Optimum tax strategy to cut costs and ensure compliance

Bui Tuan Minh, tax partner of Deloitte Vietnam

Resolution No.10-NQ/TW dated June 3, 2017, issued by the Central Committee of the Vietnamese Communist Party on the development of businesses in private sector in Vietnam, has called attention to the rampant private businesses malpractice of making fraudulent financial statements and dodging tax. What do you think are the most common tricks used by enterprises?

I myself have observed such practices at some private enterprises, however, it is on a descending trend. In fact, tax optimum or tax evasion have never been a top priority for private businesses in their early phase of establishment, especially for start-ups and small- and medium-sized enterprises. However, when private businesses grow up to a certain scale, there are two common stances among business owners: either reducing tax costs by all means (including tax evasion) or optimising tax costs while ensuring legal compliance.

The second choice is a rising trend and is an increasing concern for all private enterprises, especially as the government is implementing various solutions to support private enterprises to actualise the growth target, enabling it to grow faster than the overall economy.

It is critical to distinguish between tax optimum and tax evasion. In a simple way, tax optimum is when businesses utilize the prevailing regulations in a lawful and smart way, when crafting their long-term tax strategies and the industry characteristics to minimise tax costs. Meanwhile, tax evasion are acts against this principle, including the submission of fraudulent financial statements or tax reports.

What are the most common acts of tax evasion and fraud among private enterprises in Vietnam?

Tax evasion happens in most countries in the world, and Vietnam is not an exception. Since 2004, the Organization for Economic Co-operation and Development’s Forum on Tax Administration has been issuing a list of common tax evasion techniques and recommends compliance management models for tax authorities.

In Vietnam, the methods that private enterprises most often use to reduce their taxes through evasion are keeping two sets of books; creating fake buying-selling transactions, using illegal invoices to increase input expenses; and declaring lower taxable income, among others.

In fact, the General Department of Taxation and the local tax departments also annually assess and summarise the violations of tax laws by enterprises, including the private sector, to keep tax management practices and solutions up to date.

Recently, the Ho Chi Minh City Tax Department has publicly disclosed a list of common tax errors of enterprises in the area, categorising them by industry.

Specifically, most common tax-related mistakes ­include: not issuing sale-invoices then declaring lower revenue; purchasing services from related parties which are not actually performed; using the invoices of run-away ­enterprises; paying wages not in accordance with labour contracts; recording business expenses that do not match their revenue; recording ­interests after loans that were not taken up for business ­activities.

How will these acts of tax evasion affect private enterprises in Vietnam?

Tax evasion acts can bring immediate benefits, allowing private enterprises to reduce tax costs in the short-term, however, they are not long-term solution.

Specifically, enterprises shall be penalised from up to 300 per cent the deemed tax-evaded amount under the Law on Tax Administration. Their business licence might also be revoked under the Criminal Law.

This will negatively affect the enterprises’ reputation and operations and the value of the business will be at risk of amortisation.

Maintaining two sets of accounting books, one for tax declaration purposes (the taxable profit is generally lower than the actual profit) and one for internal management purposes, could lead to the business owner being unable to control accounting records and lead to fraud risk in the enterprise.

I think business owners need to change their mindset to prevent these consequences and developing a tax strategy to optimise tax costs while complying with the law, which could ensure its long-term sustainable business development.

You have mentioned to build a tax strategy as a solution for private enterprises to optimise tax costs effectively. Can you tell more about how this can help?

An effective tax strategy that can help enterprises to optimise tax costs generally includes the following factors: First, an internal tax administration system that clearly outlines the roles and responsibilities of each department and division, and provides for an independent monitoring mechanism to manage the tax activities of enterprises.

A tax risk management system with effective procedures helps assess tax risks and corresponding solutions to manage them.

Second, tax planning, the most important element of an effective tax strategy. Tax planning helps businesses estimate and optimise future tax costs based on the prevailing tax laws, tax reform trends, business plans, and the actual situation of the business.

Finally, consultation with the tax authorities under an effective and transparent working method that helps to solve unclear tax issues quickly and effectively. Private enterprises should act together with the Government on “unofficial cost” of doing business issue towards for honest and transparent business environment.

In addition to the above factors, enterprises also need to focus on training tax accountants who are competent and qualified to handle tax issues.

At the same time, they need to enhance the application of information technology to raise the efficiency of management and tax compliance control.

In fact, there are many enterprises who, after ­developing to a certain stage, come up with plans to co-­operate with foreign ­investors to expand and thus invite consulting companies to help develop a better tax strategy.

Setting transparency and compliance as the top priorities contributes to the sustainable development and creates trust among business partners. Optimising tax costs on the basis of legal compliance by enlisting a professional tax consultancy is necessary and will be an effective tool to reduce operating expenses and risks.

(*) The scope of this interview focusses on limited ­liability companies and joint stock companies, including family businesses, ­which are hereafter referred to as private enterprises.