A ‘tax audit’ as commonly termed in practice, is officially referred to as a “tax examination” or “tax inspection” by the Law on Tax Administration. These activities are conducted by the tax authorities to review the tax compliance status of taxpayers.
As usual, the tax audit plan for 2018 has been activated through the issuing of Official Letter 5339/TCT-TT (“OL 5339”) dated 20 November 2017 by the General Department of Taxation (“GDT”). The Official Letter directs all local tax offices to establish a tax audit master plan for 2018. The GDT has set the following minimum tax audit targets for 2018:
- Local tax offices are requested to conduct on-site tax audits to review the tax compliance status of at least 18.5% of taxpayers directly managed by each tax office. The specific mission is that at least 1% of taxpayers will be subject to tax inspections. The rest will be subject to tax examinations. This represents an increase of 0.5% on last year’s target of 18%. It will come as no great surprise that the target for tax audits is likely to increase constantly every year given that taxation is a key contributor of revenue to the state budget. As the budget deficit grows, it can be expected that greater pressure will be applied on achieving tax revenue targets, resulting in more frequent tax audits, and an increasingly aggressive approach in enforcing the outcome of such audits.
- The Official Letter outlines that targeted taxpayers should be selected based on the evaluation of taxpayers’ probable tax risks using the tax probable risk (TPR) system. Moreover, the Official Letter goes even further by instructing that tax audits should be directed in particular at:
- Taxpayers engaging in sectors generating significant revenues such as oil and gas, petroleum, private hospitals (medical centers), airlines, credit institutions, pharmaceutical companies, hotels and casinos, lottery companies, seaports, airports, multination companies, and other big groups.
- Enterprises involved in capital transfers or franchises, or investment project transfers;
- Enterprises that conduct numerous transactions with related parties or those that reported losses for years, or have profit margins much lower than other enterprises operating in the same industries or sectors;
- Real estate companies, manufacturers of construction materials, natural resource exploitation companies; Fast Moving Consumer Goods (FMCG) companies, automobile manufacturers/traders are also in the crosshairs.
- In particular, enterprises operating in new sectors such as multi-level trading companies, gaming, or those provide services based on the grounds of digital technology etc. will similarly come under the spotlight for tax audits.
- Taxpayers that have claimed VAT refunds will also be targeted.
It is thus now very clear that specific sectors or taxpayers engaging in those sectors have been broadly defined for next year’s round of tax audits. The list covers all of the sectors, enterprises, or transactions traditionally seen or recently evaluated by the tax authorities as constituting high tax risks.
A tax audit is challenging and can often be an exhausting process for taxpayers, especially for those who are reactive in their tax risk management. Putting in place a proactive tax risk management system serves as a strong starting point in reducing potential tax exposures or avoiding tax disputes arising due to a tax audit.
A pre-audit tax health-check conducted by tax advisors can help in managing these risks by:
- Identifying risks areas that may lead to tax exposures;
- Identifying opportunities or alternatives that have not been availed of in terms of tax planning; and
- Recommending measures and procedures to be implemented that will ensure regulatory compliance with Vietnamese tax laws and properly mitigate tax reassessment risks.
Forewarned is forearmed! Preventative and proactive tax risk planning can demonstrably assist taxpayers in avoiding unnecessary and costly tax exposures resulting from a tax audit. This includes having a good understanding of your rights and obligations in a tax audit, along with knowing how best to deal with the tax audit’s outcome. In light of the more vigorous approach now being adopted by the Vietnamese tax authorities, we recommend that taxpayers take vigorous action to mitigate these risks sooner rather than later.
Please feel free to contact us if you need further details on these guidelines.
*The information provided is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.