Multilateral transactions and the demand for domestic materials are on the rise and products, mainly materials, change hands several times before finding their way overseas. The increased demand for the on-site export of materials offers local suppliers a chance to serve as satellites for multinational enterprises. It is necessary for the government to clarify the incentives for local and foreign investors in supporting industries. The question is whether the legal system, especially tax regulations, are comprehensive enough and are transparent and supportive for modern day trade. KPMG tax partner Le Thi Kieu Nga and tax manager Nguyen Ngoc Thai highlight certain contemporary value added tax (VAT) issues regarding on-site exports that were encountered by a number of Vietnamese enterprises.

An on-site export is broadly defined under customs regulations as goods exported by Vietnamese traders to foreign traders that are designated for other Vietnamese traders to receive the said goods in Vietnam.

Import and export procedures will be cleared by both of these Vietnamese traders. The law on VAT and Decree 123/2008/ND-CP stipulates that 0 per cent VAT will be applicable to export goods as regulated in commercial regulations. Circular 129/2008/TT-BTC narrows the 0 per cent VAT application to on-site export goods. Only on-site export goods which are used by Vietnamese traders for the further processing and manufacturing of products for export purposes, are subject to 0 per cent. Other on-site export activities will be taxed at either 5 or 10 per cent accordingly.

The key point in determining if 0 per cent VAT is applicable is whether the goods imported by Vietnamese traders are for the purpose of manufacturing goods for export. Such a situation increases the pressure on Vietnamese on-site exporters and creates a negative impact on export activities in general. At the time of the delivery of goods and invoice issuance, exporters may not always be aware of whether Vietnamese traders will continue using the imported goods for processing and manufacturing for export purposes. Even in cases where such traders commit to export, there is still a significant concern whether evidence will be accepted by the tax authorities as proof to apply 0 per cent VAT on the export transaction. The probability of VAT collection and subsequent penalties imposed on on-site exporters is becoming considerable, even though this does not stem from intentional noncompliance by them.

Whether double VAT will be imposed on the on-site export goods?

On-site export goods that are not for further processing for export, will be subject to VAT once at the export stage and will be collected by the exporter, as analysed above. Since there is no direct contractual transaction between the two Vietnamese traders, the Vietnamese trader which is designated by the foreign trader to receive the goods are required to perform customs clearance and fulfill its obligation to pay import duty and VAT at the import stage. VAT is imposed once more on the transaction price plus import duty. Consequently, VAT is charged twice on one consignment of goods and on one transaction. While the VAT at the import stage is creditable or refundable as input VAT for the Vietnamese trader, there is no mechanism for the Vietnamese trader to claim the VAT charged by the exporter to the overseas traders at the export stage. Such double VAT treatment results in a significant increase in the transaction costs which may ultimately be transferred to the Vietnamese traders. The overall transaction will therefore be negatively impacted by this tax policy.

Which type of invoice is relevant to the on-site export?

According to current regulations on VAT, the necessary supporting document for claiming a credit/refund of input VAT under on-site exportation is the VAT invoice. Similarly, customs regulations indicate that enterprises must use VAT invoices for customs procedures in any on-site export activities.

The most recent regulation on invoice issuance and usage, Circular 153/2010/TT-BTC, is likely to ignore the case of on-site export by stating that enterprises are obliged to issue export invoices for every export activity. Such an inconsistency in the applicable form of invoice creates real pressure for exporters when dealing with either local tax authorities for VAT credit/refund purpose or customs authorities for customs procedures. In the past few months, commodities were delayed in customs clearance areas due to adverse interpretation by the local customs authorities as to which invoice should be used.

Having received feedback from enterprises, the recently issued Official Letter 6282/BTC-TCT has cleared these obstacles and specifies that for the period after January 1, 2011, export invoices can be used in lieu of VAT invoices for customs purposes, subject to prior registration with the competent authorities. Given this, on-site exporters can now be confident regarding issuing invoices for its activities.

Vietnamese tax policy makers seem to be of the view that concessional 0 per cent VAT on exports is applicable where the prerequisite requirement is that the final products after changing hands several times should be exported overseas. While they are fully aware of the outstanding issues of such VAT treatment, they are also in an awkward position in trying to resolve the tax policy problem and further guidance is expected to be issued in the future. Enterprises with on-site export activities should therefore closely monitor the development of the regulations and seek professional tax advisors’ opinions for implementation in practice.

The views of the authors do not necessarily reflect those of KPMG.

Source: VIR.