This article is to provide a list of key and common issues, which are frequently challenged by the tax authorities during a tax audit upon dissolution for the enterprises’ perception and compliance in order to mitigate the risks of additional tax liabilities, penalties, and interest on late tax payment.
|There is a lot to consider when liquidating a company, with tax issues a major issue|
The voluntary dissolution procedures of a company include the following steps with relevant parties and regulatory authorities:
- Resolution on dissolution to be passed by investors, disclosed to relevant stakeholders and announced publicly in the newspaper;
- Terminating contracts (with customers, suppliers, landlord, etc.) and liquidating assets;
- Settling liabilities in accordance with the statutory order: salaries, severance allowance, social insurance, other benefits owned to the employees; tax and obligations owned to the state; debts to creditors;
- Submission of regulatory dossiers to the authorities after having fulfilled the obligatory liabilities; return of the company’s seal and certificates; closure of tax code.
Among the aforementioned procedures, tax clearance with the tax authorities is exhaustive and costly as the dissolving entity will be tax audited by the tax authorities after notification of liquidation. In this respect, in view of the fact that our government is under excessive pressure to reduce the fiscal deficit over the last years, the target of re-collected tax liabilities (tax claw-back) upon tax audit and inspection are planned and set out for local tax authorities.
Tax audit upon liquidation, therefore, is highly likely to result in tax claw-back, penalties, and interest on late payment for the dissolving entity.
Based on the above, to speed up the process of closure and to ease the financial burden (i.e. heavy tax) for the dissolving entity upon final tax audit, the entity should pay attention to the following common tax risks, which the tax authorities usually challenge during the tax audit:
Value Added Tax (VAT)
- Under-declared/Under-paid VAT payable due to over-declaration of creditable input VAT of illegitimate invoices, non-business related expenses, input VAT of expenses exceeding regulatory caps;
- Unavailability of non-cash payment evidence for purchase of goods and services valued at VND20 million or above;
- Under-declared output VAT due to the enterprise’s incorrect interpretation of nature of goods sold or services rendered which lead to an incorrect application of VAT rates;
- Under-declared VAT revenue in comparison with CIT revenue due to incorrect timing for VAT revenue recognition;
- Under-declared output VAT of free-of-charge goods without registration/notification on promotion programmes to Department of Industry and Trade (DoIT).
Corporate Income Tax (CIT)
- Discrepancy between CIT revenue and VAT revenue which cannot be explained/supported by detailed reconciliation/breakdown from the enterprises. Accordingly, the tax authority might adjust and increase the CIT revenue and VAT revenue which leads to under-declaration and payment of tax;
- Non-deductibility of expenses under CIT regulations (i.e. provisions without proper supporting documents; over-capped staff welfare expense, interest exceeding 150 per cent of basic interest rate and/or equivalent to charter capital deficit, etc.);
- Benefits in-kind for employees without proper supporting documents (i.e. labour contracts or policy): training fees, tuition fees for expatriates’ children, non-compulsory insurances, etc.; or benefits in cash/in-kind paid to individuals who are not under enterprises’ employment;
- Insufficient recognition of income (i.e. loss from transfer of real estate before 2014 is not allowed for any form of offset whilst from 2014 onwards loss from transfer of real estate is offset against income in the same activity, the remaining loss can be offset against income of business activities; income received in cash or in kind from financing sources/ support; etc.);
- Interest-free loans which will tentatively trigger deemed interest income by the tax authorities;
- Non-deductibility of interest expenses of enterprises with negative EBITDA under Decree 20/2017/ND-CP and relevant official letters No.1990/CT-TTHT dated January 15, 2018 and No.3966/CT-TTHT dated January 24, 2018;
- Shared/allocated overheads from parent company and affiliated firms without appropriate supporting documents and evidence of actual performance of services;
- Incorrect determination and application of tax incentives;
- Incorrect determination of loss carried forward
Personal Income Tax (PIT)
- Benefits-in-kind neither presented in the pay-slip nor included in taxable income for PIT (i.e. air tickets for expatriate’s home leave more than one trip per year and tickets for family members, maid-servant/gardener/driver, entertainment/sports activities, etc.)
- Incorrect determination of tax residency status of expatriates, which result in under-declared and under-paid PIT obligation;
- Assessment of submitted DTA application (DTA application is not assessed upon submission but later upon tax audit, the tax authorities will determine if the taxpayer is entitled to tax exemption/reduction under the tax treaty).
Foreign Contractor Tax (FCT)
- Non-compliance issues (e.g. No sufficient and timely declaration and payment of FCT imposed on payments of service charges to offshore entities);
- Under-declaration and payment of FCT due to incorrect application of tax rates and determination of taxable income;
- Under-declaration and payment of FCT due to lack of FCT declaration and payment for (i) services attached with goods that provided by Foreign Contractors (FC) such as installation, test run, warranty, maintenance, replacement or other services carried out within Vietnam border gate (including complimentary services); (ii) purchase goods under condition D of Incoterms;
- No FCT declaration/payment for service fees paid to FC for online training, online advertisement on Google, Facebook, and other websites, commission on booking services paid to Agoda.com, Booking.com, Hotels.com, Expedia.com, etc.);
- FCT under-declaration and under-payment due to not declaring the accommodation expenses of FC’s experts assigned to Vietnam supporting the projects under the service agreement signed between the FC and Vietnam entity in which Vietnam entity is liable for paying the experts’ accommodation and related expenses (e.g. hotel, transport, meals, etc.) to domestic suppliers;
- Incorrect exchange rates used for converting the payment in foreign currencies into Vietnamese dongs for FCT declaration.
Transfer Pricing (TP)
- Compliance works (TP form, TP documentation, etc.)
Important notes during operation
From a tax perspective, to ease the enterprises’ financial burden from tax audit upon liquidation, the following important issues should be ensured during their course of business:
- Be updated with the prevailing regulations and apply to the company’s cases properly;
- Conduct periodical review of the company’s tax compliance status;
- Carefully and sufficiently prepare supporting documents for the revenues and expenses;
- Prepare proper filing of documents (it is required to maintain for at least ten years);
- Develop internal control processes and oversee the tax compliance;
- Clarify any unclear points in the regulations with tax advisors and/or seek official letters from tax department.
In light of the above, in case the entity would like to liquidate its business activities in Vietnam, it should prepare a reasonable plan for its dissolution. During its operation, the entity needs to save files (e.g. accounting books, data, supporting documents, invoices, tax returns, tax payment vouchers, etc.) fully, safely, and systematically.
Additionally, it is crucial that the entity should sufficiently collect the supporting documents for its expenses as well as should comply with the prevailing tax regulations to mitigate the risks of tax claw-back, penalty, and interest.
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