Circular No. 685-TC/TCT regarding the determination of taxable income for individual households engaged in business operations

LETTER

ISSUED BY THE MINISTRY OF FINANCE NUMBER 685-TC/TCT ON MAY 24, 1991
REGARDING THE DETERMINATION OF INCOME SUBJECT TO TAX FOR INDIVIDUAL HOUSEHOLDS

Pursuant to Article 20 of the Income Tax Law and to ensure consistency with the actual situation mentioned above, ensuring fair and reasonable contributions among individual households engaged in production and business activities, the Ministry of Finance guides the measures for determining income subject to tax for individual households as follows:

I. FOR HOUSEHOLDS IMPLEMENTING AUDITING
ACCOUNTING SYSTEMS AND TAX DECLARATION REGIMES

The income subject to tax shall be determined in accordance with the provisions set out in Section II, Part II of Circular No. 47 TC/TCT dated October 4, 1990 issued by the Ministry of Finance.

Upon receiving the tax declaration form, the tax authority must:

- Compare the declared information with the prescribed model; if the declaration is incorrect, request the household to re-declare accurately.

- Recheck the accounting books, invoices, and supporting documents to see if they comply with regulations; in cases where the accounting books, invoices, and supporting documents do not conform to regulations, the household must pay income tax according to the method of fixed taxable income (as detailed in Part II).

- Compare the declared figures with the accounting books, invoices, and supporting documents to verify the accuracy of the declarations.

+ Regarding revenue: Each sales invoice must be cross-checked against the accounting records, and then from the accounting records to the declaration form.

+ Regarding expenses: Verify the calculation of depreciation expenses, material costs, wages, and other expenses to ensure compliance with regulations?

Specifically, material costs (raw materials, purchase cost...) require careful verification of the purchase price of materials: purchases from other economic units must have valid invoices, if purchased from the free market, the purchase price cannot exceed the average price at the same time period.

Other expenses such as electricity, water, sanitation, rent for seating (if renting a business location...) must be calculated based on the average rate and not higher than that.

- Additionally, it is necessary to regularly combine management on accounting books with investigations of actual production and business conditions through inventory checks of capital, goods, assets, labor...; investigate sources of incoming and outgoing goods, seasonal production and business operations, business locations... to accurately determine revenue, taxable income of the household engaged in production and business activities and require the household to adjust their accounting records when recorded figures are inconsistent.

II. FOR HOUSEHOLDS NOT YET IMPLEMENTING
ACCOUNTING SYSTEMS AND TAX DECLARATION REGIMES

The tax authority must guide, assist, and compel these households to implement them to have a basis for accurately calculating taxable income.

In the meantime, while households have not yet implemented, taxable income can be determined using the following methods and measures:

1. Based on revenue and the average taxable income ratio of the same industry according to the formula:

Taxable Income Ratio VND - Total Business Expenses

=

Average Taxable Income Ratio Total Revenue x 100%

Wherein: business expenses include both depreciation expenses of fixed assets, material costs (or purchase cost), management expenses including wages paid to external hired labor based on unit product or revenue as specified by the provincial People's Committee and business tax (or special consumption tax) payable.

For example, there are survey data on three retail households selling domestically produced goods as follows (in the table) regarding wages for external hired labor as stipulated by the provincial People's Committee for the trade sector:

Revenue up to 5 million VND/month is exempted by 100,000 VND.

Revenue over 5 million VND to 10 million VND/month is exempted by 200,000 VND.

Unit: 1,000 VND

Taxable Income Ratio 22.500.000 - 20.150.000

Average of the Industry = x 100% = 10,0%

Liable to Tax 22.500.000

The taxable income of the business households will be:

Household A = 5,000,000 x 10,0% = 0.5 million

Household B = 7,500,000 x 10,0% = 0,750 -

Household C = 10,000,000 x 10,0% = 1,00 -

To have a basis for establishing the correct taxable income ratio, the Tax Department needs to organize thorough surveys, select many households of different scales and types of production and business activities, analyze each expense item in comparison with state-owned enterprises, cooperatives... in the same industry and seek opinions from related sectors to establish a common ratio applicable to all households in the same industry and area. Every six months, review and adjust for industries and areas if there are changes and the established ratio no longer fits the reality;

The taxable income ratio is determined by the Provincial Tax Department. For large cities, separate ratios should be set for different areas (city, town, delta district... mountain district...). Because the same type of business in different areas will have different profit rates.

To ensure fair and reasonable contributions among different forms of production and business entities, when establishing the taxable income ratio, attention should be paid to balancing and avoiding situations where the tax mobilization ratio of households in the same industry is too disparate, even lower than small households regulated by the Law on revenue collection.

During the management process, if investigating households with taxable income higher than the average ratio, it will be calculated based on actual taxable income, if lower, it will be calculated based on the average taxable income ratio.

2. Based on the scale of business:

The scale of a business is reflected through operating capital; shop size; labor force and business location...

a) Based on operating capital: To grasp the operating capital, reliance can be placed on the tax registration declaration form combined with direct investigation and inventory.

After grasping the operating capital, the tax authority must classify households with the same amount of capital, engaging in the same industry in the same area into groups. Each group investigates the profits earned by some households to serve as a basis for fixing the taxable income for all households in that group.

During the investigation, additional aspects such as the living standards of the business household, actual wages paid to external hired labor, purchased assets... should be considered to more accurately determine the household's profit.

b) Similarly, based on business capital, it may be based on business area, number of workers, location to classify households engaged in production and business activities into groups or teams with the same scale, then investigate and determine the taxable income for households within the same group or team according to the principle that households engaged in the same industry and having the same scale shall have the same taxable income.

Depending on specific characteristics in each locality, the Tax Department directs the Tax Branches to select methods for determining taxable income appropriately. During implementation, any difficulties or obstacles should be reported for further study and guidance.