Compliances: Taxes, Accounting, Audits and Remittance

Many small and medium sized businesses are prioritizing investments in Vietnam and are acting on the business potential it holds. In this chapter, we examine the tax landscape so that new investors can better understand their in-country tax exposure before setting-up.

Taxes
All taxes in Vietnam are imposed at the national level; there are no local, city, or provincial taxes. Enterprises should pay tax in localities where they are headquartered or have duly registered branches.

Most companies and foreign investors in Vietnam are subject to the following six major taxes:
● Business license tax;
● Corporate income tax;
● Value-added tax;
● Special consumption tax;
● Foreign contractor tax;
● Customs duties.

Business license Tax (BLT)
BLT is an indirect tax imposed on entities conducting business activities in Vietnam, paid by enterprises annually for each calendar year that they do business in the country. All companies, organizations or individuals (including branches, shops and factories) and foreign investors operating businesses in Vietnam are subject to BLT.

Corporate Income Tax (CIT)
All income arising inside Vietnam is subject to CIT, no matter whether a foreign enterprise has a Vietnam-based subsidiary, or whether that subsidiary is considered a Permanent Establishment (PE). CIT is a direct tax levied on the profits (gross revenue minus expenses) earned by companies or organizations.

Value-added Tax (VAT)
VAT is imposed on the supply of goods and services at three different rates: 0, 5 and 10 percent, with the latter being the standard rate. All organizations and individuals producing and trading goods and services in Vietnam are liable to pay VAT, regardless of whether the organization has a Vietnam-based establishment.

Special Consumption Tax (SCT)
SCT is a form of excise tax that applies to the production or importation of 11 categories of products and six types of services which are considered to be luxurious or non-essential such as alcohol and tobacco products.

Companies are liable for SCT both at the time of import and sale. However, to prevent an excessive tax burden, import SCT will be creditable against SCT incurred at the point of sale.

Customs duties
Most goods exported across the borders of Vietnam, or which pass between the domestic market and a non-tariff zone are subject to export or import duties. Exceptions to this include goods in transit, goods exported abroad from a non-tariff zone, goods which are imported from abroad into a non-tariff zone and only used within that non-tariff zone and good passing from one non-tariff zone to another. Most goods and services being exported are exempt from tax.

Foreign contractor tax
Foreign businesses are considered foreign contractors if they conduct business or earn income in the country under contract with local organizations and individuals. Usually, foreign contracts are the winners of auctions or bid offerings organized by the Vietnamese government or organizations and may be principal contractors, general contractors, partnership contractors or subcontractors. Foreign contractors in Vietnam are liable to pay the same tax rates applicable to local companies, including import-export duties, personal income tax and other taxes required by authorities.

Accounting and Bookkeeping
Local and foreign-invested companies doing business in the country are required to comply with Vietnam Accounting Standards (VAS) when recording their financial transactions.

Foreign companies may choose to manage two accounting records: one based on the VAS and another compiled specifically for the overseas head office. In practice, many foreign companies maintain an accounting system according to VAS and only convert financial statements into the International Financial Reporting Standards (IFRS) on a quarterly basis for the foreign parent company’s reference.

In brief, the VAS requires that accounting records:
● Are in the Vietnamese language, or can be combined with a commonly used foreign language;
● Use VND as the accounting currency (however, FIEs are allowed to select a foreign currency as their accounting currency);
● Comply with the Vietnam chart of accounts;
● Include reports specified by VAS regulations, printed on a monthly basis, signed by the General Director, and affixed with the company seal.

An accounting period in Vietnam is generally determined according to the calendar year, or January 1 to December 31. However, after registering with the Tax Department, this can be adopted to 12 month periods beginning the first day of each quarter.

Tax authorities can penalize companies for VAS non-compliance through the disallowance of input VAT credits and withdrawal of CIT incentives.

Annual finalization
Based on the accounting periods specified above, investors and other enterprises operating in Vietnam will be required to prepare audit and file annual financial statements 90 days following the close of the annual accounting period.

As per current regulation, annual finalization must be filed with the following offices:
● The General Statistics Office;
● The Ministry of Planning and Investment;
● Tax office at the provincial or city level.

For those companies operating in export processing zones (EPZs or industrial zones (IZs)), financial statements may be required to be filed with the management board of the respective EPZ or IZ. Most economic zones will qualify an investor for tax holiday incentives.

Foreign investors should check with each zone to clarify its incentives, which government officials grant on a case-by-case basis.

Retention of documentation
Following annual finalization, companies will be required to retain a variety of documents that may arise as the result of the bookkeeping and accounting process. The time period of retention is tied to the nature of the documentation generated and is broadly split into 5-year, 10-year, and indefinite periods of retention.
● The 5-year retention period applies to all documentation that is used in the management and operation of the enterprise.
● The 10-year retention period applies to all accounting data, accounting books, financial statements, and reports of independent audit firms that have been prepared on behalf of the company in question.
● The Indefinite retention period is limited to documents that are deemed to be of significance to the economics, national defense, or security of the Vietnamese state.

Whether it be convergence with IFRS, the growth of e-filing, or simple efforts to improve business competitiveness, Vietnam has a continually changing set of audit procures that must be followed closely in order to ensure compliance.

Below we provide a step-by-step guide on this process for one of the most common investment vehicles of foreign enterprises in Vietnam: Foreign Owned Enterprises (FOEs).

The FOE compliance process, which is also applicable to JVs, can be complex and time consuming. The successful completion requires the compilation of a statutory annual audit report, and the finalization of corporate and personal income taxation. Following successful submission of this information to various government bodies, it becomes possible for firms to repatriate profits from their operations.

With rules constantly changing, prospective and established investors alike should contact a service provider or relevant government officials to ensure that reports are prepared in accordance with the most up-to-date regulations.

Step 1 – Prepare statutory annual audit report
All FOEs are required to produce audited financial statements on an annual basis. These statements must be prepared in accordance with Vietnamese Accounting Standards (VAS) and follow the most up to date guidance available.

As per Vietnamese law, compilation of all reporting must be conducted externally from invested enterprises by an independent auditor. The following audit procedures must be followed and documentation prepared to ensure compliance:

Statutory Audit Requirements
● Statement of income;
● Statement of financial position;
● Statement of changes in equity (if any);
● Statement of cash flow;
● Balance sheet;
● Notes.

Requisite Documentation
From 04-CS/SXK: Report on Production and Business Activities, including:
● Actual Operating Business Lines,
● Labor Statistics (Number of Employees, turn over, etc.),
● Labor Income and employer payments of social insurance, health insurance, unemployment insurance, and trade union fees,
● Production and business activity results (revenue, profit, cost, etc.),
● Taxes and other amounts payable to the state;

The Goods and Services tax (GST) system requires taxpayers to self-assess their tax liability and pay their tax without any intervention by the tax authorities. The law provides for a robust audit mechanism to measure and ensure compliance by the taxable person.

Deadlines
Within 90 days after the end of the fiscal year, FOEs need to submit audited reports to the following three government departments:
● Provincial Department of Planning and Investment (DPI) (or the Provincial-Level Export Processing and Industrial Zone department in the case of FOEs based in IZs or EPZs);
● Provincial Level Tax Departments;
● Provincial level Statistical offices.

Upon receipt of documentation, these offices place an incoming stamp directly on one copy of submitted reports for confirmation purposes.

Step 2 – CIT Finalization
In addition to the submission of quarterly Corporate Income Tax (CIT) declarations, FOEs in Vietnam must conduct CIT finalization at the end of every year. The standard tax year applied in Vietnam is the duration of one calendar year. If a different year is utilized, the enterprise must report this to the local tax agency.

When preparing finalization paperwork, enterprises should pay close attention to revenue streams to ensure all requisite income is included in finalization statements. Currently, revenue applicable for CIT includes any and all income arising from production, trading, and service; irrespective of whether it has been generated within Vietnam.

Following an assessment of revenue streams, outstanding obligations, and investment incentives, it is a possibility that taxes may be reduced substantially or avoided altogether. In the event that no tax liability has arisen or taxation has been exempt under applicable tax incentives, enterprises must still complete tax filings with tax authorities by established deadlines.

It should be noted, however, that filing is not required for enterprises whose tax-generated activities are terminated or have ceased business operations and no tax liabilities have arisen. Those finalizing Corporate Income Taxation should prepare CIT reports in accordance with the following requirements and deadline:

Requisite Documentation
● Form 03/TNDN CIT finalization statement;
● Annual Financial Statements and other related documents;
● One or more annexes enclosed with the declaration (depending on the actual arising of the enterprise).

Deadlines
Submission of finalization paperwork must be submitted to the head of relevant tax agencies 90 days prior to the end of the fiscal year. For cases of operation termination, contract termination, or corporate ownership transformation tax offices must be made aware 45 days following the date at which changes were made.

Step 3 – PIT Finalization
FOEs, as employers, are responsible for the finalization of all personal income taxation (PIT) of their employees covering deductions from salaries throughout the year.

Enterprises finalizing PIT for their employees should make sure that the following forms are successfully completed by the deadlines outlined below:

Requisite Documentation
● Form No. 05/KK-TNCN – PIT finalization statement;
● Form No. 05A/KK-TNCN – The list of taxable in-come and tax deductions from salaries and wages of resident individuals who are engaged in an employment contract;
● Form No. 05B/KK-TNCN – The list of taxable in-come and tax deductions from salaries and wages of resident individuals who do not have an employment contract, have an employment contract of less than three months, or other non-resident individuals.

In the event that enterprises are consolidated or merged, they must complete PIT finalization for deducted tax in advance of these changes and provide a voucher to employees for their PIT finalization at the end of the year.

Deadlines
The submission of finalization paperwork must be completed no later than 90 days from the end of the calendar year and sent to the tax office that directly manages the enterprise. In most circumstances, this is the department of taxation in the province or city that the enterprise conducts its operation; however, there may be instances where local tax offices authorize alterative state bodies to collect taxes.

Step 4 – Social Insurance Finalization
In addition to their Vietnamese counterparts, all foreign employees working in Vietnam under labor contract with indefinite terms, or definite terms of over three months, need to be included in the mandatory social insurance scheme. The new rule came into effect.

Step 5 – Profit Remittance
Following tax finalization, or the termination of investment projects in Vietnam, profits may be remitted to offshore accounts. For enterprises whose investments are still in operation within Vietnam, profits may only be remitted in the event that the FOE in question has not accumulated losses.

Deadlines
In the event that an FOE has completed tax finalization, the relevant tax office must be notified of any plan to remit profits at least seven working days before the scheduled transfer.