Urgent tax response to going digital

Vietnam’s tax regime has fallen far behind business trends in the digital age, Photo: Le Toan

Conventional ways of doing business are transforming, leaving behind outdated tax collection practices. The latest draft amending the Law on Tax Administration captured some of the prominent changes to respond to emerging transactions in the digital arena. However, policy alignment is not just about law revision, it should be a process of embracing and supporting businesses along the way.

FRESH VIEW OF SUPPORTING DOCUMENTS FOR DEDUCTIBILITY

With everything going digital nowadays, online advertising services via platforms like Facebook or Google are gradually replacing traditional marketing tools to become the first and more reliable choice of businesses to promote their products and services. Thanks to its easy accessibility and cost effectiveness, e-advertising has largely transformed marketing, providing a way by which even small businesses with no brick and mortar storefront or office can easily reach their target audience virtually anywhere in the world. As undeniable the benefits that online advertising can bring are, it also creates compliance challenges that compel companies to accommodate its unorthodox transactions and documentations, especially in Vietnam where commerce and taxation regulations have yet to catch up with the digital economy.

For businesses that incur substantial online advertising expenses, one of the main concerns from the tax perspective is how the requirements to claim tax deductibility under prevailing regulations apply to these unconventional expenses in practice.

In recent years, the tax authorities have issued a number of rulings which confirm that Facebook and Google ad expenses are accepted as deductible, provided that they satisfy three general criteria, namely they are (1) associated with business activities; (2) accompanied with valid and legal invoices and documentation; and (3) payment evidence as per regulations.

In particular, documentation has to comply with the laws on Commerce, E-Transaction, and Information Technology. Regarding the last requirement, payment for online ads is made almost exclusively by credit cards, and as the tax authority has now acknowledged this widely-used type of payment, there should be no issues as long as certain conditions are met. For instance, if a personal credit card was used, an authorisation of payment between the business and the individual, and proof of transfer from the company’s account to the individual’s account conforming with internal policy, must be properly retained.

However, for the first two criteria, there is no specific guidance for the standard of documentation required for such transactions yet. When hard copies of contracts, invoices, service deliverables, among others, with signatures and seals from contracting parties are not available as they are for traditional services, local tax auditors tend to be skeptical and issue an unfavourable interpretation on the deductibility of such expenses.

Yet, fairly speaking, online advertising services provide users with more transparent and real-time results than traditional platforms. Terms and conditions of services are enclosed upon acceptance and can be archived for later review. Users are then charged by views or clicks automatically through a set budget. Billing summary and invoices are easily accessed anytime on the account.

While it is indeed impractical for the tax law to cover all circumstances, it is fairly reasonable to expect the tax authority to have a more flexible approach and mindset when reviewing non-traditional transactions such as Facebook and Google advertisement, taking into account common e-commerce practices in today’s digital economy.

SLAPPING TAXES ON FOREIGN DIGITAL SERVICE PROVIDERS

Another noteworthy taxation issue regarding online advertising expenses is the taxing mechanism on foreign service providers, especially when they normally do not have physical presence in the country where the services are delivered.

Under the Vietnamese tax law, these expenses are subject to foreign contractor tax and Vietnamese users are responsible for withholding and declaring tax upon paying to offshore advertising companies.

However, the collection of withholding tax on cross-border online services purchased by individuals has been a challenge to the tax authority. As digital platforms have created enormous entrepreneurial opportunities for personal businesses, tax leakage from this source could be significant.

Across countries, debates have been going on for years on how tax in the digital economy could work effectively. From the perspective of double tax agreements, if it can be established that the e-advertising service providers do not have permanent establishment (PE) in Vietnam, then income tax can be exempted. Whether the online presence of service providers constitutes PE is a controversial topic in many corners of the world. As part of the base erosion and profit shifting (BEPS) action plans, the G20 is expected to modify the PE definitions taking into account how businesses operate in the digital economy.

From the perspective of local laws, the latest amended Law on Tax Administration has proposed that banks where payments are processed should be responsible to withhold and pay taxes due on the income of foreign organisations or individuals conducting e-commerce activities in Vietnam. This could entail a huge workload for the banks and the risks surrounding the legal and tax obligation of banks towards their customers and the tax authority. The implications can be complex as online transactions are diversified and robust.

One possible supplement option which may work to relieve part of banks’ pressure is to make foreign companies responsible for their own tax filing and payment. The new Law on Cybersecurity has been passed by the National Assembly and will become enforceable from 2019, prospecting to change the ways the online service providers operate in Vietnam.

Accordingly, foreign service providers via Vietnam’s cyberspace would have to retain data about their service users or data created by their service users in Vietnam and to submit this information to the Vietnamese government upon request for national security reasons. On top of this, they must have a branch or a representative office in Vietnam as well. This shall indirectly create a presence for the online service providers in Vietnam.

The Vietnamese tax authority may consider another tax mechanism where the obligation in declaring and paying taxes can be transferred from the users to the service providers as a result. It might become easier for the tax authority to manage and monitor these businesses as well as capture tax collection on revenue from digital services as economic activities increasingly shift online.