Deductible Expenses – Correct and Full Understanding || AS Auditing

Determining deductible expenses when calculating corporate income tax is especially important, because it helps to reduce tax payable, limit the risk of tax arrears and penalties, and this is also a criterion for assessing the applicability of tax and accounting laws of accountants.

The phrases “deductible expenses” or “reasonable and valid expense” used in corporate income tax calculation have the same meaning. The above phrases are very commonly used in the accounting profession.

In the law in general and tax law in particular, there is no definite definition of what is a valid and reasonable expense. It can be understood that the lack of definition is obvious because the reasonable and valid expenses of determining taxable income are so diverse and complex that we cannot define them as a general concept. It depends on the state budget management relationship and socio-economic development in each period. Lawmakers also try to narrow the distinction between accounting expenses and tax expenses.

Although the tax law does not define it, there are regulations on the conditions for expenses to be deducted when determining taxable income for corporate income. Currently, according to Circular No. 96 issued in 2015, it can be understood that expenses are deductible if these expenses meet the following 3 conditions:

Condition 1: The actual expenditures arising related to production and business activities of enterprises.

Condition 2: Expenditures with adequate legitimate invoices and documents as prescribed by laws.

Condition 3: If expenditures for purchase of goods or services have invoices valued at VND 20 million or more (VAT-inclusive price) upon each purchase, receipts of non-cash payment are required upon the payment.

For each condition, we have the following things to note:

For condition 1:

Note that the actual expenditures arising related to production and business activities of enterprises must be according to the list permitted by tax law.

In other words, although the enterprise actually incurs expenses, it will not be deducted when determining taxable income if this expense is not included in the provisions of Tax.

For example:

• Expenses for raw materials, materials… in excess of reasonable consumption limit according to the reasonable consumption norms prescribed by the State.
• Expenses for outfits in cash to laborers which exceed 5 (five) VND million/person/year.
• Depreciation expenses exceed the depreciation bracket prescribed by the tax.

For condition 2:

Note that expenditures with adequate legitimate invoices and documents as prescribed by laws mean that the expenses must comply with the regulations on documents according to the accounting law and tax law.

Regulations on vouchers under the tax law are often "complicated" and "difficult" than those prescribed by the accounting law. At the same time, the expenses that are deductible according to the tax law usually have specific documents for each case.

For example, the following expenses will be excluded when determining taxable income if these expenses do not meet the required documents and records:

• Deduction and use of provisions are not in accordance with the guidance of the Ministry of Finance on deduction of provisions and there is no record to prove this deduction.
• Expenses for education, health care, and housing for the poor funding are not for the subjects or without dossiers to identify the funding.
• Merchandise discounts and promotional discounts do not have enough records according to tax laws.

For condition 3:

Note that,

• In case of purchase of goods and services: if each purchase has an invoice value of 20 million VND or more and the enterprise has not paid by the time of recording expenses, it will be counted as a deductible expense.
• In case the expense is due to be paid, but the enterprise does not have a non-cash payment document, we must declare and reduce the expenses corresponding to the value of goods and services without non-cash payment documents in the tax period incurred.

Understanding correctly and fully deductible expenses when determining corporate income tax is an indispensable knowledge for accountants.