Mr. Bui Ngoc Tuan, Tax Partner at Deloitte Vietnam
Mr. Bui Ngoc Tuan, Tax Partner at Deloitte Vietnam, discusses the implementation of Circular No. 38 on customs policies for export enterprises, which came into being one year ago.
One year has passed since Circular No. 38/2015/TT-BTC, the legal document profoundly and comprehensively revolutionizing customs procedures, customs supervision and inspection, and import-export duty, came into effect on April 1, 2015.
Among many advanced points, the changes in the management regime for export-manufacturing and export-processing enterprises (EPEs) have brought positive developments in alleviating administrative procedures, but on the other hand created bottlenecks regarding tax refunds and non-tax payments.
Furthermore, the materials finalization report and the new audit methods have also posed challenges to both customs authorities and enterprises.
VET spoke with Mr. Bui Ngoc Tuan, Tax Partner at Deloitte Vietnam, on the implementation of the new regulations over the past year and trends in the future.
With years of experience in providing customs and import-export duties advice, can you tell us about the reform of management methods of customs authorities with regard to tax refunds and non-tax payments for export manufacturing activities?
Under previous regulations, enterprises importing materials for export manufacturing were entitled to a maximum deferred tax payment period of 275 days from the date of customs registration.
For EPEs, materials imported are non-taxable. Customs authorities also employ various procedures in order to control the use of materials for export purposes, such as registration of consumption norms, liquidation of import declarations on E-CUS, and the preparation and submission of tax refund and non-tax payment dossiers after exporting goods.
Accordingly, the consumption norms registered by enterprises to customs authorities and the liquidation reports on E-CUS were always the basis on which customs authorities assessed and approved tax refund and non-tax payment dossiers.
Nonetheless, due to several problems arising from implementation, most enterprises were unable to register the correct norms over various production periods. The consequence was that liquidation reports failed to accurately reflect actual production wastage.
Moreover, due to limited time for customs authorities to review the tax refund and non-tax payment dossier, the verification of norms declared by enterprises was not feasible.
To resolve these issues and reduce administrative procedures for enterprises, in Circular No. 38/2015/TT-BTC dated March 25, 2015, the Ministry of Finance eliminated the procedures on the registration of norms and liquidation reports.
By nature, the review of tax refund and non-tax payment dossiers was to reconcile between enterprises’ imported materials and the relevant exported products, to identify which materials have actually been consumed in the exported products. On that basis, customs authorities would refund the corresponding import duties paid or not collect import duties on the imported materials that are still under the 275 days deferral.
Therefore, the removal of norm registrations and liquidation reports under Circular No. 38 means that customs authorities would no longer have the tools to directly reconcile the import-export balance, and hence the tax refund and non-tax payment process will be purely based on the information declared by enterprises themselves.
So what problems have enterprises and customs authorities encountered in implementing this new policy? Is there any way to resolve them?
It is believed that, with the alleviation of procedures and the authorization for enterprises to self-manage production norms as well as merely report input-output inventory on an annual basis, it could be understood that export manufacturing has being treated equally to processing activities, which are fully subject to import duties exemptions. In other words, the application of the 275 days deferral is no longer suitable as customs authorities cannot keep track of the tax payment deadline for each declaration, as previously regulated.
With the profound reforms above, during implementation local customs authorities confronted embarrassment while still having to avoid budget losses resulting from incorrect or incomplete declarations by enterprises.
In fact, in early 2016 many customs authorities still required enterprises to submit liquidation reports for tax refunds and non-tax payments, as per the old regime.
In some cases, enterprises have submitted dossiers on tax refunds and non-tax payments according to new regulations but custom authorities have not processed them, giving rise to a tremendous backlog of dossiers and a significant tax payment upfront for a long period. This heavily influences the operating cash flow of enterprises.
To resolve this difficulty when import-export policies are yet to be changed, a possible solution to be considered at this stage is to issue official guidance from the central authority (i.e. the General Department of Customs) to local departments of customs to handle leftover dossiers of tax refunds and non-tax payments once and for all on the basis of enterprises’ declared information according to the spirit of Circular No. 38.
Simultaneously, under risk management principles, customs authorities can conduct audit on tax refunds concurrently with post-clearance audits to assess data declared and compliance by enterprises, avoiding wrong or excessive refunds that may cause State budget losses.
What exposure may enterprises face when customs authorities carry out post-clearance audits?
For customs declarations registered before the effective date of Circular No. 38, post-clearance audits on imported materials are mostly based on data comparisons between actual inventory and the customs balance on the E-CUS liquidation system.
In case of differences (when registered norms differ from actual), the enterprise has the right to explain and then customs authorities will proceed to examine the case. If customs authorities do not find enough reasons to accept the enterprise’s explanation, they can impose additional import duties and value added tax on the differences in the amount of materials.
In recent post-clearance audits, audited enterprises have presented many explanations for inventory differences, such as inaccurate registration of design norms and wastage rates, mistakes in material codes or mistakes in import data, etc. However, there have not been any common criteria based on which customs authorities could reasonably accept or reject such explanations.
As the deadline for audits on customs declarations registered before the effective date of Circular No. 38 is still far away (March 2020), common benchmarks and criteria for evaluating enterprise’s explanations are necessary to avoid subjective and partial conclusions among enterprises.
For customs declarations registered after the effective date of Circular No. 38, enterprises have been given a more proactive role in norms setup and management in line with actual production and only need to present the norms when customs authorities conduct auditing at the enterprise’s office.
This also means that tax authorities will not have the tools to calculate inventory differences as in the previous period. Audits on enterprises’ imported material compliance, therefore, will mostly focus on whether the norms set up by the enterprise are appropriate or not.
What do you think will be the trends in post-clearance audits in the time to come given all the changes in management methods under Circular No. 38?
It can be said that although the application of Circular No. 38 has not had much impact on post-clearance audits in 2015 as the effective date is quite recent, in the long run this should fundamentally change the current approach in material inventory audits and the evaluation of norms set up and monitored by enterprises.
Accordingly, if the enterprise’s norms are consistent with actual inventory, i.e. there are few differences, customs authorities would depend on actual production and the enterprise’s internal control to evaluate the appropriateness of the declared data and to identify mistakes and violations, if any.
As the internal system of each enterprise may differ and contain a lot of information, the data may not be immediately available. Therefore, post-clearance audits with the new methods will require a high level of skills and technical knowledge on accounting and auditing from customs authorities.
From the enterprise’s side, the complete archive of documents and vouchers, especially for inventory, production, and wastage data, is extremely important to prove actual consumption norms and to respond inquiries from customs authorities.
For the positive changes in Circular No. 38 to truly bring about benefits to enterprises as well as to simplify administrative procedures, customs authorities need to innovate training, equipping management teams with additional knowledge, reorganize audit procedures to focus more closely on enterprises’ practical production control, and ensure accurate and sufficient tax collections while helping enterprises improve their own customs compliance status.