(Lai Thi Dieu Thuy & Phan Huy Quyen – Phuoc & Partners)
Tax evasion in real estate business and transfer activities (“REBTA”) is one of the main causes leading to the loss of state revenue. Therefore, it is necessary to have a unified and close coordination mechanism between competent State authorities to help with investigating, detecting, handling and preventing tax evasion cases to ensure sustainable development and transparency in the REBTA. Recently, the Ministry of Finance has issued Official Letter 438/BTC-VP (“Official Letter 438”) dated 12 January 2022 on strengthening coordination among relevant State authorities to prevent against tax loss in the REBTA. So whether the Official Letter 438 is strong enough to tighten management and bring up a transparent REBTA market in 2022?
According to the provisions of law, when implementing tax inspection and when there are tax examination or inspection results, the tax authorities detects that there is any sign of tax evasion crime, then tax authorities will transfer the files to the competent investigating agency to investigate as regulated by laws. However, as a matter of fact, by 2019, there is almost no criminal prosecution for tax evasion in the REBTA. It can be seen that the coordination between tax authorities and investigating authorities is not really effective. However, in recent, the tax authorities have transferred many REBTA records, which had signs of tax evasion to the competent investigating agency for investigation, typically the case of transferring apartment at the Hado Centrosa Garden project (District 10, Ho Chi Minh City). This is considered as a tough action taken by the tax authorities to deter and handle tax evasion cases as well as a vigorous change in the coordination between tax authorities and investigating authorities. Realising the positive results of the coordination between tax authorities and investigating authorities in collecting tax arrears for the state revenue, through Official Letter 438, the Ministry of Finance requested the Ministry of Public Security to direct the local polices to coordinate with Departments of tax to investigate and strictly handle acts of REBTA with signs of tax evasion.
In addition, the Ministry of Finance also proposed the Ministry of Justice and the People’s Committees of the provinces and cities under central authority to direct the Departments of Justice to closely coordinate with local Departments of tax to require organisations of notarial practice upholds its role and responsibilities in guiding people, real estate project investors, and REBTA businesses to declare the actual sale price in the notarised contracts. Such proposal is considered as a tool to guide, help controlling, “tighten input” and support tax authorities in preventing tax evasion and avoiding loss of state revenue.
Compared to Official Letter 14257/BTC-VP of the Ministry of Finance dated 15 December, 2021, Official Letter 438 has risen to a higher level of coordination and extended the scope of coordination with the Ministry of Public Security and the Ministry of Justice, and at the same time explicitly propose a coordination mechanism between ministries, departments and authorities to jointly tighten and minimize tax loss in the REBTA.
Whether the Official Letter 438 is tightened enough to fight against the tax loss in REBTA?
As analysed above, the Official Letter 438 has created a supervision and coordination mechanism among local police authorities, the People’s Committees at provincial level, organisation of notarial practice and local tax authorities to handle acts of REBTA with sign of tax evasion. However, the Official Letter 438 only deals with immediate problem, refers to “the tip of iceberg” but not solves the “root” of such problem, specifically the “two sale prices” as analysed below to fight against the tax loss. But whether the problem can be solved while the cause of tax evasion still silently happens.
In fact, the relevant state authorities feel confused in proving the actual and accurate value of REBTA value since the legal loophole in determining the taxable price still depends on the sketchy real estate price. Because in accordance with the laws on tax, tax base for income from transferring real estate is the price stated in the agreement on transferring real estate at the time of transfer or is determined based on land price list regulated by State at the time of transfer. However, the difference between these two methods of tax calculation will create the gaps for tax evasion and loss of state budget.
More specifically, the REBTA transaction in nature is a civil transaction so, the transaction value, payment method is agreed by parties and recognised in the transferring agreement. Therefore, the declaration of price and choice of different payment methods lead to “dodging” tax which actually silently happens. The parties relevant to the REBTA transaction will declare the price in the notarised contract much lower than the actual sale price. Meanwhile, the tax base that the tax authorities rely on is the price stated in the contract and this leads to the loss of state budget. The verification of the actual sale price of transaction is difficult, for example, when the buyer makes payment in cash outside the notary office and only transfer the sum of money stated in the notarised sales and purchase contract via bank. The relevant parties will have to consider the legal risks arising in the false declaration of the actual sale value, such as administrative penalties or being prosecuted for criminal liability. If the dispute happens, the buyer may have to lose the difference between two sale prices mentioned above.
Apart from the agreement on the REBTA transaction value, such value can also be based on the specific land price framework decided by the People’s Committee at provincial level and governed by the laws on land. For example, under Law on Land 2013, the determination of land price shall, in principle, be in consistency with the prevailing market price of transferred land type having the same use purpose, the winning price of land use right auction for places where there are land use right auctions or income from land use. However, the State’s land price framework and land price list currently do not reflect accurately and are even much lower than the market land price for several reasons including the delay in updating and adjusting land price framework, list in each locality.
Official Letter 438 – “talk the talk, walk the walk”
When it comes to tax evasion in the REBTA as analysed above, the experts’ recommendations are often given to change the policy, detailed as follows:
- Increasing the State’s land price framework equivalent to the market price for land. However, it can be seen that in current reality, the land price of some places is too inflated to be considered as the price for tax calculation. When an exceedingly high price is applied, this could lead to the instability of economy and social security;
- Controlling the income from the REBTA by requiring all transactions to be done through banks instead of using cash. However, like the example just mentioned above, the provisions of laws are also difficult to regulate; or
- Raising the level of administrative fine and criminal penalties for tax evasion. However, as mentioned above, verifying the existence of tax evasion is extremely difficult because in several cases, the parties in REBTA have a handshake coordination to jointly benefit from tax evasion, specifically the seller will not have to pay a part of the tax and enjoy the difference profit and the buyer will receive a “fortune” or a reduction for a part of the transaction amount. Then, it should take the following question into consideration: who is the subject of the penalties, the buyer or the seller, and what is the extent of the violation committed by the parties to apply the penalty and the corresponding penalty level.
It can be seen that the current on provisions of the law REBTA still have gaps that individuals and organizations can take advantage to commit tax evasion. While waiting for new regulations to be issued to fill these gaps in the upcoming time, the issuance of the Official Letter 438 is necessary and timely, because the its approaches are more realistic and remarkable by increasing the coordination among competent State authorities to tighten and prevent tax evasion from REBTA.
 Clause 2 Article 108 Law on Tax Administration 2019
 Article 14 of Law on Personal Income Tax 2007
 Article 15 of Law on Real Estate Business 2014
 Point c clause 2 Article 398 of Civil Code 2015
 Clause 3 Article 114 of Law on Land 2013