Difference in declared sales amount between value-added tax return and corporate tax return
2023/02/01
Introduction
In tax audits, the consistency of the total sales on the current year’s VAT return and the total sales on the CIT tax return is one of the very basic items examined by the tax authorities. If there is a difference between the two, the company needs to understand the cause of the difference in order to provide a reasonable explanation to the tax authorities. This paper summarizes the main reasons for this difference.
1. Time of recording of service sales
1) Handling on VAT
When services are provided, revenue is recorded at the earlier of the issue of the invoice, (a) completion of the service, or (b) receipt of money. An example is shown below.
Example 1
On December 2, 2020, a service contract regarding recruitment was concluded between recruitment company A and operating company B. On December 30, 2020, it was decided to hire the person introduced by Company A, and on January 10, 2021, Company B transferred the recruitment support service fee to Company A. In this case, Company A issues an invoice on December 30, 2020, the time the service is completed, and declares it as sales in the December 2020 VAT return.
Example 2
A service provision contract was concluded between consulting companies C and D. The contract was concluded on December 20, 2020, and on the same day, Company D transferred 50% of the service amount to Company C and received the money. Additionally, the consulting work was completed on March 20, 2021. In this case, Company C will issue an invoice twice, once on December 20, 2020 at the time of payment and once on March 20, 2021 on the service completion date, and will also declare it as sales in the VAT return (for December 2020 and for March 2021).
2) Handling on CIT
The time when sales are recorded in CIT is when the service is completed or partially completed.
For example, if services are provided between December 1, 2020 and December 31, 2020, even if invoices and payments are made in January 2021, CIT will record sales in December 2020.
In other words, if the time of payment and the time of service completion are different (as in example 2 above), there will be a difference in declared sales between VAT and CIT.
2. When rental business sales are recorded
1) Handling on VAT
In a rental business where a lump sum payment is made at a single point in time or advance payments are made over multiple periods, the total amount of rent paid at a single point or prepaid rent is declared as revenue for VAT purposes. For example, office rental company E entered into a three-year office rental contract with F. The contract was concluded on December 1, 2020, and on the same day, Company F transferred the six-month rental fee to Company E and received the money. In this case, on December 1, 2020, at the time of deposit, Company E must issue an invoice containing the total amount of six months’ worth of prepaid rent and declare it as sales in the December 2020 VAT return.
2) Handling on CIT
Under CIT, the idea is that the amount paid each period by the lessee is declared as sales. Therefore, if a tenant makes prepayments over a number of years, a company can choose one of two methods when calculating CIT revenue:
(a) declare the entire amount of prepaid rent as sales;
(b) The amount obtained by dividing the total advance payment by the number of years of advance payment is declared as annual rental revenue.
In other words, if the company chooses (b) above, there will be a difference in declared sales between VAT and CIT.
3. Gift sales
1) Handling on VAT
If a company may gift products to employees, customers, suppliers, etc., but the gift is not registered with a governing body such as the Ministry of Industry and Trade, the company may issue an invoice as a normal sales transaction. issued and must be declared as sales revenue on the VAT return.
2) Handling on CIT
Previous regulations stipulated that when a gift transaction occurs, it must be declared as a sale based on the invoice issued. However, since Circular 78/2014/TT-BTC was issued, recognition of sales of gift products has been abolished. In other words, for gift transactions, there will always be a difference in declared sales between VAT and CIT
4. Proceeds from sale of assets
1) Handling on VAT
When selling fixed assets, etc., an invoice must be issued and it must be declared as sales revenue on the VAT return.
2) Handling on CIT
Based on Circular 78/2014/TT-BTC, the sale of fixed assets, etc. is not considered as ordinary sales revenue, but is included in taxable income as other income. In other words, for asset sale transactions, there will always be a difference in declared sales between VAT and CIT.
In conclusion
Above, we have explained some details regarding the difference between the total sales on the VAT return and the total sales on the corporate tax return for the taxable period. By understanding the nature of the discrepancy in advance, it is possible to understand the situations that the company may encounter, and it is possible to make a plan for a rational explanation at the time of a tax audit.
*This article was translated by Yarakuzen.
