, banking, e-commerce, online business, mining, real estate,tourism and services. Fourthly, enterprises with large and frequentValue Added Tax (“VAT”) refunds, exporters of agricultural products,trading companies who export goods cross border, especially those withtypical indicators, such as registered capital much lower than revenue,companies operating trading activities without physical premises, andsettlement for export transactions via current accounts.
It should be noted that for most high risk taxpayers, tax refund willbe remarkably more difficult than usual, and in most cases would besubject to investigations before refund, instead of the current common“refund first, check later” mechanism.
* So what can enterprises do to avoid any troubles with tax finalisation?
In our observations of recent tax finalisation audits conducted by taxauthorities, we would like to draw your attention to some common issuesin tax finalisation. Various enterprises wrongly declared, orunder-declared tax in an unintended manner due to mistakes ormisunderstanding of current regulations. These issues or mistakes, ifnot settled in a timely and appropriate manner, might result in largeamounts of tax recollection and penalty when tax authorities visited fortax investigations or audits. Below are three common cases, among manyothers.
Enterprises with business expansion in theperiod 2009-2013 will not be entitled to tax incentives on their incomefrom the business expansion. Therefore, even if the enterprise isentitled to Corporate Income Tax (“CIT”) exemption and reduction, incomefrom business expansion would still be subject to tax at the standardtax rate. Taxpayers are required to account separately for the incomefrom business expansion, or allocate such income using acceptablemethods under prevailing regulations for CIT determination andcompliance purposes.
Performance bonuses, holidaybonuses, and ad hoc bonuses for the employees should be determined andstipulated as early and clearly as possible. Many enterprises are notallowed to deduct these reasonable expenses from their taxable incomebecause they did not specify the conditions for and level ofentitlements in Labor contracts, Collective Labor Agreement or FinancialPolicy.
Promotion and rebate programs are usuallyaccompanied by tax risks. Accordingly, enterprises with frequentpromotion activities should take into consideration the requirements andregulations under the Law on Commerce, as well as the requirements forinvoices and supporting documents in each program. For example, when anenterprise gives away gifts to their customers, they have to registerthese programs to the Department of Industry and Trade prior tolaunching, otherwise they will be required to issue invoices andrecognize the revenue as normal sales for VAT and CIT purposes withregard to these free gifts. In case of discount, the discount must beclearly stipulated on the relevant invoices.
* Giventhe VAT evasion cases in the past, getting VAT refund is tougher. Doyou have advice for taxpayers to avoid unnecessary issues involving thismatter?
Recently, the amended regulations oninvoices have facilitated more flexibility and autonomy by enterprisesin their business operations. However, VAT evasion caused by “ghost”enterprises, issuance of fraudulent invoices or frauds also inflatedvastly. In this context, the Ministry of Finance has implemented variousschemes for prevention of such invasions, from issuing directives andofficial letters to the General Department of Taxation, provincial TaxDepartments requesting a strengthening of tax refund investigations forbetter compliance, classification of risks with regard to VAT refundapplications of exporters for investigations before refund.
These schemes, while on one hand reinforcing the VAT collection ofsome fraudulent enterprises, on the other hand causing variousdifficulties to “bona fide” enterprises. For VAT refund, instead of onlyinvestigating the direct vendor who supplies goods to the enterprisesas previously, tax authorities now investigate upstream even to thefirst supplier in the supply chain. Exporters, especially those who haveto gather materials from multiple locations, from various levels ofvendors, would face recurrent difficulties and delays in VAT refund,since only one minor infringement by one vendor in the chain, the wholeVAT refund process will be suspended.
Therefore,apart from aggressively petitioning to tax authorities directly or viaconsultants to seek solutions, enterprises should also actively set upan internal control mechanism to avoid unnecessary issues from the VATrefund process.
In particular, it is recommendedthat frequent VAT refund applicants should consider purchasing fromreliable vendors and obtain sufficient information regarding the relatedsupply chain from the vendor. In addition, enterprises shouldfrequently update themselves on the latest regulations and requirements,especially those regarding invoices and documentation from taxauthorities. There should also be policies and procedures for variousrelated departments and units within the organisation to check invoicesthoroughly, and frequent updates of absconding enterprises from theauthorities’ database. Furthermore, the issuance of invoices by theenterprises should also be taken seriously, since an invalid outputinvoice may result in non-creditability of corresponding input VAT invarious circumstances.
The above activities, ifimplemented appropriately, can help enterprises to actively relievethemselves from various challenges regarding invoices and supportingdocuments upon tax investigations/audits, to intensify the chances forgetting full input VAT refund and to ensure deductibility of their validand reasonable expenses from business operations./
On the sidelines of Deloitte Vietnam’s TaxUpdate Seminar on November 26 where Deloitte experts shared experiencesin year-end tax finalisation and exposures from recent tax inspections,The Saigon Times Daily spoke with Phan Vu Hoang, Tax Partner of DeloitteVietnam, over some tax issues that might be of enterprises’ interest.
* What issues taxpayers should pay particular attention to in tax inspections and audits this year?
In 2013, in line with the newly amended Law on Tax Administration(“LOTA”) effective from July 2013, tax authorities have strengthened taxaudit and tax inspection activities. One notable issue in the amendedLOTA is that tax authorities will manage taxpayers through frequentanalysis of financial statements, assessment of compliance level, andconsequently classification of risk level with regard to tax compliance.Accordingly, tax authorities would more frequently investigate andaudit corporate taxpayers with high tax compliance risk than others.
From a closer look at Directive 02/CT-BTC issued on 8 August 2013 andDirective 04/CT-BTC issued on 6 November 2013 by the Minister ofFinance, some official letters issued by the Ministry of Finance andGeneral Tax Department, and from our experience of assisting ourclients, we would like to highlight the following cases that are viewedas indications of high compliance risk taxpayers, for which specialconsideration and preparation in advance for snap tax audit and taxinspections are highly recommended.
Firstly,enterprises with transfer pricing indications, for example, those havingsignificant transactions with related parties, or those repeatedlymaking losses but still expanding business continuously. Secondly,enterprises with tax incentives and investment expansion in the periodfrom 2009 to 2013. Thirdly, enterprises in some specific industries suchas credit, banking, e-commerce, online business, mining, real estate,tourism and services. Fourthly, enterprises with large and frequentValue Added Tax (“VAT”) refunds, exporters of agricultural products,trading companies who export goods cross border, especially those withtypical indicators, such as registered capital much lower than revenue,companies operating trading activities without physical premises, andsettlement for export transactions via current accounts.
It should be noted that for most high risk taxpayers, tax refund willbe remarkably more difficult than usual, and in most cases would besubject to investigations before refund, instead of the current common“refund first, check later” mechanism.
* So what can enterprises do to avoid any troubles with tax finalisation?
In our observations of recent tax finalisation audits conducted by taxauthorities, we would like to draw your attention to some common issuesin tax finalisation. Various enterprises wrongly declared, orunder-declared tax in an unintended manner due to mistakes ormisunderstanding of current regulations. These issues or mistakes, ifnot settled in a timely and appropriate manner, might result in largeamounts of tax recollection and penalty when tax authorities visited fortax investigations or audits. Below are three common cases, among manyothers.
Enterprises with business expansion in theperiod 2009-2013 will not be entitled to tax incentives on their incomefrom the business expansion. Therefore, even if the enterprise isentitled to Corporate Income Tax (“CIT”) exemption and reduction, incomefrom business expansion would still be subject to tax at the standardtax rate. Taxpayers are required to account separately for the incomefrom business expansion, or allocate such income using acceptablemethods under prevailing regulations for CIT determination andcompliance purposes.
Performance bonuses, holidaybonuses, and ad hoc bonuses for the employees should be determined andstipulated as early and clearly as possible. Many enterprises are notallowed to deduct these reasonable expenses from their taxable incomebecause they did not specify the conditions for and level ofentitlements in Labor contracts, Collective Labor Agreement or FinancialPolicy.
Promotion and rebate programs are usuallyaccompanied by tax risks. Accordingly, enterprises with frequentpromotion activities should take into consideration the requirements andregulations under the Law on Commerce, as well as the requirements forinvoices and supporting documents in each program. For example, when anenterprise gives away gifts to their customers, they have to registerthese programs to the Department of Industry and Trade prior tolaunching, otherwise they will be required to issue invoices andrecognize the revenue as normal sales for VAT and CIT purposes withregard to these free gifts. In case of discount, the discount must beclearly stipulated on the relevant invoices.
* Giventhe VAT evasion cases in the past, getting VAT refund is tougher. Doyou have advice for taxpayers to avoid unnecessary issues involving thismatter?
Recently, the amended regulations oninvoices have facilitated more flexibility and autonomy by enterprisesin their business operations. However, VAT evasion caused by “ghost”enterprises, issuance of fraudulent invoices or frauds also inflatedvastly. In this context, the Ministry of Finance has implemented variousschemes for prevention of such invasions, from issuing directives andofficial letters to the General Department of Taxation, provincial TaxDepartments requesting a strengthening of tax refund investigations forbetter compliance, classification of risks with regard to VAT refundapplications of exporters for investigations before refund.
These schemes, while on one hand reinforcing the VAT collection ofsome fraudulent enterprises, on the other hand causing variousdifficulties to “bona fide” enterprises. For VAT refund, instead of onlyinvestigating the direct vendor who supplies goods to the enterprisesas previously, tax authorities now investigate upstream even to thefirst supplier in the supply chain. Exporters, especially those who haveto gather materials from multiple locations, from various levels ofvendors, would face recurrent difficulties and delays in VAT refund,since only one minor infringement by one vendor in the chain, the wholeVAT refund process will be suspended.
Therefore,apart from aggressively petitioning to tax authorities directly or viaconsultants to seek solutions, enterprises should also actively set upan internal control mechanism to avoid unnecessary issues from the VATrefund process.
In particular, it is recommendedthat frequent VAT refund applicants should consider purchasing fromreliable vendors and obtain sufficient information regarding the relatedsupply chain from the vendor. In addition, enterprises shouldfrequently update themselves on the latest regulations and requirements,especially those regarding invoices and documentation from taxauthorities. There should also be policies and procedures for variousrelated departments and units within the organisation to check invoicesthoroughly, and frequent updates of absconding enterprises from theauthorities’ database. Furthermore, the issuance of invoices by theenterprises should also be taken seriously, since an invalid outputinvoice may result in non-creditability of corresponding input VAT invarious circumstances.
The above activities, ifimplemented appropriately, can help enterprises to actively relievethemselves from various challenges regarding invoices and supportingdocuments upon tax investigations/audits, to intensify the chances forgetting full input VAT refund and to ensure deductibility of their validand reasonable expenses from business operations./
