Currently, when carrying out dissolution procedures, most enterprises are afraid of the tax related issues. Closure of tax code involves the tax authority’s review of all the documents of the company to ensure that all tax obligations of the business have been fulfilled in accordance with regulations. The processing time depends on the business duration, the scope of business, and the status of periodic accounting books of the enterprise, especially manufacturing enterprises. To ensure compliance with relevant tax regulations prior to the tax audit upon dissolution, a self-assessment of the current tax compliance status is recommended.
Companies should consider the following when carrying our tax audits for closure
- Submission deadline for declaration for closure: Within 45 days from the closure date specified on the notification of company termination given to the licensing bodies, the corporate income tax (CIT), personal income tax (PIT) (if any) finalization returns, and the invoice usage report shall be submitted to the tax authorities, and relevant tax liabilities must be remitted to the state budget. Enterprises also need to clearly determine the creditable VAT position payable or refundable for the best results, such as requesting a VAT refund or carrying forward to a new business entity.
- Late tax payment interest: A rate of 0.03% per day will be imposed on unpaid tax liabilities counted from the day following the deadline for submission of tax declaration to the actual remittance date.
Administrative penalties and identification of improper tax fillings by the tax authority
- For wrongful tax filing or lack of adequate information in the tax fillings, the administrative penalty could range from 5 million to 8 million Vietnamese dongs (Clause 3, Article 12, Decree 125/2020/ND-BTC).
- For under-declared tax obligations, the rate administrative penalty shall be 20% (Article 16, Decree 125/2020/ND-BTC).
- For tax evasion, the administrative penalties might be up to 1-3 times on the evaded tax obligations (Article 17, Decree 125/2020/ND-BTC)
Common challenges by tax authorities
Corporate Income Tax (“CIT”)
- Tax incentives applied for new investment projects and disadvantaged areas
- Offset profit and loss of business activities and losses carried forward
- Inter-company services expenses
- Interest expense for companies having related party transactions
- Discrepancies in inventories between records and physical count, and stock loss
- Provisions and write-offs of bad debts
- Technology transfer, royalty registration with Science and Technology Department (if any)
- Capital Assignment Tax
- Employment cost and related expenses
Value-added Tax (“VAT”)
- Discrepancies in revenue between VAT declaration and CIT declaration
- Allocation of input VAT in relation to non-taxable revenue and taxable revenue
- VAT refund
- Supporting documents for exported goods/ services
- Promotion/ rebates required to be registered with the Department of Industry and Trade
- Output invoices issued for promotional goods/gifts.
Personal Income Tax (“PIT”)
- Declaration of onshore and offshore income sources of the resident
- Benefit in kind/in cash paid to employees but not specified clearly in labor contract/ company policies
- Determination of taxable income and tax assessable income
- Housing benefits are added to taxable income
- Withheld PIT for income paid out to individuals (service contract, non-resident, capital assignment for individuals, etc.)
Foreign Contractor Tax (“FCT”)
- Determination of taxable revenues for importing goods with services which are delivered inside/ outside Vietnamese territory
- Declaration of foreign contractors having or not having a permanent establishment in Vietnam
- Declaration of service provided by an overseas supplier (website, e-commerce, etc.)
- Tax rate applied to foreign contractor providing different services
- Application for double tax avoidance or tax incentives
Transfer Pricing Issues
- Incorrect determination of exemption for disclosure transfer pricing documentation
- Incorrect determination of related parties (i.e. bank is considered as a related party the loan borrowed is at least 25% of the capital or 50% of total medium and long-term loan of an enterprise)
- Advance pricing agreement between the enterprise and tax authority (“APA”)
- Lack of TP documentation to provide to tax authorities upon tax audit
- Adjustment of the company’s profit not under market price
- Transfer pricing documentations that are not prepared and submitted by the deadline
It is highly recommended that enterprises make a self-assessment of the current tax compliance status before official submission for dissolution. This will boy time for enterprises to identify and adjust the tax compliance status and thereby decrease the inspection time by tax authorities. In some cases, self-assessment of the current tax compliance status before official submission for dissolution helps enterprises avoid tax penalties under official tax audits.