Planning on Starting a Foreign Owned Business in Vietnam? – Read This.
This content is provided by Domicile Corporate Services
Foreign investment into Vietnam is a key driver for the Vietnamese economy – representing around 40% of the economic output, and accounting for greater than 70% of the country’s exports.
Opportunities abound for entrepreneurial foreign business people seeking to start their own business in Vietnam – either as an extension of their current foreign operations, or as a new venture based out of Vietnam. However, caution (as ever) needs to be cast on these opportunities, as there are as many failures as success stories.
A recent example that crossed my desk – but it is by no means an isolated example – is as follows:
The Foreign Investor – Losses, Taxes and Penalties.
A foreign investor had established a new company in Vietnam as he believed he could use his entrepreneurial and investment skills to create a successful venture here. His plan was to curate a portfolio of food & beverage operations in Vietnam, commencing with the establishment a simple restaurant outlet within a new shopping centre. As a self-funded start-up business, minimising his cash drain was a priority.
To save funds, the investor employed an eager but inexperienced Chief Accountant (“CA”) (note: every Vietnamese company must appoint a CA, who must hold a CA certificate). He also paid staff in cash and didn’t declare salaries for insurances or taxes as this kept his cash cost of operations down, despite not being legal or compliant, but which is not uncommon in Vietnam in industries like food & beverage.
His CA was constantly telling him everything was okay, and that she was protecting him – helping him save cash. Nine months in, and coming to the end of the first tax year, the investor determined that the restaurant was not profitable (various commercial reasons, compounded by shopping centre landlord issues), and he decided to cease trading. At the same time the CA abruptly left the company.
As no-one was reviewing the work of the CA, the owner simply trusted things were okay – however he was in for a shock when he had someone else review. What he discovered was:
• Numerous company-issued VAT invoices were missing from his invoice books, with others not filled in correctly, and the VAT book being a complete mess (this, by itself, is a major issue, with substantial fines for each missing/incorrect invoice). Further, the status of his internal VAT books was consistent with what you would likely see where invoices had been sold to other companies to reduce their taxes (although it was not confirmed whether this actually occurred – it will still appear this way to the tax authorities).
• All sales receipts had been deposited into his company bank accounts on a daily basis, as a control to ensure point-of-sale records were easily matched against cash receipts/deposits. However, as he had not been declaring staff as legal employees, and with staff costs exceeding 30% of his restaurant costs, this had inadvertently created a tax payable position for him, despite the operating loss, as he could not deduct any of the payroll costs.
• It got worse. As he was making cash losses, and based upon the reassurance of his CA, he didn’t bother obtaining red invoices for many company expenses, as he didn’t see the need for them (note: in Vietnam, without a “red VAT invoice”, expenses are not deductible for Corporate Income Tax or for VAT credits). However, this just compounded his Corporate Income Tax issues, as this resulted in further expenses he could not deduct against the revenue.
• A review of his company’s lodgements with authorities throughout the year showed that almost none of the ongoing (monthly, quarterly, half-yearly and ad-hoc) required lodgements had in fact been made to the tax and other government authorities.
The final position is that the investor has large Corporate Income Tax and VAT debts. He has major issues with missing invoices and penalties with his VAT compliance and for the tax authorities to work through. He has exposure for labour authorities for staff not being correctly employed. As Legal Representative, he is personally exposed for many of these corporate issues. And, his plans to create a portfolio of successful food & beverage operations through this Vietnamese company have been severely dented.
Recommendations & Suggestions for All Investors
The above example may appear only to be on a small scale – but these exact issues do extrapolate on a larger scale: the risks are the same. The corrective actions and costs that apply to fix the company issues; the dealings with tax authorities; the additional taxes payable despite the losses already funded; the future liabilities that may arise which need to be factored in – these are lessons for anyone.
Five Key Suggestions:
1. Get advice.
The laws and practices work very different in Vietnam to other countries, and even if you have extensive experience in Vietnam, learn exactly what you need to know to run your business. And, most importantly, never pretend that you (or anyone) may know everything. Good advice at the start may cost (scarce) funds, however it will always save money later.
2. Do things right from the start.
Just because things look expensive, don’t cut corners. The bureaucratic nature of Vietnamese business requirements, and the extensive “paper warfare” approach to compliance exists, and you cannot change this. As a result, how you document and deal with everything is very important, and to do this properly will cost you money. Factor this into your business plan, and do it correctly from the start the same as you would do when you have a large successful business. Correcting historic cost-saving exercises will always cost more in the future.
3. The "local way" is not the way for you. It just isn’t.
This is true across many measures, and the implications for not doing things correctly are substantial. The “local way” can include paying officials bribes for overlooking non-compliance – not only is this immoral/illegal at best, it marks you as a walking ATM to the officials and from which you will need to keep paying out from time and time again. Further, the “local way” will also limit your ability to repatriate funds abroad if your business is later successful and will almost certainly decrease the value of your company should you seek to later sell it.
4. Corrective actions cost more than doing things properly in the first place.
Where investors don’t follow their compliance obligations correctly in Vietnam, the corrective actions are protracted, costly, and distracting. Penalties alone can be costly, however keep in mind that there are provisions in Vietnamese law that can take away certain rights allowing you take advantage of timing or lodgement concessions, or exclude you from entire systems (like creditable VAT) – being on a “blacklist” can cost your business more than you bargained for.
5. Get the right people – and never (ever) rely on one person.
Vietnam’s compliance environment is complex and constantly changing. The possibility of one person knowing everything and getting everything right is a fallacy in Vietnam – but a fallacy that we see perpetuated time and time again. The successful approach is to never rely on one-person, and never rely on the premise of “self-review” – always have multiple people in your system checking and reviewing, to ensure you are not going to be caught out later. This can be as simple as having an external party review the work of your internal staff from time to time, or can be sophisticated as an internal audit team reviewing compliance across your entire organisation.
Matthew Lourey is Managing Partner of Domicile Corporate Services, a Vietnam based provider of professional accounting, tax, compliance, payroll and corporate services.