In recent years, the changing global economy, the disruption of supply chains and the consequences of the Covid-19 pandemic have created a heavy burden on businesses around the world. Many companies have temporarily gone out of business, while others have gone bankrupt, dissolved or downsized.

Vietnamese businesses, especially small and medium-sized businesses, are no exception to this trend: more than 87% of businesses have been negatively affected by the Covid-19 pandemic. At the start of 2021, statistics showed that across Vietnam, there were nearly 79,700 companies that were temporarily suspending operations, ceasing operations pending dissolution, and completing dissolution proceedings. On average, nearly 11,400 businesses are dissolved each month: the sectors most affected are the clothing, information and communication industries, electrical equipment manufacturing and motor vehicle manufacturing.

Financial challenges and lack of liquidity during the Covid-19 pandemic may lead investors to shut down a company’s operations to reduce losses, or restructure their business model, by closing one or more of the group’s business units that are affected. and are no longer viable.

When disposing of the business or restructuring to close a line of business, in addition to debtors and employee obligations and legal requirements, finalizing tax obligations with local tax authorities may also be a concern. Importantly, for example, when a company may have an incorrect tax return or have applied improper tax incentives / treatments, this could trigger challenges from the tax office.

Although clearing tax obligations with the tax authorities is one of the necessary steps in closing a business, attention should be paid to current potential tax obligations, as well as corrective tax arrangements, in order to reduce the burden. exposure of the company, which could adversely affect cash flow. .

We describe below certain tax matters relating to the dissolution of a business.

Additional tax obligations during the closing tax audit

Assessing the current state of tax compliance prior to a tax audit is strongly encouraged to ensure that current tax returns and payments comply with relevant tax laws. Here are some things companies should consider when performing tax audits in preparation for closure:

• Deadline for filing the closing declaration: Within 45 days of the closing date mentioned on the notification of termination of the company to the granting bodies, corporate tax (IS), tax on Personal income (IRP) (if applicable) finalizing declarations and usage report of invoices must be submitted to the tax authorities and the corresponding tax debts must be remitted to the State. For Value Added Tax (VAT), businesses should clearly determine the VAT position to be paid or refunded in order to take the best approach, such as requesting a VAT refund or deferring to a new business entity.
• Interest on late payment of tax: The rate of 0.03% per day is levied on unpaid taxes from the day following the deadline for filing the tax declaration until the date of actual submission.
• Penalties for administrative violation and potential tax exposure if the tax official identifies taxpayers as making an inappropriate tax return, in particular:
  • in case of underreported tax obligations, the administrative penalty for incorrect tax declaration is 5 million ($ 220) to 8 million Vietnamese dong (clause 3, article 12 of Decree No. 125/2020 / TT-BTC of 19 October, 2020);
  • in the event of tax fraud / evasion, administrative sanctions imposed at 20% (Clause 1c, article 16 of decree n ° 125/2020 / TT-BTC) or 1 to 3 times (article 17 of decree n ° 125/2020 / TT -BTC) evaded tax obligations; and
  • late payment interest at the rate of 0.03% per day (clause 2a of article 59 of the law on tax administration n ° 38/2019 / QH14 of June 13, 2019) on unpaid tax obligations.

Main areas of tax risk

Many businesses may have unpaid tax debts or obligations that they are not aware of, or have not resolved, upon going out of business, so having an exit plan is highly recommended. detailed to mitigate tax risks. Examining common tax problems is a practical strategy to identify appropriate solutions before asking the tax administration to finalize the company’s tax obligations.

One of the most common major exposures to CIT for companies going out of business or restructuring is unpaid outstanding debts. A plan for the payment / clearance of debts to employees, creditors and tax authorities can reduce the tax risks of being considered as other taxable income by the tax authorities.

Liquidating assets and trying to dispose of them at the best price is essential in deciding to close a business. The company is also required to issue and store exit invoices for disposal transactions for tax reporting purposes. Unceded assets must be written off with sufficient documentation to justify the tax deductible expenses for the finalization of the IS.

A reconciliation of cash in bank / on-hand against the cash ledger is required; the difference in monetary value noted in the context of the tax audit procedure would be treated as other income.

The preparation of the financial statements and the CIT finalization report must be carried out on a non-going basis.

Common areas of contestation by tax authorities

Understanding tax audit trends and specific risk areas for your business situation can create a path forward in tax risk prevention. In particular, the common tax areas which could be challenged by the tax authorities could be summarized as follows.

Corporation tax

• Incorrect CIT incentives applied to new and extension projects (tax exemption / reduction and preferential tax rate);
• Offset profits and losses between business activities and losses carried forward;
• Intercompany service fees (eg, re-billed management fees, shared fees, service fees, etc.);
• Technology transfer, franchises, royalties must be registered with the Department of Science and Technology, if applicable
• Interest charges for a company having transactions with related parties;
• Inventory stock deviations after physical counting, loss of stock, damaged or expired inventories, etc. ;
• Provisions and write-offs of bad debts;
• Recognition of discounts / rebates / support; and,
• Labor costs and other compensation costs due to the dismissal of employees.

Value added tax

• Difference between VAT and income tax receipts;
• Incorrect allocation of input VAT corresponding to income subject to and not subject to VAT;
• Input VAT on inventory discrepancies, stock losses, damaged or expired stocks;
• Promotion campaigns without registrations / notifications to the Ministry of Industry and Trade;
• No exit invoice issued for promotional / gift items; and,
• VAT on discounts / rebates / assistance programs.

Income tax

• Under-reported onshore and offshore income sources of resident natural persons and in-kind / cash benefits paid to employees;
• Incorrect conversion of net income into gross income;
• Erroneous determination of housing allowances and non-taxable income;
• IRP under-withholding for income paid to individuals; and,
• IORP under-deducted for compensation paid to employees in the event of termination of employment due to a restructuring plan / company split.

Tax on foreign entrepreneurs

• Determination of taxable income derived from the supply of goods / goods with services that are delivered in bonded warehouse, inside or outside Vietnamese territory;
• Withholding tax on technology transfer fees, branding fees or software attached to machines; and
• Income generated by foreign entrepreneurs with or without a permanent establishment or application of exemption or reduction of double taxation agreement.

Transfer pricing issues

• Incorrect determination of exemption for TP transaction disclosure, exemption for preparation of transfer pricing documentation report or insufficient declaration in TP form;
• Lack of TP documentation to provide to the tax authorities during the tax audit event;
• Unadjusted TP charges / allowance due to the Covid-19 pandemic creating a business situation different from normal;
• Disputes on any TP documentation that is not prepared before the deadline for submission to the tax authorities.

In the current difficult economic climate, any tax imposition also directly affects the survival and short-term cash flow of the business. Therefore, understanding the tax audit process as well as the important issues requiring special attention will help the business reduce the risk of tax burdens.

Planning points

Businesses should develop a clear strategy, a detailed timeline, and a strong, dedicated team to work with the tax administration during the tax audit event.

Companies should periodically self-examine to identify and assess the main potential risks, estimate tax exposure in advance and put in place appropriate action plans to minimize tax risks.

In some cases, tax audit decisions are not appropriate and companies should consider developing an appropriate plan to appeal to a higher level in order to obtain a correct assessment.

This article is of a general nature only and readers should seek advice specific to their situation from professional advisers.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Nguyen Thu Phuong is Tax Director and Nguyen Dinh Huy is Senior Tax Director at Grant Thornton (Vietnam).

The authors can be contacted at: thuphuong.nguyen@vn.gt.com; huy.nguyen@vn.gt.com