How To Manage A Company’s Compliance Procedures In Vietnam

tax procedures

How To Manage A Company’s Compliance Procedures In Vietnam

There is currently in Vietnam a business law system applicable to both domestic and foreign investors, whereby all companies must operate in accordance with relevant regulations on business registration, tax procedures, accounting, labour, insurance, foreign exchange, and anti-money laundering, etc.

Our series of articles deal with the following topics:

We are willing to share with you our experiences and real cases accumulated and inherited since the 2000s when the Vietnamese business law officially “opened up” to allow the private sector to have been born and grown at storm-like speed throughout the past 18 years.

tax proceduresDOING BUSINESS IN VIETNAM

PART TWO: HOW TO MANAGE A COMPANY’S COMPLIANCE PROCEDURES IN VIETNAM

Business compliance procedures are associated with every company, from its incorporation, through daily transactions and even till its cessation of operation. These involve specialized areas that require both professional skills and practical experience.

Governance of business compliance procedures not only helps a company avoid the risks that may cause obstacles and damages, but also assists in optimizing the ultimate outcome, creating a competitive advantage.

For the important values of business compliance procedures, the following six core contents are brought about to potentially help you enhance your corporate governance:

FIRST,

1. Organization and management of the business records system

Proper preparation and maintenance of business records and documents is both a mandatory requirement for audits by some state authorities and an internal management tool of enterprises. Many mistakes and risks arise from failure to properly organize, arrange, and control one’s documentation system right from the beginning:

  • Input invoices with large amounts not accompanied by sufficient documents that help prove their legality and validity are not considered for value-added tax deduction, resulting in the business being subject to corporate income tax.
  • Wages and other benefits paid to employees not documented may give rise to additional corporate income tax.
  • When it is required, documents to be provided to banks, partners, or tax authorities are insufficient or take a lot of time to prepare, resulting in the loss of business opportunities and other severe risks.
  • Failure to categorize and manage storage duration of each type of document or to carry out document cancellation procedures in the right order.
  • When an employee resigns from his or her job, the new employee either fails to take over the job or performs the work in a riskier manner.

You can overcome and prevent those risks by organizing and managing the business records system using a business records management procedure comprising of the following steps:

  • Classify documents and set up document categories based on the nature of each type of document
  • Establish principles for creating and standards for storing each type of document along with their risk management approaches and review techniques.
  • Create folders with labels in accordance with ISO and Kaizen – 5S standards.
  • Organize documents according to accounting principles and store them on these folders.
  • Monthly or quarterly check the adequacy, legality, rationality, and validity of each category of document; make reports on shortcomings, risks (including those due to loss or inadequacy of documents, record errors, inadequacy of compliance reports, faulty or irrational data, etc.), and solutions; make independent reports to submit to all relevant management authorities.
  • Timely complete faulty documents or reports.
  • Establish storing regulations, manuals on how to organize and use the documentation system, and principles and professional skills for managing administrative works and for organizing and completing forms and documents.
  • Keep electronic copies of important records and documents for coordinating and reporting purposes.

SECOND,

2. Compliance with tax procedures

Enterprises must declare and submit monthly, quarterly, and annual tax reports and make tax finalization reports on:

  • Excise tax, which is the annual fixed tax based on each enterprise’s business license and charter capital; each registered branch or place of business must also pay excise tax.
  • Value-added tax (VAT), which is 10% for general goods and services and 0% for exported goods and services related to agriculture, water, food, etc; VAT amount to be paid through the deduction method is the total VAT amount of goods sold or services provided less the total deductible VAT amount of purchased goods and services.
  • Corporate income tax (CIT), which has a common tax rate of 20% on taxable profits; the special feature of this tax is the taxable profit, whereby a tax authority retains the right to determine the enterprise’s taxable profit based on its own tax calculation (according to the regulations on calculation of taxes stipulated by the Law on Corporate Income Tax) instead of charging 20% of the profits stated on the financial statements provided by the enterprise; generally, taxable profits determined by tax authorities through tax audits are larger (sometimes a lot larger) than the amounts declared by the enterprise; this not only results in additional tax amounts, but also adds unexpected late payment fines and interests; in order to manage the CIT expenses, the person in charge of accounting must be highly knowledgeable of tax regulations and policies, capable of managing the business records system that supports the reports, and well-prepared in terms of plans and tactics to be deployed in tax audits and settlements.
  • Personal income tax, which is imposed on the salaries paid to employees; personal income tax rate may range from 5% to 35% depending on each employee’s income; the enterprise is responsible for calculating, deducting, and paying the tax on behalf of its employees at the time of salary payment; many of the employees’ items of income, though, can be exempted from this tax if the enterprise properly presents and demonstrates these payments with valid supporting records; failure to manage personal income tax sometimes becomes a burden for both the enterprise and employees; personal income tax procedures for local labors also differ from those applicable to foreign labors.
  • Foreign contractor tax, which applies when a domestic enterprise purchases certain goods and services from foreign suppliers not present in Vietnam; under the relevant service or purchase contract, the buyer is obliged to declare, deduct, and pay foreign contractor tax on behalf of the seller at the local tax office; foreign contractor tax includes VAT and CIT and may range from 2% to 15% on taxable revenue.
  • Status of compliance with procedures for associated transactions and anti-transfer pricing policies.
  • Other taxes by sector or profession such as special consumption tax, export tax, import tax, etc.

It is not a wise move for enterprises to recruit a large number of accountants, each in charge of a type of tax. There are also only a handful of skilled employees who can properly manage and optimize tax procedures and the cost of maintaining these people are usually very high. Using outside advisors is the choice of many businesses of all sizes.

THIRD,

3. Compliance with accounting and auditing procedures

Based on its system of business records and documents stored in strict accordance with regulations, an enterprise is required to open and record its daily business transactions into a stipulated general and detailed accounting book system. The forms and principles for recording this accounting book system shall be in accordance with the Vietnamese accounting standards issued and managed by the Ministry of Finance.

Enterprises must prepare financial statements based on this accounting book system. Depending on the type and nature of the business, financial statements may be required to be audited independently before being provided to competent authorities.

Enterprises must provide accounting books and financial statements to state authorities and other agencies in the following cases:

  • Provided to tax authorities for the purpose of determining tax bases,
  • Provided to market management agencies on request,
  • Provided to business registries on request,
  • Provided to independent auditing firms,
  • Provided to banks,

An enterprise’s accounting books must present all of its assets and equity, and details on business situation in chronological order to provide information to the Management and compliance information to state authorities on request.

FOURTH,

4. Compliance with labor and wage procedures

The basic procedure to be followed in terms of labor and wages comprises of the following steps:

  • Issue and register labor rules and regulations.
  • Sign and register collective labor agreement.
  • Register a wage scale system suitable for labor and income structure.
  • Establish payroll and welfare rules and regulations.
  • Issue personnel manual and code of conduct.
  • Collect personnel profiles.
  • Prepare and sign employment contracts.
  • Register and declare employment relationship.
  • Declare social insurance premiums and salary-based deductions.
  • Apply for work permits and temporary residence cards for foreign workers.

The cost of human resources includes not only the actual salaries paid to employees, but also the various salary-based deductions, including:

  • Social insurance, health insurance, and unemployment insurance premiums, and trade union fee totaling up to 34.5% of total salary fund; the total insurance fund tends to increase from 2016 onwards as it also includes allowances, additional payments, etc., and as the minimum wage increases over time.
  • Personal income tax paid on behalf of employees,
  • Rewards, allowances, benefits, training benefits, per diem, and other items paid directly or through the each enterprise’s general policy.
  • Means, tools, and other working facilities.

Thus, the total actual cost of human resources can be enormous. This amount should be managed in accordance with the principles of accounting and management accounting, including:

  • To follow state regulations and procedures.
  • To keep sufficient employee records, employment contracts, payroll sheets, salary regulations, salary records, and so on to demonstrate their validity and legality.
  • To record an amount in consistence with actual production and business activities.
  • To control highly effective, lowly effective, and ineffective sources of expenditure.
  • To timely detect all errors, risks, wastage, etc., especially risks involving compliance with state requirements.

In addition, the cost of human resources also involves an extremely important and sensitive relationship, which is the relationship between an enterprise and its employees:

  • Is the salary policy clear and fair?
  • Is the salary policy capable of controlling and promoting responsibility and productivity?
  • Is the salary policy associated with the compliance with rules, code of conduct, and corporate culture?
  • Is the current labor productivity (the ratio of gross profit, total revenue, etc. to total salary cost) appropriate?
  • Is the current wage rate competitive with the market?

In order to comprehensively manage labor and salary procedures, it is necessary to first carry out the following steps:

  • Review the organizational chart and operational procedures,
  • Review organizational and operational regulations
  • Review the job description system,
  • Review the system of regulations and policies on labor and wages, including rules and regulations on labor and labor discipline; policies on salary, bonus and benefits; policies on recruitment, training, development, and exploitation of human resources; it is required to update, estimate, and control the costs incurred related to labor and wages.
  • Review the salary fund and manage salary costs and salary-based deductions,
  • Strictly comply with regulations on labor relations according to current law,
  • Review policies on information security, conflicts of interest, code of conduct, etc.
  • Review the corporate culture.

FIFTH,

5. Following business license procedures

Enterprises may be required to apply and complete procedures for business licenses and legal documents, including the following main licenses, permits, and documents:

  • Enterprise registration certificate, necessary to carry out business in accordance with Vietnamese business laws.
  • Investment registration certificate, necessary for foreign investors to invest in Vietnam.
  • Business certificate, necessary for foreign merchants to conduct commercial activities.
  • Certificate of registration of establishment of independent branch (or dependent branch).
  • Representative office registration certificate.
  • Certificate of establishment of warehouse and other business facilities.
  • Documents on plants and offices.
  • Profiles of capital contributing members, initial business establishment documents, seal registration certificate.
  • Documents on protection of intellectual property rights.
  • Documents for printing and issuing VAT invoices.
  • Documents on sale, franchising, and valuation of enterprises.

SIXTH,

6. Determination of enterprise value

In the course of business, circumstances may occur where the enterprise may have new shareholders or the founders may want to sell the business or simply get a bank credit, etc. In order to be proactive in determining enterprise value when there is a need to buy shares, transfer the business, participate in bidding, obtain entry visas or pass audits/customers due diligence tests to be carried out by reputable clients (i.e. Samsung, Honda, Li & Fung, Panasonic, and so on), the enterprise needs to be well-prepared for the establishment and completion of the commercial credibility report system which comprises of the following:

  • Internal management regulations.
  • Financial statements and reports on financial capacity
  • Documents on assets.
  • Documents on personnel and internal policies
  • Customer records
  • Product profiles and documents on rate and potential of revenue, long-term business plans, and policies on quality
  • Documents on field of operation and advantages
  • Competitiveness profiles
  • Legal documents
  • Documents on suppliers and partners
  • Documents on compliance with business regulations issued by state agencies in the field of taxation, labor, salary, and customs
  • Quality management documents
  • Other documents fully reflecting the enterprise’s tangible and intangible values

With a clear and transparent governance system, enterprises are not only prepared to take advantage of business opportunities with partners, but also capable of controlling risks to meet all audit requirements issued by competent authorities.

Note the difference if you are a domestic investor with business owners all being Vietnamese citizens: 

  • You are not required to open a direct investment account.
  • You are not required to have your end-year financial statements audited independently.

Note the difference if you are a foreign investor or if one of the business owners is not a Vietnamese citizen:

  • You are required to open a direct investment account in Vietnam to receive capital from abroad.
  • You are required to have your end-year financial statements audited independently.
  • Profit to be received abroad must be registered and notified to relevant state authorities.

 

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