Review initiated for VAT refunds on on-site import-export transactions prior to Vietnam's tax law amendment

The long-standing delayed Value-Added Tax (VAT) refund issue—one of the primary challenges faced by South Korean companies operating in Vietnam—is expected to be resolved following the Vietnamese authorities' decision to apply the regulations retroactively. The government stated that this outcome resulted from requests made by President Lee Jae-myung and related governmental bodies, including the Ministry of Trade, Industry and Energy (MOTIE) and the National Tax Service (NTS).

On the 20th, the NTS announced that the delayed VAT refund issue concerning on-site import-export transactions, which had been a major hurdle for South Korean firms in Vietnam, has been resolved through diplomatic and administrative efforts.

According to the NTS, the General Department of Taxation of Vietnam recently issued a directive to all provincial and municipal tax departments across the country, instructing them to retroactively apply the on-site import-export system stipulated in the law passed last July.

The on-site import-export system is similar to South Korea's local letter of credit (L/C) system. It recognizes transactions between companies physically located within Vietnam as import-export transactions if they are part of the manufacturing process for export goods. This system allows export businesses in Vietnam to receive refunds for the VAT paid during the transaction process.

However, delays in VAT refunds for South Korean companies operating locally had recently become a recurring issue. Since the introduction of the on-site import-export system in 2015 until 2022, VAT refunds had been conventionally granted regardless of whether foreign merchants had representative offices located in Vietnam.

Nevertheless, through legal interpretations issued in December 2022 and May 2023, the Vietnam General Department of Customs restricted the application of the on-site import-export system for foreign merchants with representative offices in Vietnam. The NTS explained that because the Vietnamese authorities did not provide a grace period during this process, South Korean companies that had benefited from long-term refunds suffered significant cash flow difficulties.

According to a survey by the Korean Chamber of Commerce and Industry in Vietnam (KorCham), the delayed refund amounts reported by just a small number of responding companies total at least 40 billion KRW. The NTS noted that considering the unrefunded amounts from many companies that did not participate in the survey, the actual delayed refund amount is expected to be much larger.

In response, South Korea's NTS, MOTIE, and Ministry of Foreign Affairs continuously requested a resolution to this issue, which led to the reflection of the legal basis for the on-site import-export system in Vietnam's laws and decrees last July.

Consequently, the criteria for VAT refunds under on-site import-export transactions became clear, allowing VAT to be refunded regardless of whether foreign merchants' representative offices are located in Vietnam.

However, Vietnamese authorities initially recognized only the prospective effect of the law and did not permit retroactive application for transactions conducted prior to the amendment. As a result, the issue of delayed VAT refunds remained unresolved, according to the NTS.

To resolve this issue, during his state visit to Vietnam last April, President Lee Jae-myung explained the difficulties faced by South Korean companies due to the delayed VAT refunds during a summit with Vietnamese leaders, including General Secretary and State President Tô Lâm, and requested their attention to find a solution. Subsequent follow-up efforts were led by South Korean government agencies, including the NTS and the Ministry of Trade, Industry and Energy.

The NTS requested cooperation from the Vietnamese side to ensure prompt VAT refunds for South Korean companies in Vietnam during the 25th Korea-Vietnam Commissioner of Tax Meeting held last June.

At the time, NTS Commissioner Lim Kwang-hyun conveyed the difficulties caused by the delayed VAT refunds experienced by some South Korean companies in Vietnam and requested the attention and cooperation of the Vietnamese authorities for swift VAT refunds.

In a social media post at the time, Commissioner Lim stated, "We will further strengthen tax support so that our companies can focus on their businesses with peace of mind in Vietnam, one of the countries where our companies have the highest presence, and to this end, the tax authorities of both countries have agreed to cooperate closely," revealing that he had requested measures for early VAT refunds.

Beyond the NTS, the Ministry of Trade, Industry and Energy also stepped in to resolve the issue. Through high-level meetings—such as meetings with the Vietnamese Minister of Finance last August and the Vice Minister of Finance last November—as well as dispatching letters under the Minister's name, MOTIE communicated the grievances of South Korean companies caused by the delayed on-site import-export VAT refunds and urged a resolution.

As a result of these efforts by the South Korean government, the Vietnamese tax authorities issued a directive last month instructing local tax offices to review VAT refunds even for on-site import-export transactions carried out prior to the tax law amendment. Consequently, South Korean companies are now able to receive refunds for the previously delayed VAT related to on-site import-export transactions, the NTS stated.

The NTS expressed expectations that this decision by Vietnam will not only alleviate the financial burden on South Korean companies operating in the country but also eliminate tax uncertainties.

[ⓒ Global Economic Times. 무단전재-재배포 금지]