Plugging the loopholes

(Dzung Trieu Law firm)_Poor management and an inadequate legal framework make it easier for loss-making enterprises to reduce their tax burden or even obtain refunds.

In the world of business an enterprise with continued losses exceeding their charter capital will, at some stage, declare bankruptcy. Not necessarily in Vietnam, though. There are many enterprises out there claiming losses for a number of years in succession but still conducting business. And many ask for and receive tax refunds.
Poor management
Daewoo Hanel, a foreign invested enterprise (FIE) with 60 per cent foreign capital, is a case in point. According to Mr Ngo Chi Hung, Deputy Head of the Board of Management at the Hanoi Industrial and Export Processing Zone, Daewoo Hanel has reported losses since starting ten years ago. Though lacking evidence to back up his claims, he insisted that the company has never posted a profit. “We see only losses and these losses are even higher than its registered capital, but it is still operating,” he said.
He believes there are many FIEs in Hanoi doing likewise. “What’s worth noting is that enterprises, after declaring losses, are not required to pay taxes,” he said. When asked about the responsibility of EPZ management authorities, he said that the board of management is aware of what was happening but are powerless because in every other respect the FIEs follow regulations.
In Ho Chi Minh City a lack of discipline by management authorities makes the situation even worse. Figures from the Ho Chi Minh City Department of Planning and Investment show that there are nearly 3,500 FIEs operating in the city, but the city’s Department of Taxation said that it only has 2,500 enterprises under its control and just 2,200 enterprises submit regular tax reports.
The decentralisation of investment licensing prompted localities to race to attract foreign direct investment (FDI). But given the levels of management capacity at local authorities, how much money have they missed out on in uncollected taxes?
The QMI Industrial VN Joint Stock Company, a Ho Chi Minh City-based FIE in the garment sector, has never had trouble with local tax authorities despite claiming losses for many consecutive years. The company has received tax refunds 13 times, most recently in 2009 when it received VND639 million ($30,400). Only by inspecting some large FIEs have tax authorities identified violations and collected billions of Vietnam dong.
However, due to a lack of staff and a number of “sensitive” factors, local tax authorities visit just 1 per cent of the enterprises under their control.
Inadequate legal framework
While cumbersome requirements may be a contributing factor, many FIEs actively seek to exploit whatever legal loopholes are available. In order to encourage exports, the State offers enterprises in the export sector a value added tax (VAT) rate of zero per cent, allowing many to receive large input tax refunds. Yet they only export a certain proportion of their products, selling the remainder without an invoice. For this reason local tax authorities often have no idea whether these enterprises are recording losses or earning profits.
Current regulations also stipulate that a refund is made prior to any inspection, which benefits a loss-making enterprise the most. Enterprises seeking a tax refund can receive billions of Vietnam dong in fairly quick time, while tax authorities lack the staff to conduct inspections.
Moreover, Vietnam’s bankruptcy law stipulates that enterprises who cannot pay their debt when creditors demand payment are considered bankrupt and will be forced to declare so. But the current law does not include any sanction for enterprises that are technically bankrupt but do not declare.
This is why a number of enterprises with losses exceeding charter capital can still operate. Allowing so many of these enterprises to stay afloat in the economy has a negative effect on the business environment and typically raises concerns about fairness.
Possible solutions
Vietnam is in critical need of tax reform because it needs more revenue to fund its programmes and make much-needed investments. As the existing tax regime is so complex and riddled with loopholes, more effort is needed to make a real difference. It is, at least, trying harder to get its tax regime in order, with bringing down rates of tax evasion being a priority. There are no immediate ways to deter tax evasion, but there are a couple of methods that could be undertaken by authorities to limit it as much as possible.
The best way to curb tax evasion is to reduce the corporate income tax (CIT) rate. It seems unlikely that State coffers would receive more tax revenue under the high CIT rate of 25 per cent. Fixing a new rate may well change the attitude of enterprises, from being unwilling to being more willing to pay tax, especially those falsely reporting losses.
Local tax authorities lack the qualified staff to conduct quality inspections. In the long run they should consider promoting e-tax services to support tax officials dealing with complex transfer pricing issues. Having enterprises calculate their tax liability and report it to the tax agencies could also be considered, as could higher fines for tax evasion.
To ensure fairness among business components, tax authorities should publicly name enterprises recording losses. This will help other companies, especially those who need to know about potential partners. The Hanoi Taxation Bureau refused a request from VET to provide the names of FIEs reporting losses for consecutive years. An official from the Bureau for Taxation said that the law on tax management did not permit tax authorities to reveal any secret information about an enterprise.