How to maximise value added tax refunds

January 21, 2019 | 08:53
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Despite the fact that enterprises understand the importance of VAT (value added tax) refund, they are not aware of all the issues of workload, time-consuming assessment process, as well as potential tax risks to successfully obtain tax refunds and maximise the refund amount.
how to maximise value added tax refunds
Grant Thornton Vietnam provides a look at the thorny issue of VAT refund in Vietnam

VAT refund plays a crucial role in the cash flow and tax budget of both enterprises and the government. For these reasons, Grant Thornton Vietnam would like to share some of its practical experience in this regard.

Benefits of VAT refund

The significant benefits that enterprises can enjoy when they succeed in getting tax refund include:

  • Reduction in tax cost/tax burden: tax cost/tax burden is always a pressure on enterprises. Thus, the refunded tax amount can help the enterprises to ease their obligation and use the refunded VAT amount to pay other kinds of tax.
  • Available working capital to finance operation and expansion plan: by getting tax refund, the enterprises have funds to finance their production, operation, and expansion plans.

Potential risks in VAT refund process

Despite the benefits of a VAT refund, enterprises should be aware of potential risks and obstacles they may face during the refund process.

  • Heavy workload during tax audit before refund (for the case of “tax audit first, tax refund later”)

When enterprises plan on requesting VAT refund, all supporting documents like invoices, contracts, and payment vouchers must be prudently filed and recorded in both hard files and soft files at their offices. During tax audit, many working papers need to be prepared, supplemented, and explained to the tax officials.

Additionally, upon request of the tax officials, admin tasks such as sorting out files/documents, printing documents, and meetings are very time-consuming. In practice, the enterprises have to spend a lot of time explaining issues during the tax audit period. This makes the whole VAT refund process long and exhausting.

  • Failure to be proactive in cash flow management

Many enterprises submitting VAT refund dossiers for the first time estimate the necessary time to obtain the refund in cash would be one or two months. However, in practice, in complicated cases, subjective and objective reasons can prolong the refund process by more than six months. Consequently, if enterprises are not able to manage their cash flow and tax budget well, they may encounter a cash flow crisis.

In other cases, enterprises may submit VAT refund application dossiers indicating the refundable amount determined/calculated themselves. However, in the end, the refunded amount approved by the tax authorities based on their tax audit/refund assessment may be less than the amount determined by the enterprises. This could negatively impact the enterprises’ budgeting and planning for operation and production.

  • Unexpected extension to scope of tax audit/inspection

Under the current regulations, the enterprises that submit VAT refund application dossiers for the first time must be subject to “tax audit first and refund later.” In this case, the tax authority will conduct a tax audit at the enterprises. During the tax audit to assess the VAT refund dossier, the tax authority may investigate and find out more tax exposure (rather than VAT only as per the enterprises’ expectation), such as transfer pricing, non-deductible expenses for Corporate Income Tax (CIT), no qualification for professional practice like pharmaceutical production, real estate, construction or violation of capital contribution rules. As a result, the enterprises might be subject to another tax audit/inspection by the tax authority.

  • Lack of updated knowledge of VAT refund regulations

Enterprises’ personnel might fail to understand VAT refund regulations correctly or fail to update themselves on the dramatic and constant changes in VAT refund, which can lead to incorrect self-determination of VAT refund entitlement or insufficient preparation for supporting documents relating to the VAT refund dossier. Consequently, the authorities can reject VAT refund applications or reduce the refundable VAT amount on reasonable grounds.

Notable points for VAT refund application

To mitigate the aforementioned potential risks and maximise the refundable VAT amount, enterprises should pay attention to the following significant points:

  • Enterprises must comply with the rules that (i) the requested amount for refund is declared at item [42] in the VAT return of the last month/quarter of cutting off the tax refund period and (ii) the creditable VAT amount to be carried forward to the next period (item [43]) in the VAT return of the last month/quarter of cutting off the tax refund period is equal to the creditable VAT amount carried forward from the previous period (item [22]) in the VAT return of the following month/quarter. Only when the said rules are satisfied can the refundable VAT amount properly be recorded in the tax authority’s system.
  • For investment projects, enterprises are only entitled to VAT refund if their declaration has been filed under Form 02/GTGT for the investment period and such investment period must be same as the one registered in the Investment Registration Certificate.
  • The failure to contribute charter capital sufficiently (according to the registered schedule) of investment projects can result in the possibility that the tax refund application will be rejected by the tax authorities.
  • Input VAT of goods and gifts given under promotion programmes with a value of VND100 million ($4,350) or above without registration with the local Department of Industry and Trade (DIT) is not creditable.
  • Input VAT amount corresponding to the exceeding amount between actual cost and registered cost of the registered promotion programmes is not creditable.
  • No issuance of output VAT invoices for other incomes.
  • Unavailability of customs declaration for import/export activities (non-commercial import, export by air/portable goods).
  • Input VAT invoices issued by run-away entities.
  • Input VAT of non-VAT-able revenue (e.g. producing software products).

Changes and legal trends on VAT refund

  • From July 1, 2016 onwards, the refundable VAT amount of export activities cannot exceed 10 per cent of the export revenue. In the past, there was no threshold.
  • From July 1, 2016 to January 31, 2018, VAT refund was not applied to goods imported then exported under Decree No.100/2016/ND-CP. From February 1, 2018, according to Decree No.146/2017/ND-CP, imported goods for re-export will be entitled to VAT refund, given that the customs procedures are executed at the customs offices under the Law on Customs.
  • According to the recent draft law, in the future, the enterprises that currently have output VAT rate of 5 per cent (increase to 6 per cent under the draft law) declaring VAT under the credit method will only be considered for VAT refund if the accumulated input VAT is not completely deducted after 12 consecutive months or four consecutive quarters.

By capturing the updates on the latest tax regulations, together with good preparation/self-review before submitting the request for VAT refund, enterprises can maximise the refundable VAT amount. In practice, it is not too difficult to obtain the full refund amount self-determined by enterprises in the application dossier, depending on the complexity of transactions and expenses, the internal structure, availability of supporting documents, and document filing.

More importantly, the practical experience of the personnel in charge in the whole VAT refund process, such as preparing/filing documents, having proper explanation for the issues challenged by the tax officials during VAT refund assessment, will make the process go more smoothly and efficiently.

This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisors.

By Grant Thorton

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