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Thuy Tung wrote this article in Vietnamese, which was published in Luat Khoa Magazine on September 30, 2023. Lee Nguyen translated the article into English.

During the discussion in Part 3 of this series, we stated why many non-profit organizations in Vietnam choose to receive aid through research and technology service contracts with sponsors. These agreements imply that non-profit organizations must pay value-added tax (VAT) and corporate income tax (CIT). Within this context, sponsors pay VAT using one of two methods: deduction and direct taxation.

Regardless of the method chosen, non-profit organizations must also select one of the three accounting methods discussed in Part 2. Some scientific and technological organizations are required to choose the business accounting method. Hence, these organizations must register to issue invoices and declare VAT and other accounting and financial requirements. They also need to register their tax calculation method with the authorities.

Registering and issuing VAT invoices for grants is a reluctant choice for non-profit organizations that some foreign sponsors must accept begrudgingly. This has led to non-profit organizations becoming the "sellers" while foreign sponsors become their “buyers,” even though there is no actual trade of services or goods. In reality, sponsors are paying extra to send aid to Vietnam.

If one of the three accounting methods is not applied or if VAT and corporate income tax are not registered, the Vietnamese government will impose further taxes on top of VAT and CIT for foreign aid. Moreover, the state will impose fines and prison sentences on the leaders of organizations that use foreign aid for humanitarian purposes.

Two Taxation Methods Below are two methods of VAT applied to foreign aid under research and technology service contracts.

The first is deduction. This applies to organizations with annual revenue exceeding 1 billion dong. Under this method, VAT must be paid based on the output VAT minus the deductible input VAT. [1]

Output VAT is reflected on invoices issued by non-profit organizations to sponsors. Input VAT is shown on invoices for businesses' goods and services to non-profit organizations.

With the deduction method, the Vietnamese government imposes a 5% or 10% VAT rate on service contracts between non-profit organizations and foreign sponsors, including individual sponsors. [2]

The 5% rate on output VAT applies to scientific research and technology development contracts. However, to enjoy this lower rate, non-profit organizations must have a license for research, training, and scientific and technological services. CHANGE holds this type of license. For contracts related to scientific research they must be recognized by the authorities as scientific research and technology development contracts.

The 10% rate, similar to regular goods and services, applies to organizations without both types of documentation. To mitigate the effects of the COVID-19 pandemic, the Vietnam National Assembly reduced the VAT rate from 10% to 8% for certain goods and services for a specific period. [3][4]

The output VAT is deducted from input VAT for goods and services purchased by non-profit organizations to fulfill their research and technology service contracts with foreign sponsors.

Inputs can include goods and services used for organization operations, such as office rentals, equipment and office supplies, airline tickets, or rental cars for employees on business trips. It can also include services like meeting room rentals, accommodations, meals, transportation services for delegates participating in conferences, training, tools for environmental cleaning, gifts, and communication services related to wildlife protection.

Different rates of input VAT apply to various goods and services, including 0%, 5%, or 10%. Non-profit organizations only need to pay 8% for goods and services with a 10% VAT rate due to the Vietnamese government's tax reduction policy, as mentioned above.

According to current regulations, input VAT for foreign aid projects is fully refundable. To be eligible for a refund, the overseeing agencies must issue documents that provide evidence of project activities [5]; these are then confirmed by the Ministry of Finance. [6] Additionally, non-profit organizations must prepare a refund request and an invoice for the purchased goods and services. However, suppose foreign sponsors do not require it. In that case, many non-profit organizations choose not to go through the aid confirmation process to receive this tax refund because of the additional costs and the complexity of the entire process.

Since 2016, the Ministry of Finance has also stopped issuing confirmations for aid that is not part of the state budget revenue, making it even more difficult for some non-profit organizations to comply with VAT exemption procedures.

Even if they receive tax refunds, foreign sponsors must bear some of the output VAT already paid for service contracts with non-profit organizations. This is because, apart from goods and services with VAT invoices, many expenses of non-profit organizations do not have these invoices for deduction, such as salaries or wages for employees and experts.

Some community expenses cannot be documented with VAT invoices or deducted for personal income tax, especially expenditures in cash to support people in need within the framework of projects. These are referred to as invalid expenses that non-profit organizations are still obligated to pay as corporate income tax.

The second method is direct taxation. This method applies to businesses and cooperatives with annual revenue below 1 billion dong, and other economic organizations that are not businesses or cooperatives. Under this method, the Vietnamese government applies a 5% rate on output VAT for contracts of buying and selling goods and providing services, similar to the first method. [7] However, tax authorities will also impose a 5% CIT rate, making it 10% for both taxes. [8]

Results of the Government’s Investigation of CHANGE According to the investigation’s conclusion and indictment, the authorities have used Clause 1, Clause 2, and Clause 3 of Article 108 of the Law on Tax Management in 2006; Clause 1, Clause 2, and Clause 3 of Article 143 of the Law on Tax Management in 2019; and Clause 3 of Article 200 of the Penal Code in 2015 (amended in 2017) to charge Hoang Thi Minh Hong with tax evasion. [9][10]

The authorities concluded that CHANGE evaded approximately 6.8 billion dong in taxes, including 396 million dong in VAT and 3.4 billion dong in CIT, an equal division between the two amounts.

The investigation revealed that the Vietnamese government has been imposing taxes on top of both VAT and CIT for all sponsorship agreements, service supply contracts, and individual donations. This includes sponsorship agreements CHANGE's overseeing authority, VUSTA, has approved. [11]

Firstly, they imposed an output VAT on nearly 1.3 billion dong for invoices issued by CHANGE for training, communication, and other services in 2022.

Secondly, they imposed output VAT, at a rate of 5%, on nearly 68 billion dong received from 2013 to 2022. This is direct taxation, as mentioned above. The reasons cited are that CHANGE did not create accounting records and financial reports, did not issue VAT invoices, did not declare CIT settlements, did not declare VAT, and did not implement the accounting regulations for this amount. These are requirements for a business accounting scheme.

Thirdly, they taxed the entire input VAT CHANGE paid for goods and services over 10 years of operation. Therefore, the output VAT and input VAT were not deductible.

References: Article 10 of the 2008 Law on Value-Added Tax and Article 12 of Circular No. 219/2013/TT-BTC dated Dec. 31, 2013 of the Ministry of Finance. Article 8 of the 2008 Law on Value Added Tax. Decree No. 15/2022/ND-CP dated Jan. 28, 2022 of the Government. Decree No. 44/2023/ND-CP dated June 30, 2023 of the Government. Decree No. 80/2020/ND-CP dated July 8, 2020 of the Government. Circular No. 109/2007/TT-BTC dated Sept. 10, 2007, of the Ministry of Finance (replaced by Circular No. 23/2022/TT-BTC dated April 6, 2022, of the Ministry of Finance). Article 11 of the 2008 Law on Value Added Tax and Article 13 of Circular No. 219/2013/TT-BTC dated Dec. 31, 2013 of the Ministry of Finance. Clause 5, Article 4 of Circular No. 78/2014/TT-BTC of the Ministry of Finance. The conclusion of the criminal investigation was proposed for prosecution by the Police Investigation Agency under Ho Chi Minh City Public Security Department. The indictment was announced by the Ho Chi Minh City People's Procuracy. Conclusion No. 722/KL-BKHDT dated Feb. 7, 2023, of the Ministry of Planning and Investment concluding the inspection of the management and utilization of foreign-funded resources and foreign donation-calling activities by the Vietnam Union of Science and Technology Associations (VUSTA) and its affiliated units from Jan. 1, 2018, to June 30, 2022.

Exploring CHANGE’s Tax Evasion Charges – Part 4: How VAT is Applied to Non-profit Organizations

Lee Nguyen

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