Nghiem Xuan Hong An, of Grant Thornton Vietnam, discusses the potential risks in the value-added tax (VAT) refund process and how to maximize the refundable VAT amount.
Value-added tax (VAT) refund plays a crucial role in cash flow and tax budget of companies and the government. Despite the fact that companies understand the importance of VAT refund, are they fully aware of the issues of workload, the time-consuming assessment process as well as potential tax risks to be successful in obtaining tax refund and maximizing the refund amount?
Benefits of VAT Refund
The significant benefits for companies when they succeed in receiving a tax refund include:
- reduction in tax cost/tax burden is always a pressure on companies. The refunded tax amount can help companies to ease their obligation and use the refunded VAT amount to pay other types of tax;
- available working capital to finance operation and expansion plans: by obtaining a tax refund, companies have the funds to finance production, operation and expansion plans.
Potential Risks in VAT Refund Process
Despite the benefits of VAT refund, there are potential risks and obstacles that a company may face during the refund process:
Heavy Workload During Tax Audit Before Refund
When companies plan on requesting a VAT refund, all supporting documents (e.g. invoices, contracts, payment vouchers, etc.) must be prudently filed and recorded (both hard and soft copies) at their offices.
During the tax audit, many working papers need to be prepared, supplemented and explained to tax officials.
Additionally, upon request of the tax officials, administrative tasks such as sorting files/documents, printing documents, meetings, etc. are very time-consuming. In practice, companies have to spend a considerable amount of time explaining issues during the tax audit period. This makes the whole VAT refund process long and exhausting.
Failure to be Proactive in Cash Flow Management
Many companies submitting a VAT refund dossier for the first time estimate the necessary time to obtain the refund in cash is between one to two months.
However, in practice, in complicated cases, the refund process may be delayed for various reasons by more than six months.
Consequently, if companies are not able to manage their cash flow and tax budget well, they may be placed in a critical situation regarding cash flow.
In other cases, companies submit the VAT refund application dossier indicating the refundable amount determined/calculated themselves. However, in the end, the refunded amount approved by the tax authorities upon the result of their tax audit/refund assessment is less than the amount determined by the company. This has a negative impact on the company’s budgeting and planning for operation and production.
Unexpected Extension to Scope of Tax Audit/Inspection
Under current regulations, companies that submit a VAT refund application dossier for the first time must be subject to “tax audit first and refund later on.”
In this case, the tax authority will conduct a tax audit of the company. During the tax audit to assess the VAT refund dossier, the tax authority may investigate and discover more tax exposure (rather than VAT only according to the company’s expectation) such as transfer pricing, non-deductible expenses for corporate income tax purposes, no qualification for professional practice (i.e. pharmaceutical production, real estate, construction, etc.), violation of capital contribution, etc.
Therefore, companies may be subject to another tax audit/inspection by the tax authority.
Lack of Updated Knowledge of VAT Refund Regulations
A company’s personnel might fail to understand the VAT refund regulations correctly or fail to update themselves on the constant changes in VAT refund, which can lead to incorrect self-determination of VAT refund entitlement, or insufficient preparation for supporting documents relating to the VAT refund dossier.
As a result, the authorities have reasonable reasons to reject the VAT refund application or to reduce the refundable VAT amount when companies do not comply with the current regulations.
Points to Note in VAT Refund Application
To mitigate the potential risks and maximize the refundable VAT amount, enterprises should pay particular attention to the following:
- Companies must comply with the rules that (i) the requested amount for refund is declared at item [42] in the VAT return of the last month/quarter of cutting off the tax refund period; and (ii) the creditable VAT amount to be carried forward to the next period (item [43]) in the VAT return of the last month/quarter of cutting off the tax refund period is equal to the creditable VAT amount carried forward from the previous period (item [22]) in the VAT return of the following month/quarter. Only when the rules are satisfied will the refundable VAT amount be properly recorded on the tax authority’s system;
- For investment projects, enterprises are only entitled to VAT refund if their declaration has been filed under Form 02/GTGT for the investment period and the investment period must be the same as the one registered on the investment registration certificate;
- Failure to contribute the charter capital sufficiently (according to the registered schedule) of investment projects can potentially result in the tax refund application being rejected by the tax authorities;
- Input VAT of promoted goods, gifts:
- input VAT of goods, gifts given under promotion programs with a value of 100 million dong ($4,303) or above without registration with local Department of Industry and Trade is not creditable;
- input VAT amount corresponding to the exceeding amount between actual cost and registered cost of the registered promotion programs is not creditable.
- No issuance of output VAT invoices for other incomes;
- Unavailability of customs declaration for import/export activities (i.e. non-commercial import; export by air/portable goods);
- Input VAT invoices issued by run-away entities;
- Input VAT of non-VATable revenue (i.e. producing software products).
Changes and Trend of the Law
Since July 1, 2016, refundable VAT amount of export activities cannot exceed 10% of export revenue. Before July 1, 2016, there was no threshold.
Between July 1, 2016 and January 31, 2018, VAT refund was not applied to goods imported then exported under Decree 100/2016/ND-CP. From February 1, 2018, according to Decree 146/2017/ND-CP, imported goods for re-export will be entitled to VAT refund where the customs procedures are executed at the customs offices under the Law on Customs.
According to recent draft law, in future, companies that currently have an output VAT rate of 5% (increased to 6% under the draft law) declaring VAT under the credit method will be considered for a VAT refund if the accumulated input VAT is not completely deducted after 12 consecutive months or four consecutive quarters.
Planning Points
Keeping abreast of the latest tax regulations together with good preparation/self-review before submitting the request for VAT refund, will ensure that companies maximize the refundable VAT amount.
In practice, it is not too difficult to obtain the full refund amount based on the company’s self-determination in the application dossier, which depends on the level of complexity of transactions and expenses, the internal structure, availability of supporting documents and document filling.
More importantly, the practical experience of the personnel in charge in the whole VAT refund process (e.g. preparing/filing documents, having proper explanation for issues challenged by tax officials during VAT refund assessment, etc.) will make the process go more smoothly and efficiently.
Nghiem Xuan Hong An is a Tax Senior Manager at Grant Thornton Vietnam.
This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisers.
