FDI Enterprises Operating In Vietnam: Why Do Insufficient Documentation And Incorrect Accounting Records Lead To Expenses Being Disallowed During Tax Finalization?

During the tax finalization process in Vietnam, many FDI enterprises have part or all of their expenses disallowed, resulting in higher taxable income, tax reassessments, and late payment penalties.

In practice, the root cause is often not that the expenses did not occur, but that the supporting documents and accounting records do not fully comply with Vietnamese tax regulations.

1. Expenses incurred but supporting documents are not tax-compliant

Under current regulations, an expense is deductible for Corporate Income Tax (CIT) purposes only when it simultaneously meets the following conditions:

• It is actually incurred and related to business operations
• It is supported by lawful invoices and documents
• It is paid via non-cash methods for amounts of VND 5 million or more

Many FDI enterprises face risks due to:

• Invoices issued at incorrect times
• Missing contracts, acceptance minutes, or liquidation minutes
• Inappropriate payment evidence (payments made on behalf of the company, payments from the parent company, or via third parties, etc.)

Result: Expenses are disallowed during tax finalization, even though the transactions are genuine.

2. Related-party transaction expenses lack sufficient supporting evidence

Common expenses that are key focus areas of tax inspections for FDI enterprises include:

• Management fees and service fees charged by the parent company
• Royalty fees and technical support fees
• Routine group cost allocations

If the enterprise:

• Does not have clear service contracts
• Cannot demonstrate the benefits received in Vietnam
• Does not prepare, or prepares insufficient, transfer pricing documentation

The Tax Authorities may disallow such expenses or even reassess taxable income.

3. Accounting records are inconsistent with tax declarations

Some FDI enterprises prepare:

• Financial statements in accordance with group standards or international standards
• While tax declarations are not aligned with accounting records prepared under Vietnamese regulations

Common discrepancies include:

• Differences in the timing of revenue and expense recognition
• Improper cost allocation not compliant with tax regulations
• Data inconsistencies between accounting ledgers, financial statements, and tax returns

These issues make it difficult for enterprises to explain and reconcile figures with the Tax Authorities, increasing the risk of expenses being disallowed during tax finalization.

4. Failure to timely update Vietnamese tax regulations

Vietnam’s tax legal framework changes frequently, especially in relation to:

• Deductible expenses for CIT purposes
• Limitations on interest expenses, employee benefits, and depreciation
• Regulations on related-party transactions and foreign contractor tax

FDI enterprises that apply practices from other jurisdictions without adjusting to Vietnamese regulations face significant risks during tax inspections and audits.

Conclusion

For FDI enterprises operating in Vietnam, accounting documents and records are not merely compliance requirements, but the legal basis for defending reasonable expenses during tax finalization.
Standardizing accounting documentation, conducting periodic tax risk reviews, and strictly complying with regulations help enterprises to:

• Minimize the risk of expense disallowance
• Reduce tax reassessments and penalties
• Remain proactive and secure when working with the Tax Authorities
  

For detailed consultation, please contact TPM via our website tpm.com.vn or hotline (+84) 28 3505 1800 for prompt support.

Thao Phung