Exploring CHANGE’s Tax Evasion Charges Part 1: Non-profit or Business?

Thuy Tung wrote this article in Vietnamese, which was published in Luat Khoa Magazine on September 27, 2023. Lee Nguyen translated the article into English.

From being an environmental activist and leader of an NGO respected by the state media, Hoang Thi Minh Hong and her organization suddenly found themselves entangled in a tax evasion case. [1]

The Vietnamese Magazine will publish a special series on non-profit legal entities to explain the legal and ethical basis for the conviction of Hoang Thi Minh Hong, the director of the Center for Hands-on Actions and Networking for Growth and Environment (abbreviated as CHANGE), for the offenses of value-added tax evasion and corporate income tax evasion.

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When considering the tax obligations of an organization, two factors must be taken into account:

• Whether the organization operates for profit or is non-profit;
• Whether the organization's activities fall within a category subject to taxation or whether they are tax-exempt.

The legal system in Vietnam does not have the concept of non-profit organizations, but it does have several equivalent terms in various regulations. To attain a deeper understanding of the charges filed against CHANGE, an examination of specific regulatory terms that closely align with the CHANGE Center's operating model and non-profit nature is essential.

Scientific and Technological Organization

First, it is important to discuss the formal legal status of CHANGE on paper. It is a non-public scientific and technological organization established based on the Law on Science and Technology. [2]

According to the investigative conclusion of the Ho Chi Minh City Police in the case of Hoang Thi Minh Hong, CHANGE was established according to Decision No. 78/QD-LHHVN dated January 28, 2013, by the Vietnam Union of Science and Technology Associations (VUSTA). The Ministry of Science and Technology issued a certificate of registration for scientific and technological activities, bearing number A-1094, to CHANGE for the first time on March 13, 2013, the second time on Dec. 8, 2016, and the third time on Jan. 3, 2020.

The decision to establish and the registration certificates for scientific and technological activities demonstrate that CHANGE operates in the field of science and technology. Its activities encompass scientific and technical research, technology applications, and scientific and technological services in collaboration with domestic and international organizations.

This license does not specify whether CHANGE is a for-profit or non-profit organization. In other words, a non-public scientific and technological organization can operate as either a for-profit or a non-profit entity in Vietnam.

Non-Commercial Legal Entity

The concept of non-commercial legal entities, as defined in Article 76 of the 2015 Civil Code, must also be addressed. [3] According to this provision, a non-commercial legal entity is an entity that does not have the primary objective of seeking profit. If it does make a profit, it cannot be distributed to its members.

This law broadly defines non-commercial legal entities to include state agencies, people's armed units, political organizations, socio-political organizations, political-socio-professional organizations, social organizations, socio-professional organizations, social funds, charitable funds, social enterprises, and other non-commercial organizations.

According to this regulation, it can be argued that CHANGE and other organizations with similar establishment procedures and operation methods (such as MEC, LPSD, GreenID, etc.) can be classified as social organizations or as other non-commercial organizations.

Specifically, CHANGE's Annual Report for the year 2020 recorded that 92% of the organization's income that year came from grants from foreign governments, the United Nations, and international non-profit organizations. [4]

These grants originated from taxes and charitable contributions from the people of various countries, often referred to as foreign aid, from wealthy states to people living in less privileged nations. CHANGE accepts these grants to carry out activities in sustainable development, environmental protection, climate change mitigation, and wildlife conservation in Vietnam. Additionally, a small portion of CHANGE's budget is directly sponsored by Vietnamese and foreign individuals, often under the guise of charity and humanitarian assistance.

The critical point is that CHANGE must commit to operating without a profit motive to receive the above-mentioned grants.

This is a clear manifestation of CHANGE's non-profit nature.

Furthermore, in a news report and an interview with the Người Lao Động newspaper in 2018 and the Phụ nữ TP. Hồ Chí Minh newspaper in 2019, Hoang Thi Minh Hong described CHANGE as a non-profit organization.[5][6] CHANGE's Annual Report for 2020 also acknowledges itself as a non-governmental organization (NGO), a term commonly comprehended as synonymous with a non-profit organization.

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The legal ambiguity surrounding the non-profit nature of CHANGE can be clearly seen. According to the provisions of the Civil Code, CHANGE is either a social organization or a non-commercial organization with no profit-seeking objective. However, the Law on Science and Technology and the certificate of activities do not explicitly indicate the non-profit nature of CHANGE.

As a result, regulatory authorities can handle CHANGE and Hoang Thi Minh Hong differently, depending on whether they consider CHANGE a for-profit or non-profit organization and whether its activities are subject to taxation.

The government can rely on applying different legal provisions and specific data regarding grants, contracts for supplying scientific and technological services, and expenditures for community activities by CHANGE. They may use regulations applicable to commercial entities seeking profit to charge Hong with value-added tax evasion and corporate income tax evasion. Alternatively, they may treat CHANGE as a non-commercial and non-profit legal entity for a more humane judgment in Hong's case.

Ethically, the Vietnamese government cannot refer to any reason to impose value-added and corporate income taxes on these grants. Taxpayers and philanthropists in foreign countries and Vietnam should not accept paying taxes on their donations to CHANGE and other non-profit organizations. In practice, the investigative conclusion and the indictment in the case affirmed that CHANGE operates under an enterprise model and must be taxed like a regular business entity.

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In the upcoming sections, we will explore whether Hoang Thi Minh Hong should be sentenced to prison for the offenses of value-added tax evasion and corporate income tax evasion related to the grants and service contracts for CHANGE's activities. We will also examine which legal grounds might be applied to this case.