Vietnam businesses use 'bogus shutdown' to evade taxes

Vietnam businesses use 'bogus shutdown' to evade taxes

All the three businesses set up by Ho Thi Ly shut down when they still collectively owed VND1.6 billion (US$75,308) in taxes, but the Dak Lak Province tax department is unable to get the owner to clear her tax arrears.

Ly is one of hundreds of business owners in Buon Ma Thuot, the capital city of the Central Highlands province of Dak Lak, who took advantage of a loophole in the business registration law to avoid taxes.

The trick is simple: whenever their businesses incur huge tax arrears, they will abruptly close down their operations, and register to set up a new firm in the same line of business.

In April 2012, Ly established Ho Thanh Dat Co. Ltd. to trade coffee and other agro-products, after she had shut down Phuc Ly Co. Ltd., which owed VND399 million ($18,780) in taxes a year earlier.

Then, in April 2013, Ho Thanh Dat announced that it was closing, while the firm was still VND530 million ($24,946) in tax debt.

Ly is also the owner of Dak Lam Co., which accumulated tax arrears of VND718 million ($33,795).

Similarly, Hoang Thi Huong shut down Le Hung Co. Ltd., an electronics trading firm in Buon Ma Thuot, where she was the director, due to a VND213 million ($10,025) tax debt.

Shortly after that, Huong had her husband, Le Viet Hung, set up a new company, called Hoang Le Hung Co. Ltd., at the same location where her erstwhile business was headquartered.

Hoang Le Hung Co. was then hit by VND72 million ($3,389) in tax arrears before it abruptly ceased operations.

Unable to reclaim funds

Hundreds of businesses in Buon Ma Thuot, which collectively owe VND282 billion ($13.27 million) in taxes, have used the ‘false shutdown’ trick, according to the municipal taxman.

“We have enacted all possible measures, but the businesses remain stubborn,” Le Van Anh, head of the Buon Ma Thuot tax department, said.

Anh has frozen Ly’s bank account, invalidated her businesses’ invoices, and even asked police to look into the case, the official said.

“But we are still unable to reclaim the tax arrears,” he admitted.

Ngo Viet Hong, deputy head of the Dak Lak tax department, said businesses can easily avoid repaying their tax debts, as it is very simple to register a new business.

“One only needs an identity card, residence address, and the registered capital of their firm – which they can easily make up – to open a new company,” Hong said.

“So whenever their tax debts get too large to pay, they just shut down the business and open a new one.”

By law, if a business is closed down when it has yet to clear its tax debts, the business owner is obliged to pay the tax arrears, Nguyen Dinh Tan, head of the Ho Chi Minh City tax department, said.

If the business owner refuses to pay the debts, he or she is considered to be evading taxes, Tan said.

“However, it is in reality difficult to identify the address of the business owners so tax agencies cannot claim the outstanding tax back,” he added.

The tax official said the city taxman and the municipal planning and investment department, where people register to open new businesses, used to share their database with each other.

“So the investment department would know whether or not a business owner had previously owed taxes, and could better decide not to grant a business registration to them,” he explained, adding that such a database-sharing mechanism is no longer in place.

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