Cross-border services are posing challenges to Vietnam’s tax collection as existing tax regulations have yet to keep up with the fast-paced digital world.

Big tax losses

Tran Duong Quy, director of the online ceramics provider BATO Online Business and Technology Co., Ltd expressed disappointment at the fact that the ad charges paid for a Facebook agency were not included in the firm’s balance sheet as the agency did not provide any invoices for transactions.

Since its inception in 2014, the BATO, headquartered in Hanoi, has poured some VND8 billion (US$344,000) into online advertising and most of the sum were spent on the ads on Facebook.

There have been no tax invoices for the Facebook ad charges as the firm made online transactions and payments and received only confirmation emails. That’s a big hindrance to the firm, Quy complained.

Nguyen Nam Binh, deputy head of the Ho Chi Minh City Tax Department reportedly stated that taxing cross-border services is faced with numerous challenges. 

The department verified that up to 66,000 transactions in relation to Facebook and Google had been made through Eximbank with more than VND120 billion (US$5.16 million) in money transfers while other 425,000 Facebook and Google transactions, worth over VND670 billion (US$28.81 million), had been conducted via Sacombank.

Of these, nearly VND600 billion (US$25.8 million) were found untaxed. The tax department has collected the back taxes of VND20 billion (US$860,000) and the total back taxes occupied only a very small proportion of the expected taxations, Binh said.

Manh Thi Tuyet Mai from the General Department of Taxation under the Ministry of Finance (MoF) said Facebook, Google and other cross-border service providers which sell their services to the Vietnamese market are listed as entities joining e-commerce activities in Vietnam.

Facebook and Google have yet to open their representative office in Vietnam, thus local tax authorities could only administer tax regulations on Facebook and Google’s partners, advertising agencies, as well as businesses in Vietnam who directly purchase and pay for the two tech firms’ services.

Imposing taxes on Facebook and Google’s earnings generated from Vietnam could meet no strains if local firms add their payments for Facebook and Google services to their costs and the taxes (value added tax and corporate income tax) are deducted from the payments.

But, many small - sized firms and individuals in Vietnam are not self-conscious of their tax obligations and responsibility for making tax declarations on their payments for Facebook and Google services.

This hinders tax authorities from defining the purpose of payments for overseas entities as well as taxing them, Mai said.

Tackle the challenges

The fast-growing digital platforms accompanied by a number of cross-border services revealed inadequacies in tax collection and the implementation of tax-related regulations.

The biggest challenge for taxing cross-border services is to determine the value of such services which seem intangible, Associate Prof. Dr. Vu Sy Cuong from the Hanoi-based Academy of Finance said at a symposium held in Hanoi last week. 

Tax collection has been calculated on the basis of tangible goods, corporate headquarters and taxable objects, but it is now much more difficult to levy taxes on cross-border services, including those provided via the internet by Facebook, Google, AirBnB and Uber, Cuong said, elaborating that these services are under no customs control at all.

Cuong noted EU countries took months to debate ways of valuing cross-border services, including advertisements and information services.

To control the value of cross-border service transactions and tax them, the MoF made a proposal on having payments for cross-border services by international payment cards made via the National Payment Corporation of Vietnam (NAPAS).

The State Bank of Vietnam (SBV) in turn asserted that the MoF has the legal right to issue regulations, guide tax declarations, and collect tax, the SBV however, does not. Under current laws, credit institutions can deduct customers’ money only if they have consent from customers or receive relevant instructions from competent agencies. 

Lawyer Nguyen Ngoc Hung from Ket Noi (Connect) Law Firm under the Hanoi Bar Association said that current regulations on foreign exchange management allow to define whether the payments local partners make for their overseas service providers or not.

The tax deduction would be feasible if new regulations are issued to permit commercial banks and financial intermediaries to deduct customers’ money in accordance with instructions from competent agencies, the lawyer suggested.

In fact, the draft of the amended Law on Taxation Management was debated at the sixth session of the 14th National Assembly (NA) that took place last month.

The draft prescribes that the SBV has responsibility for building and developing the national e-commerce payment system and e-payment - backed applications that could be widely used for e-commerce platforms.

Additionally, the SBV is in charge of setting forth mechanisms dedicated to managing and supervising payments for cross-border services in order to aid tax authorities in taxing them.

The draft also stipulates that commercial banks, under the guidance of the MoF and the SBV, have to deduct the taxes which overseas entities, organizations, and individuals have to pay on their earnings generated from e-commerce transactions in Vietnam.

With many items causing controversy, the draft has yet to be approved by the NA. It is expected to be submitted to the NA for ratification at the upcoming seventh session.