Avoiding taking advantage and fraud of value added tax

Saigon port area 1 Customs branch checked import goods. Photo: T.H

Entanglement of subjects that are not subjected to tax

According to HCM City Customs Department, the content of legal documents on VAT currently still does not cover all cases arising in reality, needs to be further improved to ensure coverage and completeness, uniformity and synchronousness between legal documents as well as relevant specialised legal documents.

In implementation, local customs still arise many problems, focusing mainly on the subjects that are not subject to VAT and goods subject to the 5% VAT, such as: machinery and equipment used for agriculture, medical tools and equipment, animal feed, fertilisers, animal feed, poultry, aquatic products and other animals. Some groups of items must be certified by ministries and authorities to apply the VAT rate of 5% (specialised tools and equipment using in health services) or not subject to VAT (machinery and equipment used in agriculture).

In particular, goods temporarily imported and re-export are not subject to VAT. In fact, there are cases where firms take advantage of this provision to temporarily import machinery and equipment used for a long time and then expired the time for re-export without re-exporting or transferring for domestic consumption. Or, when transferring for domestic consumption, the declared value is usually very low compared to the original imported goods, even zero (if the depreciation period expires).

Thus, the firm only paid very little amount of VAT or did not have to pay VAT (if the dutiable value is zero) when changing the purpose of use. Compared with the importer of machinery that creates fixed assets and is liable for VAT at the import stage, this case is not fair in application of the tax policy between enterprises.

To ensure fairness in application of the VAT policy, to avoid the case that enterprises avoid the use of VAT payment at the import stage, HCM City Customs proposes to amend and supplement the Law on VAT towards rules of exclusion for subjects not applied policy of VAT exemption for case of temporary import and re-export like machinery, equipment and tools of organisations and individuals permitted to be temporarily imported and re-exported to implement investment and construction projects and assembly of works in service of production similar to the import tax policy specified in Points a and 2, Article 16 of the Law on Import Tax and Export Tax.

Difficult to define the intended use

The biggest difficulty of the current customs authority in applying the law on the subject of VAT is the Law on VAT and detailed documents guiding the regulation on VAT rate for goods at the import stage in accordance with the purpose of use.

Meanwhile, products, machinery and equipment following current world production trends are multi-purpose to facilitate production and consumption. At the time of importation, the customs authority only determines and collects tax based on the importer's declaration (usually based on structure, name or features), without a basis for verification if the enterprise is properly using after importation to apply the VAT rate as declared or not is the responsibility of the importer to declare and use for exactly one purpose.

According to regulations, "hand-held lawn mowers used to harvest grass" are specialised machinery in agriculture not subject to VAT. At the time of import, the time for cargo clearance is between two working hours and up to eight working hours in accordance with the provisions of Law on Customs, the customs authority will only determine and collect tax based on the importer's declaration that is lawn mowing has no basis to check whether the firm uses the machine correctly to harvest grass after import to apply the declared VAT rate or not.

Or, regulation on "stone separators of all kinds, iron and steel separators are specialised machinery in agriculture" is not subject to VAT. However, these machines can be used in industry so firms can take advantage of tax evasion.

From the above fact, the HCM City Customs Department recommended that, at the time of import, the customs authority determine and collect tax based on the importer's declaration (the responsibility belongs to the importer to declare and use the item correctly), the import data can be exploited by tax authorities and competent authorities to manage output of products, machines and equipment. Thereby, clearly delineating responsibilities to inspection and audit agencies on the implementation of VAT policy at the customs authority.

The VAT Law should be amended towards eliminating heading 34.3 of Article 5: “... specialised machinery and equipment serving agricultural production; offshore fishing vessels, feed for livestock, poultry and other livestock”, which should be converted into 10% VAT. The supports for Vietnam's agricultural sector and farmers are in a different policy, not included in the VAT law because it is easy to take advantage of and hard to manage.