Bui Tuan Minh, Tax Partner at Deloitte Vietnam
Bui Tuan Minh, Tax Partner at Deloitte Vietnam, takes readers through the new risk management approach being adopted by Vietnamese tax authorities.
A handful of enterprises have been quite surprised of late to receive a notification of a tax audit - inspection from local tax authorities even though they were audited or inspected quite recently.
This is a change compared to the former practice, where enterprises usually undergo a tax audit - inspection every three to five years. The change came as a result of a new risk management approach being implemented recently by Vietnamese tax authorities. This risk-based tax audit - inspection approach has been used in many countries worldwide.
It is now very important for Vietnamese enterprises to learn what risk management in tax audit - inspection is and how tax authorities select companies for an annual tax audit - inspection, based on which enterprises can proactively enhance their tax compliance in order to reduce the time and cost of dealing with tax authorities.
Risk management approach
The risk management approach in tax administration activities in general and tax audit - inspection activities in particular for the purpose of allowing tax authorities to evaluate enterprises’ tax compliance with tax administration (including but not limited to tax registration, tax declaration, tax payment, tax debts, tax refunds, tax audit, tax inspection, etc.) is stipulated in amendments and supplements to the Law on Tax Administration in 2012, Decree No. 83/2013/ND-CP, Circular No. 204/2015/TT-BTC and several official rulings, in which the following are notable points.
Firstly, enterprises are evaluated and then ranked by risk and compliance levels in accordance with the criteria and numbering system that is built using various sources of information to suggest an appropriate tax administration methodology (for e.g. selecting enterprises for tax audit - inspection plans).
Secondly, at the end of 2015, the General Department of Taxation (GDT) issued a set of risk assessment criteria consisting of 20 fixed criteria (consistently applied at all tax departments) and variable criteria (set out by each local tax department to fit local circumstances, following a proposal from the GDT) in order to select tax audit - inspection cases.
Thirdly, the classification of enterprises’ risk and tax compliance for tax audit - inspection is carried out automatically via software (TPR) run by tax authorities to analyze taxpayers’ risk information resources for the purpose of setting up tax audit - inspection plans.
Fourthly, cases of tax audit - inspection at an enterprise’s office selected by analyzing and then ranking the taxpayer’s risk must occupy no less than 90 per cent of all tax audit - inspection cases as set out in the annual plan (the remainder are chosen randomly).
In March this year the Ministry of Finance (MOF) established the Department of Risk Administration under the GDT and in the near future local tax departments with a large number of enterprises under their administration (more than 3,000) and generating significant tax revenues (VND1 billion or more) will also establish a specific unit in charge of risk administration to improve the effectiveness of tax administration methodology.
The application of tax administration for each enterprise shall correspond to the enterprise’s risk levels as assessed and ranked by tax authorities.
For cases of tax audit - inspection at sites mainly chosen by the software system, which automatically analyzes, assesses and ranks risk levels together with a set of criteria and weightage (which is updated annually), the possibility that an enterprise is selected in the annual tax audit - inspection plan in consecutive years is entirely possible.
Apart from local tax departments, the GDT may also establish its own set of variable criteria and risk weightage for nationwide tax administration purposes. Based on such assessments, the GDT would be able to directly select cases for tax audit - inspection and then carry out the tax audit - inspection on their own. Hence, in practice, there may be cases where one enterprise is inspected this year by local tax authorities and then be inspected by the GDT in the following year, even though the inspection period and focus are different.
The fixed and variable criteria established by tax authorities, with reference to international experience, allows the comprehensive evaluation of enterprises’ risks (for e.g. compliance levels, changes in tax declaration, history of tax audit - inspection, transfer pricing, enterprise types, financial positions, business operation conditions, etc.). The variable criteria for risk assessment are formulated by each local tax department based on local circumstances. This may lead to similar-scale enterprises in the same industry but in different locations having different risk rankings, and as a result such enterprises may have different tax audit - inspection schedules.
Enterprises categorized as a “high risk” will likely incur more time and cost as a result of the tax ranking system (for e.g. time, opportunity cost, personnel for the tax audit - inspection, consulting fees, etc.). Enterprises should now seriously act to aim for comprehensive tax compliance to be classified as good compliance / low risk.
Regarding the classification of compliance, Circular No. 204 provides several typical cases subject to low compliance to identify the focus on selecting enterprises in the tax audit - inspection plan (for e.g. cumulative losses exceeding 50 per cent of owner equity up to the time of assessment, having administrative penalties related to tax evasion or tax avoidance over the last two years since the assessment, or administrative penalties in accounting).
Given the current practice whereby tax authorities have been actively implementing solutions to simplify tax administration and ease procedures for taxpayers, the application of risk-based tax audit - inspection methodology needs to be implemented scientifically and transparently to improve the efficiency of tax administration.
The author would like to propose the following recommendations to tax authorities:
Firstly, enterprises’ information, apart from standard tax compliance information, should also include others such as investment information (for e.g. increases in investment capital over the years) and the contribution made to the local community (employment, social welfare, etc.), which should be fully reflected in the Tax Information System of tax authorities to ensure accuracy and fairness in analyzing enterprises’ risks, which shall involve the use of such information in building and uniformly applying the set of variable criteria at local tax departments.
Secondly, based on studies by various international organizations, the rankings of compliance and risk levels of each enterprise largely depend on the selection of criteria and risk weightage by tax authorities. Enterprises operate in different industries with different characteristics, and as such the criteria and risk weightage should be appropriately built up for each industry to ensure the proper selection of enterprises having high risk for tax audit - inspection.
Thirdly, tax authorities should enhance public relations programs and support for enterprises to understand risk management in tax audit - inspection while at the same time publicizing the criteria for risk evaluation, compliance ranking, and application methods. These approaches will make the tax management process more transparent and better reinforce enterprises’ tax compliance.
Tax officers, during the tax audit - inspection at an enterprise, should spend time guiding, informing and advising taxpayers in order for them to enhance their tax compliance status, which may help their tax self-assessment procedures (declarations and payments) become more effective.
In being aware of their compliance level, enterprises with high compliance will be more confident and thus can better focus on their core business operations with support from tax authorities in fulfilling their tax obligations. Enterprises with low compliance will have to self-review and improve their internal management systems to increase their compliance level in order to avoid the imposition of harsh tax management from tax authorities.
Fourthly, tax authorities should have different ways (surveys, emails, a hotline, dialogue, etc.) to gain feedback from taxpayers about the efficiency of the application of risk management in tax audit - inspection. By analyzing feedback from enterprises having similar characteristics (for e.g. similar industry, similar scale, similar tax incentive conditions, etc.) and summarizing experience obtained from the implementation process, tax authorities should regularly and continuously review and develop the set of criteria and risk weightage to ensure the suitable selection of enterprises for tax audit - inspection.
These are also recommendations international organizations have made in numerous reports on tax reforms in developed and developing countries.