Ten ways to avoid tax disputes in Vietnam
Through its inclusion in the CIVET (Colombia, Indonesia, Vietnam, Egypt and Turkey) group of countries, Vietnam is being touted as one of the world’s most attractive future investment locations for multinationals and the country’s government is rapidly trying to align its tax system with those of developed countries.
Nam Nguyen (pictured below), of KPMG, explains how the introduction of advance pricing agreements (APA), the enhancement of risk based tax audits and an increased focus on transfer pricing assessments is going to affect Vietnam’s tax disputes environment.
International Tax Review: What advice would you give to companies about how to reduce the risk of becoming involved in a dispute with the Vietnamese tax authorities?
Nam Nguyen (NN): Tax disputes in Vietnam usually arise from different interpretations of tax legislation by the tax authorities and taxpayers, from retroactive application of interpretations of tax legislation and form versus substance arguments.
Here are ten recommendations for avoiding disputes with Vietnam’s tax authorities:
· Put a robust tax compliance system and protocols in place to actively and promptly manage and address tax compliance issues;
· Proactively and thoroughly document tax transactions and uncertain tax positions;
· Formulate a broad-ranging strategy for engaging with the tax authorities, including early involvement of senior management and external tax advisers in potentially disputed or controversial tax issues;
· Obtain a clear picture of possible outcomes before responding to the tax authorities’ queries or adopting a tax position;
· Deal with enquires by the tax authorities strategically rather than on a piecemeal basis;
· Engage with the tax authorities effectively through dialogues and only use formal correspondences if necessary;
· Spend time educating the tax authorities on the particular nature and commercial or operational rationales of the transaction and the business;
· Always presume that where a tax issue is not specifically regulated, the tax authorities are more likely to interpret tax legislation against, rather than in favour of, the taxpayer;
· Obtain tax certainty before conducting transactions through seeking advance rulings, confirmation or clarification from the tax authorities; and
· Be mindful of the human factors such as maintaining a good working relationship with the tax authorities and a good corporate citizen image.
ITR: What options do taxpayers in Vietnam have to resolve tax disputes other than litigation?
NN: Most tax disputes in Vietnam are resolved through the administrative tax appeal system. Litigation in court is possible but not popular.
The administrative tax appeal system provides for two levels of appeals, one at the local district or provincial level and another at a higher level. However, in practice, further appeals may be accepted on a case by case basis, provided that the aggrieved taxpayer has good grounds of appeal.
At any point during the administrative tax appeal process, the taxpayer may exit the process to pursue litigation in an administrative court. Though not specifically regulated, once a taxpayer has initiated court litigation, appeals through the administrative appeal system may not be accepted by the tax authorities.
Therefore, it is generally recommended that taxpayers exhaust the administrative appeals before litigation. The current administrative tax appeal system does not provide for alternative dispute resolution or settlement.
ITR: Are you seeing any trends in the types of dispute cases which the Vietnamese tax authorities are taking up, and those where they are succeeding in the courts?
NN: The tax authorities are taking a stricter view on the criteria for entitlement to tax incentive schemes under domestic laws. Domestic tax legislation often overrides legislation designed to promote business and investment.
We are also seeing stricter application of tax treaties and OECD guidance; greater focus on form over substance; and more stringent compliance procedures and documentation requirements.
The last three years have seen unprecedented increases in the tax authorities’ tax audit and inspection activities. Winning a dispute is becoming harder and harder.
There is increasing tax and transfer pricing audit focus on multinational companies operating in Vietnam that continually expand their businesses in Vietnam but claim continuing tax losses. The tax authorities view transfer pricing as the main suspect.
ITR: What do you think multinationals in Vietnam can expect from the tax authorities in future?
NN: It is expected that Vietnam’s tax authorities will devote their resources to tax audit activities, focusing on the areas mentioned above to increase tax collection.
Alternative dispute resolution will remain unpopular as the current tax legislation does not provide an avenue for this.
However, there have been recent amendments to the Tax Administration Law which take effect on July 1.
· New rules on APAs;
· Further enhancement of the risk based tax audit methodology;
· Improved communication with taxpayers;
· Introduction of the ten-year period of statute of limitation for collection of back taxes (there is no limit at present);
· Daily interest penalties on tax liabilities in arrears will increase from 0.05% to 0.07%;
· Penalties for under-reporting tax liabilities from 10% to 20% of the tax shortfalls;
· Electronic tax reporting will be widely required and targeted to be fully implemented by 2015.
In addition, there will be increasing focus on large corporations, especially those suspected of engaging in aggressive tax planning and transfer pricing.