A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the claimed transactions.
Almost all companies undergo a yearly audit of their financial statements – which includes an examination of the income statement, balance sheet, and cash flow statement, among others – as the first step of the annual compliance.
While tedious, this process is a good opportunity for companies to conduct an internal financial health check to optimize tax efficiency, financial structure and processes, as well as internal control mechanisms for fraud prevention.
Annual audits serve as a perfect opportunity for foreign-owned enterprises (FOEs) to double-check their tax obligations, identify unnecessary tax payments that can be refunded, and improve their accounting system. FOEs and representative offices (ROs) are obligated to have their annual statements audited.
An accounting period in Vietnam is generally determined according to the calendar year, that is, January 1 to December 31. However, after registering with the Tax Department, this can be adapted to 12-month periods – beginning from the first day of each quarter.
Based on these accounting periods, investors and other foreign enterprises operating in Vietnam will be required to prepare audits and file annual financial statements no later than the last day of the third month after the close of the annual accounting period.
As per current regulation, annual finalization must be filed with the following offices:
- The General Statistics Office;
- The Ministry of Planning and Investment; and
- Tax office at the provincial or city level.
For those companies operating in export processing zones (EPZs or industrial zones (IZs)), financial statements may be required to be filed with the management board of the respective EPZ or IZ. Most economic zones will qualify an investor for tax holiday incentives. Foreign investors should check with each zone to clarify its incentives, which government officials grant on a case-by-case basis.
Retention of documentation
Following annual finalization, companies will be required to retain a variety of documents that may arise as a result of the bookkeeping and accounting process. The period of retention is tied to the nature of the documentation generated and is broadly split into five-year, 10-year, and indefinite periods of retention.
- The five-year retention period applies to all documentation that is used in the management and operation of the enterprise.
- The 10-year retention period applies to all accounting data, accounting books, financial statements, and reports of independent audit firms that have been prepared on behalf of the company in question.
- The indefinite retention period is limited to documents that are deemed to be of significance to the economics, national defense, or security of the Vietnamese state.
[tips title="Important Tip"]Whether it be convergence with IFRS, the growth of e-filing, or simple efforts to improve business competitiveness, Vietnam has a continually changing set of audit procedures that must be followed closely in order to ensure compliance.[/tips]
Below we provide a step-by-step guide on this process for one of the most common investment vehicles of foreign enterprises in Vietnam.
Audit procedures for FOEs
The FOE compliance process, which is also applicable to joint ventures (JVs), can be complex and time consuming. The successful completion requires the compilation of a statutory annual audit report and the finalization of corporate and personal income taxation.
Following successful submission of this information to various government bodies, it becomes possible for firms to repatriate profits from their operations.
With rules constantly changing, prospective and established investors alike should contact a service provider or relevant government officials to ensure that reports are prepared in accordance with the most updated regulations.
Step 1: Prepare statutory annual audit report
All FOEs are required to produce audited financial statements on an annual basis. These statements must be prepared in accordance with Vietnamese Accounting Standards (VAS) and follow the most up to date guidance available.
As per Vietnamese law, financial statements of FOEs must be conducted externally, by using an independent auditor. The following audit procedures must be followed, and documentation prepared to ensure compliance:
- Statutory audit requirements:
- Statement of income;
- Statement of financial position;
- Statement of changes in equity (if any);
- Statement of cash flow;
- Balance sheet; and
- From 04-CS/SXK: Report on Production and Business Activities, including: Actual Operating Business Lines;
- Labor Statistics (Number of Employees, turn over, etc.);
- Labor Income and employer payments of social insurance, health insurance, unemployment insurance, and trade union fees;
- Production and business activity results (revenue, profit, cost, etc.) and
- Taxes and other amounts payable to the state.
- From 04-CD/GVGL: Report on Charter Capital Contribution, including;
- Initial registered charter capital;
- Current registered charter capital;
- Implemented charter capital in the reporting year;
- Charter capital accumulated by the end.
The Goods and Services Tax (GST) system requires taxpayers to self-assess their tax liability and pay their tax without any intervention by the tax authorities. The law provides for a robust audit mechanism to measure and ensure compliance by the taxable person.
FOEs need to submit audited reports to the following three government departments on the last day of the third month at the end of the calendar or fiscal year:
- Provincial Department of Planning and Investment (DPI) (or the provincial-level export processing and industrial zone department in the case of FOEs based in IZs or EPZs);
- Provincial level tax departments; and
- Provincial level statistical offices.
Upon receipt of documentation, these offices place an incoming stamp directly on one copy of submitted reports for confirmation purposes.
For electronic submissions, the enterprise will receive an electronic confirmation or the documentation will be stored directly in the system of the authority without being stamped.
Step 2: CIT finalization
In addition to the quarterly remittance of provisional CIT payments, FOEs in Vietnam must conduct CIT finalization at the end of every year. The standard tax year applied in Vietnam is the duration of one calendar year. If a different year is utilized, the enterprise must report this to the local tax agency as mentioned earlier.
When preparing finalization paperwork, enterprises should pay close attention to revenue streams to ensure all requisite income is included in finalization statements. Currently, revenue applicable for CIT includes any and all income arising from production, trading, and service, irrespective of whether it has been generated within Vietnam.
Following an assessment of revenue streams, outstanding obligations, and investment incentives, it is a possibility that taxes may be reduced substantially or avoided. In the event that no tax liability has arisen, or taxation has been exempted under applicable tax incentives, enterprises must still complete tax filings with tax authorities by established deadlines.
It should be noted, however, that filing is not required for enterprises whose tax-generated activities are terminated or have ceased business operations and no tax liabilities have arisen.
Those finalizing corporate income taxation should prepare CIT reports in accordance with the following requirements and deadlines:
- Form 03/TNDN CIT finalization statement;
- Annual Financial Statements and other related documents; and
- One or more annexes enclosed with the declaration (depending on the actual arising of the enterprise).
Submission of finalization paperwork must be submitted to the head of relevant tax agencies no later than the last day of the third month from then end of the fiscal year. For cases of operation termination, contract termination, or corporate ownership transformation tax offices must be made aware within 45 days following the date at which changes were made.
Step 3: Personal income tax (PIT) finalization
FOEs, as employers, are responsible for the finalization of all PIT of their employees covering deductions from salaries throughout the year.
Enterprises finalizing PIT for their employees should make sure that the following forms are successfully completed by the deadlines outlined below:
- Form No. 05/QTT – PIT finalization statement;
- Form No. 05-1/BK-QTT-TNCN – Detailed list of taxable income and tax deductions from salaries and wages of individuals who are subject to progressive tax rates; and
- Form No. 05-2/BK-QTT-TNCN – Detailed list of taxable income of individuals who are subject to direct tax rates; and
- Form No. 05-3/BK-QTT-TNCN - Detailed list of employees’ registered dependents.
In the event that enterprises are consolidated or merged, they must complete PIT finalization for deducted tax in advance of these changes and provide a voucher to employees for their PIT finalization at the end of the year.
The submission of finalization paperwork must be completed no later than 90 days from the end of the calendar year and sent to the tax office that directly manages the enterprise. In most circumstances, this is the department of taxation in the province or city that the enterprise conducts its operation; however, there may be instances where local tax offices authorize alternative state bodies to collect taxes.
Step 4: Social insurance finalization
In addition to their Vietnamese counterparts, all foreign employees working in Vietnam under labor contracts need to be included in the mandatory social insurance scheme.
Step 5: Profit remittance
Following tax finalization or the termination of investment projects in Vietnam, profits may be remitted to offshore accounts if the business has completed all financial obligations to the State of Vietnam under Vietnamese law. For enterprises whose investments are still in operation within Vietnam, profits may only be remitted in the event that the FOE in question has not accumulated losses.
In the event that an FOE has completed tax finalization, the relevant tax office must be notified of any plan to remit profits at least seven working days before the scheduled transfer or remittance.
Annual compliance for representative offices
Representative offices (ROs) are one of the simplest and fastest ways to establish a legal entity in Vietnam. Their reporting requirements are also more simplified compared to FOEs.
The annual reports of ROs must include:
- Basic information – contact information such as office address, telephone numbers, primary bank contacts. Investors should note that the address should match to that written in the RO license;
- Human resource report – ROs must document their policies with regards to salaries, bonuses, insurance, and other benefits. The personal information and position of every employee should also be included; and
- Activities report – ROs must document their activities for the preceding year which includes information such as market research activities, advertising activities, participation in trade fairs, and the promotion of service agreements, among others.
Key considertations when conducting an annual audit in Vietnam
Allow enough time
Allow enough time for the audit and ensure that all key staff are available when required. This means making sure that your finance and accounting staff haven’t booked time off during the audit, and that they generally have a free schedule while the auditor is carrying out fieldwork.
In order to gauge a comprehensive understanding of your company, there is likely to be additional information and details behind the figures. Not being able to answer any queries promptly will inevitably prolong the process.
Due to the emergence of online accounting and invoicing software, it’s now far easier for firms to document and categorize documents that will be required in preparation for an audit. Much of this is automated, meaning less work is required from the finance department.
Alternatively, documents can be stored digitally by scanning and uploading them onto the cloud. This means the information is readily accessible online, rather than having to rifle through filing cabinets when the financial year ends. Vietnam is making a push towards digital transformation by 2025, and this presents an opportunity for businesses to further move in line with this transformation.
All FOEs are required to have their annual financial statements audited before transferring profits to their respective markets. These involve a statutory audit, audited financial statements, and tax finalization filings. Annual compliance procedures are not only required by law but are also a good opportunity to conduct an internal financial health check. To maintain compliance with Vietnamese law, and ensure that profits can be remitted without issue, it is advisable for companies to direct any and all inquiries to Vietnam’s Ministry of Finance or professional service firms operating within the country. They will be able to clarify the nature of prevailing compliance and often can provide a level of practical nuance that is not available within legislation or official guidance that has been issued to date.
Optimizing annual compliance
While Vietnam is one of ASEAN’s rising stars, the nation is also stuck with one of the most complex and time-consuming tax systems in the region. Although taxation in Vietnam is complex to varying degrees, annual finalization places a particularly significant burden upon many foreign investors.
To the credit of the government, there have been substantial improvements to the compliance process in recent years. Nevertheless, there is still significant room for improvement. On top of this, the maturing nature of tax and compliance may continue to add to a degree of uncertainty as business come to terms with implementing new regulations and practices.