Representative Office Dissolution Part 2: Tax Documentation

Vinh LeManager, Dezan Shira & Associates

In part two of this three-part series, we outline practical recommendations on how ROs can enhance their current tax documentation as well as mitigate future potential tax risks when shutting down.

Travelling expenses for employees

Costs of business trips are almost unavoidable for ROs operating in Vietnam due to the need to send their employees for meeting with potential business partners, training with the parent company overseas or seeking potential locations for future investment.

It is common to see ROs incur significant business travel costs during their operational periods in Vietnam and then be penalized for additional taxes, which are imposed on such expenses after being audited by the tax authority.

Due to this, several investors believe that the tax authorities do not allow ROs to incur travel expenses. However, travel expenses should be exempted from PIT if the RO can validate that such expenses are necessary for its business development.

Similar to a company’s accounting documentation to support deductible expenses, an RO is required to maintain adequate bookkeeping records as well as supporting documents of business travelling expenses.

To justify the direct relationship between the travel expenses incurred and the RO’s operation activities, the following supporting documents should be sufficiently maintained:

  • The policy for business travel must be specified in the RO’s internal financial regulations, collective labour agreement or employment contracts with their employees. Such a policy should cover the detailed limitation of costs, travel duration, and purposes as well as approval and payments approach (direct payments or reimbursement of actual expenses);
  • If the RO provides fixed allowances and per diem for their employees’ business trip, such provisions must also be stipulated in the travel policy as well;
  • Assignment letter with details of duration, locations, and purpose of the business trip;
  • An e-ticket (online reservation) or tax invoices (booking through flight agencies) and boarding pass;
  • Legitimate tax invoices or receipts of accommodations, cab fares and other miscellaneous expenses incurred during the trip; and
  • Payment documents.

During a tax audit for RO dissolution, the tax officers tend to challenge business travel costs without adequate supporting documents or clear conditions on the RO’s business travel policy.

In addition, it should also be noted that the business travel costs might be deemed as employees’ taxable benefits if the RO fails to establish a connection between such expenses and the need for the RO’s operations.

In this regard, it’s recommended that an itinerary specifying the employees’ work details during the trip should also be included as part of supporting documents for business travel expenses. A detailed itinerary is not regulatorily required, but it is helpful for providing an adequate explanation in future tax audits.

Annual vacations for employees’ family members

It is common for Vietnamese organizations, including ROs to provide their employees with annual vacations as part of their benefits packages.

Occasionally, as a reward for their employees after a successful and productive year, the ROs may invite family members of those employees to join the annual company trip and cover all costs. However, businesses must be aware of the added tax implications.

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This article is produced by Vietnam Briefing, a premium source of information for investors looking to set up and conduct business in Vietnam. The site is a publishing arm of Dezan Shira & Associates, a leading foreign investment consultancy in Asia with over 27 years of experience assisting businesses with market entry, site selection, legal, tax, accounting, HR and payroll services throughout the region.

 

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