Case 1: Corporate income tax – Dispute over additional deductions for R&D expenses

Case Background

Company A, a high-tech manufacturing company in Vietnam, is mainly engaged in the production of smartphone components. In 2023, the tax authorities questioned the compliance of the additional deduction of R&D expenses for the fiscal year 2020-2022 during the annual tax audit. The tax authorities believed that some of the company’s R&D expenses did not comply with the tax law and required the company to pay an additional tax of 500 million VND and imposed a 20% fine, totaling 600 million VND.

Specific controversial points

1. Scope of collection of R&D expenses:

The tax authorities believed that Company A had mistakenly included part of its market research expenses (approximately VND 100 million) in R&D expenses.

The travel expenses of some R&D personnel (about VND 50 million) were questioned as having no direct relationship with R&D activities.

2. Recognition of R&D projects:

The tax authorities questioned whether Company A’s “new touch screen technology” project (with a total investment of VND 300 million) lacked substantial innovation and should not enjoy additional deductions.

3. Time of collection of R&D expenses:

For the multi-year R&D project, the tax authorities believed that Company A had made an error in the timing of expense collection, resulting in certain expenses (approximately VND 150 million) being deducted in advance or in late stages.

Workaround

1. Prepare sufficient supporting documents:

a. R&D project documentation:

Provide a detailed R&D plan for the “New Touch Screen Technology” project, including technical innovations, expected results, etc.

Prepare project establishment reports, interim research reports, technical patent application materials, etc.

Collect evaluation opinions from industry experts on the innovativeness of the project.

b. Expense details and vouchers:

Prepare a detailed list of R&D expenses and classify them by project and expense type.

Provide original documents for all R&D expenses, including invoices, contracts, payment vouchers, etc.

For market research expenses, prepare explanatory materials to explain their direct relationship with R&D activities.

c. Personnel and time records:

Provide a list of R&D personnel, job descriptions, and attendance records.

For travel expenses, prepare detailed trip reports to explain the relevance to the R&D project.

2. Communicate with tax authorities:

a. Schedule a communication meeting:

Formally apply to the tax authorities to hold a communication meeting and submit the meeting agenda and relevant materials in advance.

b. Technical Exchange:

Invite the company’s technical experts to attend the meeting to explain in detail the innovativeness of the “new touch screen technology” project.

Prepare project demonstration materials, including technical schematics, experimental data, etc.

c. Explanation of Fees:

Provide detailed explanations and specific examples on the necessity of market research and travel expenses.

Explain the accounting treatment method for R&D expense aggregation and illustrate the rationality of cross-year project expense aggregation.

3. Legal Basis:

a. Relevant regulations:

Quoting Article 9 of the Vietnam Corporate Income Tax Law on deductible expenses.

Refer to the Ministry of Finance’s Notice No. XX of 2021 for the specific implementation details on additional deductions for R&D expenses.

b. Case reference:

Provide successful cases of additional deductions for R&D expenses of other companies in similar industries (anonymous).

Cite previous favorable decisions by the tax authorities or courts on similar disputes.

4. Appeal and Reconsideration:

a. Formal Complaint:

If communication fails, submit written appeal materials to the tax authorities, detailing the company’s position.

The appeal materials should include: an overview of the case, analysis of disputed points, legal basis, a list of supporting documents, etc.

b. Administrative Review:

If the appeal is rejected, apply for administrative reconsideration to the higher-level tax authority within the statutory period (usually 30 days).

Prepare a petition for reconsideration and attach all relevant evidential materials.

5. Internal management improvement:

a. Improve R&D management system:

Formulate detailed R&D project management methods and clarify the standards for project establishment, execution, acceptance and other links.

Establish an internal control process for R&D expense collection to ensure the accuracy and compliance of expense collection.

b. Strengthen training:

Provide tax law training to financial and R&D personnel to enhance compliance awareness.

Invite external experts to give special lectures and interpret the latest tax policies.

Case Results

After several rounds of communication and appeal, the tax authorities finally accepted most of Company A’s explanations and evidence. As for the market research expenses, the tax authorities agreed that 70% of them could be included in the R&D expenses; the “new touch screen technology” project was recognized as meeting the conditions for additional deductions. In the end, Company A only had to pay an additional tax of 100 million VND and was exempted from the fine.

Lessons Learned

• Maintaining complete and accurate documentation and expense records for R&D projects is critical.
• Maintain active communication with tax authorities and provide adequate technical and financial explanations.
• Be familiar with and correctly apply relevant laws and regulations to enhance the persuasiveness of your appeal.
• Seek assistance from external experts, such as tax consultants, industry experts, etc. when necessary.
• Continue to improve internal management systems to prevent similar disputes from happening again.

Case 2: VAT – Input Tax Deduction Dispute

Case Background

A Vietnamese trading company, B, is mainly engaged in the import and wholesale of electronic products. During the tax audit in the second quarter of 2023, the tax authorities questioned the non-compliance of some of the input tax deductions of Company B in 2022, and required it to pay an additional VAT of 800 million VND, and charged a late payment fee.

Specific controversial points

1. Authenticity of invoice:

The tax authorities suspected that the special VAT invoices totaling VND 500 million obtained by Company B from Supplier C might be false invoices.

2. Input tax deduction period:

Company B deducted an input tax of VND 200 million in December 2022, but the invoice date was November 2021. The tax authorities believe that the deduction period has expired.

3. Real estate maintenance expenses:

Company B deducted input tax of VND100 million for office building maintenance expenses. The tax authorities believed that part of it was capitalized expenditure and should not be fully deducted.

Workaround

1. Invoice authenticity verification:

a. Supplier Investigation:

Collect basic information of Supplier C, such as industrial and commercial registration and tax registration.

Obtain all business records with Supplier C, including contracts, orders, delivery notes, etc.

b. Substantial proof of transaction:

Provide bank transfer records to prove actual payment of the goods.

Prepare goods entry records, warehouse photos, sales records, etc. to prove the authenticity of the transaction.

c. Invoice verification:

Provide invoice verification records to prove the validity of the invoice in the tax system.

If possible, invite Supplier C to cooperate with the tax authorities’ investigation.

2. Input tax deduction time description:

a. Explanation of reasons for delayed deduction:

Prepare a written explanation for the delay in obtaining invoices (e.g., delay in invoicing by suppliers).

Provide correspondence with suppliers to demonstrate efforts to request invoices in a timely manner.

b. Regulatory Basis:

The relevant provisions of Vietnam’s VAT Law on the period for input tax deduction are quoted.

If there is a policy that allows for deferred deductions under special circumstances, provide relevant documents.

3. Analysis of real estate maintenance costs:

a. Description of the nature of the expense:

Provide a detailed list of repair items and invoice details.

Prepare accounting treatment documentation to explain the criteria for expensing and capitalization.

b. Expert opinion:

If necessary, hire an independent accountant to provide professional opinions to support the company’s approach.

Communicating with tax authorities:

a. Formal Meetings:

Arrange a formal meeting with the tax auditor to discuss each point of dispute.

Prepare a detailed PowerPoint presentation that clearly presents the company’s position and evidence.

b. Field visits:

Invite tax officials to visit the warehouse to verify the physical presence of the goods.

Show the actual situation of office building maintenance and explain the necessity and rationality of the maintenance.

5. Complaint Procedure:

a. Written Complaint:

If communication is unsuccessful, submit a formal written complaint detailing the company’s position on each disputed point.

The appeal materials should include legal basis, list of evidence, expert opinions, etc.

b. Administrative Review:

If the appeal is rejected, apply for administrative reconsideration to the higher-level tax authority within the prescribed time limit.

Consider hiring a professional tax attorney to assist in preparing your review materials.

6. Internal control improvement:

a. Supplier Management:

Establish a strict supplier access and evaluation system, and regularly verify supplier qualifications.

Improve the procurement process to ensure the authenticity and compliance of each transaction.

b. Invoice management:

Implement an invoice management system to record and verify each input invoice in a timely manner.

Establish a tracking mechanism for invoice deductions to avoid overdue deductions.

c. Cost classification:

Establish detailed cost capitalization standards and clearly distinguish between expensed and capitalized expenditures.

Implement a special approval process for large maintenance expenses.

Case Results

After several rounds of communication and evidence provision, the tax authorities accepted most of Company B’s explanations. As for the invoices from Supplier C, the tax authorities confirmed their authenticity after verification. Regarding the time of input tax deduction, the tax authorities agreed with the company’s handling in consideration of the special circumstances. Regarding the real estate maintenance expenses, the tax authorities required that 30% be capitalized. In the end, Company B only had to pay an additional VAT of 30 million VND, which significantly reduced the original amount of tax to be paid.

Lessons Learned

• Maintaining complete transaction records and supporting documentation is essential to prove the authenticity of the business.
• Obtain and manage input invoices in a timely manner to avoid overdue deduction issues.
• For large or complex expenses, you should consult a tax expert in advance to ensure compliance.
• Maintain active communication with the tax authorities and provide sufficient explanations and evidence.
• Continue to improve the internal control system to prevent similar tax risks.