A decision to recover taxes can cause businesses to refund billions of VND. But in many cases, the more worrying problem lies not in the amount, but in the way the customs authorities perceive the production model of the business itself.
If the imported raw materials have actually gone into the export product, but part of the stage is hired by another enterprise, will the enterprise still be refunded the paid import tax?
The real legal issue, therefore, is not whether the goods have been exported or not.
This is an intersection that is not easy to handle between the nature of production activities and the legal conditions of the tax refund policy.
From a decision to recover more than 8.8 billion VND
A real-life case clearly illustrates the problem.
The enterprise imports raw materials in the form of A12, pays import tax and puts the raw materials into the production of export goods. In that process, part of the raw materials are assigned to a subsidiary owned by the enterprise 100% to carry out a number of processing stages according to the contract notified to the customs office. After processing, the enterprise receives the product back and directly exports it abroad under the type E62.
Enterprises are entitled to import tax refunds. However, when checking after refund, the customs office said that the enterprise did not directly carry out the entire production process but hired another unit to process some stages, thereby deciding to recover more than 8.8 billion VND of refunded tax.
The real legal issue, therefore, is not whether the goods have been exported or not. What needs to be clarified is: does outsourcing part of the production process make the enterprise lose the right to tax refund?
Can an outsourced process change the right to a refund?
Point d, Clause 1, Article 19 of the Law on Import and Export Taxes and Article 36 of Decree 134/2016/ND-CP set out the tax refund mechanism for imported goods for which tax has been paid, then put into the production of exported goods and products that have actually been exported.
But the condition does not stop at the final result of "exported goods".
Clause 3 of Article 36 also requires organizations and individuals producing export goods to (1) have production establishments in the territory of Vietnam; have the right to own or use appropriate machinery and equipment; (2) raw materials eligible for tax refund must be the actual amount used to produce products actually exported; (3) products must carry out procedures according to the type of export production; and (4) organizations and individuals must directly import or entrust goods or export products.
Therefore, the argument that "the final raw material has gone into the export goods, so it is naturally refunded tax" is not enough. But the opposite direction also needs to be asked: Does the provision in Article 36 really require enterprises to carry out all stages of product creation by themselves?
This is the point that is difficult to clearly delineate. An enterprise can own a factory, machinery, raw materials, control the production process and directly export products but still hire another business to carry out a specialized stage. In modern manufacturing, that is no exception. Therefore, instead of just asking "does the business outsource or not", it is necessary to ask more precisely:
What specific conditions of Article 36 does the outsourcing of the enterprise fail to meet the specific conditions of Article 36?
If that condition cannot be determined, the inference from "outsourcing" to "non-refundable" should be carefully considered.
The gap between tax exemption and refund
The most notable point lies in the structure of Decree 134/2016/ND-CP.
Article 12, after being amended by Decree 18/2021/ND-CP, adjusts the case of tax exemption for raw materials imported for the production of export goods and has directly anticipated the outsourcing of production and reprocessing in the country.
Accordingly, when meeting the statutory conditions, taxpayers can deliver imported goods or semi-finished products to other organizations to perform one or more stages, then receive them back to continue production or export. The law even envisages the case of handing over goods to organizations where the taxpayer owns more than 50% of the capital for production, processing and then receiving the products back for export. The guidance of the General Department of Customs after Decree 18/2021/ND-CP also confirms this outsourcing mechanism.
Meanwhile, Article 36 on tax refund for imported raw materials for which tax has been paid does not have clear corresponding provisions on outsourcing.
It is impossible to apply that mechanism to Article 36 because Article 12 allows it. Tax exemption and tax refund are two different regulations.
But this very difference raises a thought-provoking question: why the same way of importing – duty-free in the first place or paying taxes and then refunding – can lead to different tax consequences?
Practice shows that this is not only a theoretical question. The General Department of Customs has instructed that Article 36 does not provide for tax refund in case an enterprise imports raw materials and accessories, produces semi-finished products and then assigns another enterprise to process and complete it before receiving the product back for export[1].
Thus, the risk of businesses lies in the distance between the two mechanisms.
This is also the reason why enterprises should not build an explanation dossier simply on the argument that "the final goods have been exported" but need to directly explain what conditions of Article 36 the customs authority is relying on; how the outsourcing activity has made that condition no longer met; and whether that understanding really comes from the content of the regulation or from the fact that Article 36 does not clearly anticipate the multi-stage production model.
Source: Government News
Decisive evidence
Even if there exists a basis for debating how to interpret Article 36, businesses still have to answer the most important question: where have the imported materials actually gone?
The document chain must allow traceability throughout: import → warehouse → production → assign processing → receive back → continue production if there is an export →.
Not only the flow of goods must match. The ownership of raw materials, norms, warehousing bills, processing contracts, delivery documents, settlement reports, export declarations and accounting records must also clearly prove the origin and flow of the product.
In particular, the enterprise must prove who owns the raw materials during the processing period; the processing unit has the right to dispose of or only perform the required stage; which products the enterprise receives; how the loss and scrap are handled; and whether the amount of raw materials requested for tax refund really constitutes the exported product or not.
In customs disputes, strong enough legal evidence will help businesses prove the nature of business activities.
When there is a decision to revoke, what should businesses do?
The first thing should not be to continue to send disjointed explanation letters.
The enterprise needs to reconstruct the entire case on a comparison table consisting of three columns: (i) legal conditions; (ii) the judgment of the customs office; (iii) the evidence of the enterprise.
From there, it is necessary to accurately determine whether the customs authority is believing that the enterprise does not meet any of the conditions of Article 36. If the problem lies in the production facility, machinery, norms or traceability of raw materials, the enterprise must focus on proving those factors.
If the only problem lies in the fact that a stage is outsourced, the enterprise needs to clarify what legal basis makes that outsourcing the reason for losing the right to tax refund, and at the same time fully assess the existing guiding practices of the customs authorities in an unfavorable direction.
If the problem is only a procedural error, it is necessary to continue to distinguish: it is an administrative obligation that can lead to a sanction or is it indeed a condition that prevents the right to a tax refund from arising.
Only after answering these questions will enterprises have a basis to choose between complying with decisions, complaining or initiating administrative lawsuits.
It can be seen that the modern production chain is no longer located in a factory. Therefore, businesses cannot design the supply chain according to the logic of production and then finally check the tax consequences. The production structure and the tax structure must be calculated together from the beginning.
A tax recovery decision can start with an outsourced process, but the legal issue should not stop at who performs that process. What needs to be determined is which conditions of the tax refund entitlement have been changed by the outsourcing. Because the nature of economics cannot replace a legal condition; but a legal condition should not be extended by interpretation alone. The gap between the two is where the business must find the answer before deciding to return the money – or protect the refunded tax.
