Implementing the Law on Tax Administration: Decree 126

Decree 126 took effect on December 5, 2020.

As described in our previous article on tax administration, the regulations allow tax authorities additional power to collect tax, particularly in instances where individuals or companies attempt to evade tax.

Key highlights: Decree 126

As per the new regulations tax authorities are likely to apply the substance over form approach. The substance over form concept is where financial statements reflect accounting transactions rather than a simple legal form. This concept shows the overall financial health of the business.

Further, businesses that use illegal invoices, do not comply with a tax audit, and fail to declare party transactions are likely to be subject to fines by tax authorities.

Tax authorities may also publicize information of tax evaders including those that fail to submit tax returns or fail to pay taxes within 90 days of the deadline.

One of the most significant aspects of the new law is for foreign workers, where if the legal representative of the company is a foreign worker, they can be stopped from leaving Vietnam if the company has not paid taxes.

In addition, businesses are required to pay taxes on the behalf of taxpayers. For example, business entities must pay personal income tax (PIT) for individuals engaging in stock dividends, stock bonuses, and capital that is contributed by individuals in the form of immovable property or shares.

Businesses that pay bonuses, sales support, promotions, discounts, and cash to individuals or business households that pay taxes are also required to declare and pay PIT on behalf of such individuals.

Corporate income tax payment provisions

Business entities must also pay at least 75 percent of the total corporate income tax (CIT) liability in the first three quarters of the tax year. If it is less than late payment interest will be imposed on the shortfall tax liability.

Value-added tax filing

Taxpayers that are eligible for quarterly filing for value-added tax (VAT) are those that can do so if the total revenue in the previous calendar year is VND 50 billion (US$2,170,330) or less or if done in the first year of operations. In addition, those that opt for quarterly returns can also opt to declare PIT on the same quarterly basis as well as they long as they meet the conditions set out in Article 9 of Decree 126.

Therefore, the amount of monthly PIT will no longer determine the term of PIT declaration. In the case of representative offices – they will have to conduct a monthly declaration for PIT as RO’s cannot issue invoices.

If taxpayers want to switch to a quarterly filing from monthly, they must do so by sending a written request to the tax authority by January 30 of the year.

For returns, they should be filed where the investment project occurs and are dependent on the branches or locations which are eligible for CIT incentives.

Ride-hailing services such as Grab will also be subject to 10 percent VAT compared to the present 3 percent. The company and not the drivers will be obligated to pay the tax.

Banks on withholding tax and e-commerce

We earlier discussed the practicalities of how banks could withhold payments for tax for suppliers that have no permanent establishment in Vietnam but derive income from customers in Vietnam.

While further clarification is still needed, Decree 126 states that the General Department of Taxation (GDT) will identify names and the websites of overseas suppliers who have not made a tax registration to banks and intermediary companies.

Once identified, banks & other payment intermediary entities will be responsible for withholding tax on the payment to these suppliers on a monthly basis. If the bank cannot withhold tax due to unforeseeable issues, such transactions will need to be reported to the GDT on a monthly basis for the purpose of tax assessment.

Banks are also required to provide bank account details of taxpayers to the tax authority within 90 days upon the effective date of this Decree. Further, information on bank account transactions of an entity must be provided to the tax authority upon official request during the course of a tax audit or tax inspection.