Dang Van Vuong
YKVN Associate
In this Article, I provide a case in which I have realized a lot of inconsistencies in practice. The case can be simply summarized as follows: a foreign-invested corporation located in a northern province (for example, Quang Ninh) wishes to put its own financial statement and a financial statement of its independent branch located in another province/city (for example, Ho Chi Minh City) in one financial statement (usually known as “consolidated financial statement”). Therefore, the corporation needs to change the accounting mode of its branch from independent to dependent. The questions are: (i) is the corporation entitled to change its branch’s accounting mode from independent to dependent? and, (ii) if possible, what is the procedure applicable to the change?
Participants to an international seminar discuss audit practices in Vietnam__Photo: Tuan Anh/VNA
1. Regarding the first question, we may notice that there is an item regarding accounting mode in an application dossier for tax registration for both a company (as shown in Tax Registration Declaration Form 01-DK-TCT under the Ministry of Finance’s Circular No. 80/2012/TT-BTC dated May 22, 2012, guiding the Law on Tax Administration regarding tax registration (“Circular 80/2012”), Article 5.2.a) and its subsidiary (as shown in Tax Registration Declaration Form 02-DK-TCT under Circular No. 80, Article 5.2.b). Accordingly, changing the accounting mode means to change the information content declared in tax registration.
Under Circular No. 80, Article 11.3 and Article 13, when changing the information content declared in tax registration, a taxpayer has to notify, within 5 (five) days from the date of change, the change to a direct tax management authority by submitting a dossier comprising (i) Declaration Form for Modification of Tax Registration (Form 08-MST); (ii) a copy of the Business Registration Certificate, Investment Certificate or Establishment License in case the change leads to change in Business Registration Certificate, Investment Certificate or Establishment License; and (iii) a list enclosed with the initial tax registration declaration (if any).
Under the above regulation, it means that the corporation is entitled to change the accounting mode of its branch, though there is no expressed regulation implying such entitlement.
Consequently, the branch will notify its direct tax management authority in Ho Chi Minh City (Ho Chi Minh City Taxation Department), and the corporation will do the same to a direct tax management authority in Quang Ninh province (Quang Ninh Taxation Department).
To my knowledge, the dossier for notifying such change should be additionally enclosed with the corporation’s decision with respect to such change of Ho Chi Minh City branch’s accounting mode. And as required in Circular No. 80, the dossier should be submitted within 5 days after such change occurs or on the date which I believe is the date of such decision. The tax obligation of Ho Chi Minh City branch (if any) will be finalized by the corporation at the end of the year towards the Taxation Department of Ho Chi Minh City.
2. Regarding the second question, according to the regulations quoted above (Circular No. 80, Article 11.3 and Article 13), the procedure for completing the change of accounting mode will be as simple as making the notification mentioned above. In this case, however, we have known a lot of inconsistencies in practice, which were both officially and unofficially guided by tax authorities and tax officers.
In the past, the Taxation Department of Binh Duong province, in a very similar case to our case here, guided in Official Letter No. 56/CT-TT&HT dated November 7, 2011 (“Official Letter No. 56”), that in a case where a branch wishes to change from independent accounting mode to dependent one, such branch must finalize corporate income tax (“CIT”) up to the time of change. As a result, the change of accounting mode in our case would require an additional procedure, which is tax finalization.
The legal ground of Official Letter No. 56, as stated, was the Ministry of Finance’s Circular No. 60/2007/TT-BTC dated June 14, 2007, guiding the implementation of a number of articles of the Law on Tax Administration and guiding the implementation of the Government’s Decree No. 85/2007/ND-CP dated May 25, 2007, detailing the implementation of a number of articles of the Law on Tax Administration (“Circular No. 60”), Part B, Section III.5.1, which provided “CIT finalization declaration includes declaration for annual finalization of CIT or declaration for finalization of CIT up to the time of termination of business operations or contracts, transformation of enterprise ownership or reorganization”.
However, Circular No. 60 has recently been repealed by Circular No. 28/2011/TT-BTC dated February 28, 2011, guiding a number of articles of the Law on Tax Administration and the Government’s Decree No. 85/2007/ND-CP dated May 25, 2007, and Decree No. 106/2010/ND-CP dated October 28, 2010 (“Circular No. 28”), but the principal content of the afore-mentioned regulation of No. Circular 60 still remains in Circular No. 28.
Also guided by the Taxation Department of Binh Duong province in Official Letter No. 10776/CT-TT&HT dated October 19, 2012 (Official Letter No. 10776) for a case where a branch wishes to change from dependent accounting mode to independent one, such branch would be required to send a dossier for registration of accounting mode to its local tax authority. Official Letter No. 10776, however, did not rely on the legal ground mentioned in Official Letter No. 56, but relied on Circular No. 80, Article 11.3, which provided “3. Notification of change of other items in tax registration declarations: When there are any changes in their tax registration information, taxpayers shall notify these changes in a tax registration modification declaration made according to Form No. 08-MST issued together with this Circular within 5 (five) days after such changes occur”. Official Letter No. 10776 does not regard this case as reorganization and, therefore, does not require such branch or its parent company to do a tax finalization.
I have discussed this matter with tax officers in Ho Chi Minh City, Hanoi city, and Quang Ninh province. They were not of the same opinion on our case, some said the branch must do the tax finalization, some said it was not required to do tax finalization and could simply make the notification of the change to the Taxation Department of Ho Chi Minh City, the others said that the branch and its corporation should send an official letter to ask the Taxation Departments of Ho Chi Minh City and Quang Ninh province. Two tax officers in the same tax authority even had different views on the case.
I have also debated this matter with some accountants, who have actually dealt with this kind of change. They all confirmed that the branch was not required to do the tax finalization and should simply make the notification of the change, which sometimes was enclosed with the decision on the change of its managing (parent) company. The tax obligation (if any) of the branch would be then finalized by its managing (parent) company after such change of accounting mode was notified to the tax authority of the locality where the branch was located.
3. I believe that the guidance of the Taxation Department of Binh Duong province in Official Letter No. 56 is not legally correct, because Circular No. 28/2011/TT-BTC, Article 11.4.(a) provides “CIT finalization declaration includes declaration for annual finalization of CIT or declaration for finalization of CIT up to the time of termination of business operations or contracts, transformation of enterprise ownership or reorganization”, which means the tax (i.e. CIT) finalization should be carried out per annum or upon termination of business operations or contracts, transformation of enterprise ownership or reorganization, not as a result of change of accounting mode.
Furthermore, as defined in the Law on Enterprises, “reorganization of an enterprise” means the division, separation, merger, consolidation or conversion of an enterprise; while the Law on Tax Administration does not define this term of “reorganization” but mentions it in the phrase “completion of tax payment in case of enterprise reorganization” in Article 55, under which the “enterprise reorganization” can be understood to include only division, separation, merger, consolidation and conversion of enterprise ownership. In short, both the Law on Enterprises and the Law on Tax Administration do not regard a change of accounting mode as reorganization.
I have also seen that the opinions of the Taxation Department of Binh Duong province were not consistent. If the Taxation Department of Binh Duong province, in Official Letter No. 56, regarded a branch changing from independent accounting mode to dependent accounting mode as a case of reorganization and required such branch to do the tax finalization, then it in Official Letter No. 10776 should view a branch changing from dependent accounting mode to independent one as a case of reorganization as well and require such branch to do the tax finalization or should at least require its managing (parent) company to do the tax finalization.
Based on the current legislation and above-mentioned practice, I find that the procedure mentioned in Section (1) above is reasonable, armed with legal grounds and consistent with the accountants’ actual cases. So I am inclined to think that the procedure mentioned in Section (1) should be applied. With this article, I would like to ring a bell with regard to a possibility that the tax authority requires a branch, which is expected to change its accounting mode, to do the tax finalization, and a doubt that the tax authority has non-disclosed internal regulations.-