The new Law on Tax Administration No. 38/2019/QH14 (“LTA” or “new Law”) was passed by the National Assembly in June 2019 will become effective from 1 July 2020. New provisions relating to electronic invoices and electronic documents take effect from 1 July 2022.
We summarize below some of the salient features of the new Law.
Introduction of ‘substance over form’ and independent transactions principles
The new Law introduces the ‘substance over form’ principle to determine tax obligations with respect to entities and transactions in Vietnam. Using this approach, the tax authorities may review the economic substance of transactions rather than just the legal form and is indicative of a changing stance by the Vietnamese tax authorities in how they will deal with tax management.
It remains unclear at this stage how this approach will be implemented in practice. Nonetheless, it may safely be assumed that it will render taxpayers subject to additional obligations, not only in terms of providing sufficient documentary evidence but also to proving the substance of their transactions. Proving substance may not be straightforward in practice, particularly in cases of complex tax arrangements.
The new Law also provides the “independent transactions” principle for determining a taxable price in related party transactions. Accordingly, the transfer price of related party transactions must be comparable to the price of similar transactions between independent parties. Taxpayers will be required to make necessary adjustments to their related party transactions for tax declaration purposes, on the basis that the adjustments should not result in decreases of taxable income. The tax authorities can deem tax if the taxpayer fails to comply with regulations on the declaration of related party transactions. This provision aligns with the current Transfer Pricing Decree and Circular. It is stipulated in this Law for the first time and overrules the Decree and Circular.
Enhancement of international cooperation
The new Law indicates that the Vietnamese tax authorities will seek to forge stronger co-operative ties with foreign tax authorities in terms of tax collection and the sharing of taxpayer information.
E-commerce and the digital economy
To combat tax avoidance as it applies to cross-border e-commerce activities and the digital economy, the new Law sets out mechanisms to enforce tax collection upon such activities. Under the new Law, a number of Government Ministries and Agencies will be involved in or responsible for creating efficient tax collection tools. In particular, the banking system will play a key role in the collection of taxes as follows:
- The State Bank of Vietnam is tasked with developing a national e-payment system to be used by e-commerce transactions for tax collection purposes, including a management and surveillance system for payment transactions.
- Commercial banks are required to withhold and pay taxes on income sourced in Vietnam from e-commerce activities by foreign entities or individuals on their behalf. It is still unclear at this stage what the practical mechanism will be and how this will work. Apparently, commercial banks will bear greater administrative burdens and compliance risks under this requirement. Failure to withhold the tax would render the banks liable to fines.
In addition, under the new Law, foreign entities or individuals performing e-commerce business activities or doing business via digital platforms without a taxable presence or Permanent Establishment (“PE”) in Vietnam, must directly register to file tax in Vietnam or authorize other parties to file the tax on their behalf. This is an entirely new requirement for tax management. Currently in order to register for direct filing of tax in Vietnam, foreign suppliers (contractors) must have a local PE, among other conditions.
Guidance on implementing these new provisions will be needed.
There is an entire chapter governing electronic invoices in the new LTA which is generally in line with the current Decree on electronic invoices (Decree 119/2018/ND-CP “Decree 119”). However, while Decree 119 provides that the use of electronic invoices (E-invoices) is compulsory from 1 November 2020, the provisions on e-invoices under the new Law will not take effect until 1 July 2022.
It is thus unclear at this stage on how the Decree will interact with the new Law in this respect. We expect more guidance to be provided by the Government or Ministry of Finance in the near future.
Update on Tax audits
A “tax audit” or “tax examination” or “tax inspection” are terms used in Vietnam to describe a review by the tax authorities of a taxpayer’s circumstances or transactions. In accordance with the new Law, taxpayers can be audited by State Auditors or State Inspectors in addition to the tax authorities as provided for under the current Law.
Previously, State Auditors or State Inspectors only performed audits on the tax authorities. In practice, a number of taxpayers have been subject to tax reassessments as a consequence or outcome of the “indirect” audit performed on the tax authorities by the State Auditors.
Under the new Law, taxpayers could be subject to “multi-layered” tax audits conducted by the various competent authorities.
Other notable changes to tax audits under the new Law:
- The timeframe for the tax authorities to conduct a “tax examination” at the place/premises of the taxpayer is increased to ten days (from five under the current Law).
- The timeframe for a “tax inspection” is not provided under the new Law which was 60 days under the existing law. However, the new Law refers to the Law on Inspection for determining the timeframe for tax inspections. In accordance with the Law on Inspection, the timeframe for administrative inspections is 30 -90 days depending on the level of the authorities conducting the inspection.
- Furthermore, while re-inspection of a case is not provided for under the existing Law, the new Law outlines circumstances where a case would be re-inspected. A re-inspection may be conducted within two years from the date on which the conclusions from the former inspection were issued. This provision of the new Law therefore creates more potential challenges for taxpayers in terms of tax risk management.
Additional clarity on private tax rulings
Under the new Law, taxpayers will not be subject to penalties or interest for late payments of tax where the tax was calculated and paid in accordance with tax rulings issued by the tax authorities. This is a positive development for taxpayers in Vietnam who seek greater clarity with respect to their transactions as existing regulations did not specifically provide for this.
Changes to tax filing and compliance
There are a number of positive changes for taxpayers concerning tax filing and compliance:
- The deadline for the filing of an annual personal income tax (PIT) finalization is extended by one month to the last date of the fourth month of the subsequent year for individual taxpayers filing tax directly with the tax departments. This will not apply in cases where the PIT is withheld and filed by the employer or income payer however.
- Taxpayers can request interest of 0.03% per day for any overpayment of tax or penalties that were paid in accordance with verdict/decision issued by the relevant court or competent authorities.
- The tax authorities will also be required to pay interest (as above) if they issue decisions on tax refunds past the statutory deadline from their side (i.e. the deadline for issuing decisions on a VAT refund is six working days or 40 working days depending on whether the applications are subject to a pre-examination (audit) or not).
Owners/shareholders and legal representatives are liable for their enterprises’ tax debt
The new Law contains provisions dealing with tax debt collection and enforcement. Under these provisions, stakeholders can be liable to pay outstanding tax liabilities as follows:
- The outstanding tax debt of a company that ceases operations or disappears from its registered address must be paid by its owners or shareholders.
- Legal representatives of enterprises that are liable to pay tax under Administrative Decisions on Enforcement of Tax Debt Collection from the authorities must discharge their enterprise’s tax liabilities before exiting Vietnam. Otherwise the legal representative will be prevented from departing the country. Currently, although this provision is not featured in the current tax Law, in certain cases the tax authorities have used this measure in practice to enforce tax debt collection.
- The outstanding tax liabilities of branches or dependent accounting units that no longer exist must be paid by the headquarters or parent company.
As outlined above, although the tax authorities are granted additional enforcement powers under the new Law, there are positive changes for taxpayers.
As usual, new decrees and circulars providing detailed guidance for implementation of the new Law are being drafted and expected to be issued by the end of this year or early 2020.
Pending such implementation guidance, all taxpayers are highly advised to review and familiarize themselves with the new Law and make due preparations for the changes.
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.
Partner & Head of the Regional Tax Practice Group
Senior Tax Manager