Audit and tax risks in 4.0 era

Lam Le, partner for tax and consulting services at RSM Vietnam

Can you give us the latest tax updates that foreign businesses and investors should pay attention to?

At the moment, the most talked-about regulation is Decree No.119/2018/ND-CP on e-invoice, which was issued at the end of 2018. According to Decree 119, within the next two years, the majority of businesses in Vietnam will have to switch from paper to e-invoices. The Ministry of Finance is now asking for public opinion on a circular that can guide businesses on how to implement Decree 119.

Besides, draft versions of the amended Law on Tax Administration are also being presented to the National Assembly. This new version of the law, expected to take effect on July 1, 2020, includes rules on the Internet economy and tax compliance for foreign suppliers.

In light of the new tax rules, we would advise companies to constantly monitor updates via the tax collectors’ websites, the media, and industry seminars. It is best that businesses work together with tax collectors to find a common ground on tax disputes, and companies should have their own risk management procedures for tax issues. Co-operation with professional services firms is also a good option.

As Vietnam becomes a magnet for cross-border mergers and acquisitions (M&A) activities, tax conflicts are also becoming more frequent. What is your advice for foreign investors conducting M&A in Vietnam?

In recent years, a lot of cross-border M&A have taken place in Vietnam as foreign investors are drawn in by Vietnam’s booming economy and potential to become the next manufacturing hub. M&A is ideal for these newcomers because they eliminate the need to set up a new business, which may involve complex paperwork.

On the flip side, M&A tend to be major transactions that are meant to be completed within a short amount of time – which may lead to oversight on tax issues. For example, Thai investors encountered tax problems when they carried out huge M&A deals for Metro Cash & Carry Vietnam and Big C a few years ago. The buyers thought they did not have to pay tax in Vietnam due to double taxation agreements, but Vietnamese authorities argued that since the assets on sale are located in Vietnam, the investors were still subject to local pay taxes. Another example is Vietnam’s leading brewer Sabeco and its lingering problems with special consumption tax, which already existed before Thai Beverage became the majority shareholder in late 2017.

Tax issues like these really affect the financial health and cash flow of the business, which means the two sides should work these out during the M&A process.

My advice for investors would be to complete a due diligence process on taxes when they are interested in a company. Normally, this part is neglected due to budget and time constraints, but it is absolutely necessary. Investors should find out whether the business has any unresolved tax conflicts, including unpaid taxes. The two sides should agree on whether the seller should complete all tax duties before the takeover or the new owner will take care of that after the deal is closed.

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Talking of M&A, the Grab-Uber merger last year was also controversial due to Uber’s unpaid taxes in ­Vietnam. How do you think Vietnam should tax internet-based companies?

Not only in Vietnam, tax collectors in other countries were also confused about how to deal with the Grab-Uber merger and internet businesses in general. Internet businesses grow much more quickly compared to traditional firms, which means tax rules tend to lag far behind. There are also matters of terms and definitions – how can we define Internet businesses? Are their sellers and drivers considered partners or suppliers?

For now, Vietnam’s tax collectors often manage Internet businesses and sellers through their representative in Vietnam or through the platform they operate in (as in the case of e-commerce). The three popular types of Internet businesses are as follows: small, independent sellers who market their products on e-commerce platforms or social media; the platforms themselves (Lazada, Tiki, and Shopee) with the middlemen that support them (Momo or Moca); and finally, Internet businesses without any representative in Vietnam (Facebook, Google, or Traveloka).

These are subject to foreign withholding tax in Vietnam, which is either paid by their Vietnamese representative – if they have one – or directly by the foreign business if they have not set up a Vietnamese office yet. Vietnam is considering issuing a separate tax document for these corporations or to extend current tax laws. Both have their pros and cons, but we can definitely agree that Internet businesses will continue to grow very fast and tax collectors will maintain a close watch on their activities. Internet businesses should collaborate closely with tax agencies to find a solution to any tax issue.

Last but not least, foreign businesses in Vietnam have also been under fire for transfer pricing rumours. What is your take on this matter and what should multinational companies do to prepare for the new Law on Tax Administration?

First of all, transfer pricing is defined as an act of putting a value on goods, services, and transactions between affiliates that is not based on market prices in order to minimise taxes. This is a worldwide issue that came to the spotlight in 2015 as the Organisation for Economic Co-operation and Development introduced the Base Erosion and Profit Shifting project targeting multinational businesses.

Vietnam has consulted this project when issuing Decree No.20/2017/ND-CP and Circular No.41/2017/TT-BTC on transfer pricing in 2017. Some common signs of transfer pricing, according to Vietnam’s tax collectors, include constant losses despite rising revenue, multiple transactions with tax havens, unreasonable prices on contracts, high interest rates or lack of contract legitimacy. So far, transfer pricing rules have been quite controversial, because Decree 20 stated that companies’ interest costs cannot take up more than 20 per cent of its earnings before interest, tax, depreciation, and amortisation. Some conglomerates have complained of this rule as they needed to borrow heavily for their business expansion activities.

In the coming years, the amended Law on Tax Administration will include new basic rules on businesses that conduct transactions with affiliates. This is an important legal base for tax collectors to manage foreign businesses, helping reduce transfer pricing and creating a transparent environment for all businesses. A clear law will also reduce the number of lawsuits or conflicts on this matter.