Judgment No. 194/2019/HC-PT dated august 20, 2019 on claim against administrative decision on handling of tax violations

THE SUPERIOR PEOPLE’S COURT IN HANOI

JUDGMENT NO. 194/2019/HC-PT DATED AUGUST 20, 2019 ON CLAIM AGAINST ADMINISTRATIVE DECISION ON HANDLING OF TAX VIOLATIONS

On August 20, 2019, at the headquarters of the Superior People's Court in Hanoi, an appellate trial is publicly conducted to hear the administrative case No. 236/2018/TLPT-HC dated August 10, 2018 on claim against administrative decision on handling of tax violations.

As the first instance administrative judgment No. 05/2018/HCST dated June 20, 2018 of the People's Court of province H was appealed.

According to the Decision on bringing the case to trial No. 7849/2019/QD-TA dated August 1, 2018 of the Superior People's Court in Hanoi among the involved parties:

1. The petitioner: GF Joint Stock Company

Address: No. 02, Colonel Driant street 75001 Paris, P.

Legal representative: Mr. ES - President, absent

Authorized representative of the petitioner:  Mr. Hoang Van T - Lawyer of Trung Hoa Lawyer Office, H City Bar Association; Address Floor 1, CT 13 B Building Vo Chi Cong Street, Phu Thuong Ward, District T*, City H, is present.

2. Respondent: Director of Department of Taxation of province H

Address: Truong Chinh Street, Tan Binh Ward, H City, H Province.

Legal representative:  Mr. Vu N - Deputy Director of Tax Department of Province H who participates in proceedings as authorized by the Director, present.

THE CASE

1. According to the presentation of the petitioner: GF Company (hereinafter referred to as Company G) is a company operating in the field of engineering and construction, established under the law of the Republic of P, based at P. To execute the project of building a cattle feed mill in Tan Truong industrial park, district C, the Company has been granted a License by the Department of Construction of Province H in accordance with Decision No. 03A/QD-GPT-SXD dated May 6, 2011.

Accordingly, Company G signed a contract with CP Vietnam Livestock Company (Company CP) from December 23, 2010, through 04 amendments to March 23, 2013, the total contract value is EUR 15,368,193.10 and VND 43,322,829,575; equivalent to VND 487,829,294,973. Company G has made the final settlement with Company CP.

When performing the contract, G has subcontracted a part of construction work to 10 Vietnamese subcontractors; the total value of settlement paid to the subcontractors is VND 404,543,918,062.  After subtracting amount paid to subcontractors, the revenue subject to corporate income tax (CIT) of G for the project is VND 83,285,376,911.  For the rest of the contract, Company G hired workers from BT sole proprietorship to directly install mechanical equipment for the entire production line of the factory with a total cost of VND 3,058,124,622 and perform design, consulting, supervision services and other services to complete the construction of the factory.

Then, in February 2016, Company G received Decision No. 5106/QD-CT dated November 27, 2015 on handling tax violations stating the tax arrears of VND 2,616,184,972 payable by Company G, including:  VND 33,553,265 of VAT, VND 2.500.876.881 of CIT. Company G disagrees with the tax arrears, so it made a complaint to Tax Department H and the General Department of Taxation of Vietnam about the tax arrears.  On October 13, 2016, the General Department of Taxation issued a Decision on the settlement of the second complaint indicating that such complaint is refused, and the decision on complaint resolution of the Tax Department H is upheld.

On July 21, 2017, Company G sued the entire Decision 5106/QD-CT dated November 27, 2015 of the Director of Tax Department of Province H, then requested to sue on the content of "Collecting VND 2,500,876,881 of CIT in arrears." specified in Article 1 of the Decision.  The reason for lawsuit petition:

Points 3.1 b and 3.2 b, Section III of Circular No. 134 stipulate:  “In case the contract could not separate the value of machinery, equipment and service prices, the CIT of 2% shall apply to the taxable revenue.”

Point b, Clause 2, Article 13, Section 3, Chapter II of Circular No. 60/2012/TT- BTC in Viet Nam stipulates:  For construction and installation activities involving the supply of materials, machinery and equipment accompanying construction works, the percentage of CIT on the taxable revenue is 2% of the whole contract value.

The Tax Department of province H noted that Company G only performed the service and subcontracted all the construction works and items to 10 subcontractors. Therefore, the application of CIT 5% is not accordance with law. In fact, Company G both subcontracted the construction work subcontractors and has performed the construction, which is reflected by the fact that the Company hired employees, brought experts to supervise and design the whole works for subcontractors, so the Company could not assign all the works to subcontractors.

Based on the above grounds, the Company believes that it is only subject to 2% CIT on taxable revenue, not 5%.  The company requested the People's Court of province H to cancel the tax arrears of VND 2,500,876,881 in Decision No. 5106/QD-CT dated November 27, 2005 of the Director of Tax Department of province H.

2. Representation of the respondent:

Pursuant to the Law on Tax Administration, Decision on dissolution of contractor of Company G, the Director of Tax Department of province H issued a decision on tax examination at Company G in order to close the contractor tax code and to check tax payment obligations of Company G with the State.

Upon inspection, the Tax Department detected that Company G had violations in matters related to the collection of VAT, CIT and PIT. Specifically, as for CIT, Company G declares the tax rate of 2%; the inspection agency claims that it must be 5%.  Basis for determining the tax rate is: Company G is the main contractor carrying out the construction project of Company CP.  However, Company G has signed contracts with 10 subcontractors in Vietnam to subcontract the entire construction of the factory, while Company G only performs the design services.  After subtracting the value transferred to the subcontractors, Company G has a revenue subject to CIT of VND 83,285,376,911.  The company agrees with this revenue.

After determining the taxable turnover, the tax authority determines that the business activities under the contract signed with Company CP are design and construction. However, the construction part has been separated for subcontractors; Company G's operation is mainly to provide design services.  For this business activity, under the provisions of Points a, b and l, Clause 3.2, Section III, Part B of Circular No. 134 of the Ministry of Finance, the tax rate to be imposed is 5%.

After discovering the violation, the inspection team and Company G made a tax inspection record on November 23, 2015.

According to the Tax Administration Law, the General Department of Taxation's Decision No. 108/QD-BTC of January 14, 2010 defining the functions, tasks, powers and organizational structure; Decision No. 5106/QD-CT dated November 27, 2015 of Tax Department of province H was issued following due process, form, authority and content as prescribed.  The lawsuit petition is unfounded.

In the First Instance Judgment No. 05/2018/HC-ST dated June 20, 2018, the People's Court of province H based on Articles 30, 32 and 116 of the Law on Administrative Procedures; applied the Tax Administration Law 2006, amended in 2012; Circulars No. 156/2013/TT-BTC in Viet Nam dated November 6, 2013 and No. 134/2008/TT-BTC of the Ministry of Finance; refused the lawsuit petition of Company G against the amount of VND 2,500,876,881 of tax arrears payable as specified in the Decision No. 5106/QD-CT of November 17, 2015 of the Director of the Tax Department of province H on dealing with tax violations.

The Court of First Instance also decided the court fee and the right to appeal of the involved parties in accordance with law.

After the first instance trial, on June 29, 2018, the authorized representative of the petitioner appealed to the Court of Appeal to accept the lawsuit petition of Company G.

At the appellate trial:

- The authorized representative of the petitioner still maintains the appeal; requests the Court of Appeal to accept the lawsuit petition, partially cancel Decision No. 5106/QD-CT of November 17, 2015 of Tax Department of province H on the fine of VND 2,500,876,881, because in this case, the Company is entitled to the rate of 2% of CIT under the provisions of Circular No. 134/2008/TT-BTC in Viet Nam, not subject to the tax rate of 5%.

- The respondent still maintains the viewpoint during the process of lawsuit settlement not accepting the appeal of the petitioner, because the decision on the tax rate applied to the tax arrears payable by Company G is correct.

- The representative of the High-level People's Procuracy expresses opinions that based on documents and evidence contained in the case file and the results of litigation at the trial, and the Court of First Instance’s rejection of the lawsuit petition of G is right; request to keep the decision of the Court of First Instance on the litigants.

JUDGEMENT OF THE COURT

[1] With reference to prescriptive period for lawsuit and jurisdiction: After receiving Decision No. 5106/QD-CT dated November 27, 2015 of the Director of Tax Department of province H on handling tax violations.  Company G has made the first complaint to the Tax Department H, the second one to the General Department of Taxation.  On October 13, 2016, the General Department of Taxation issued a decision on refusing the second complaint of Company G. On July 21, 2017, the Company filed a lawsuit under administrative proceedings, requesting cancellation of the Decision No. 5106/QD-CT above which is considered within the prescriptive period for initiating a lawsuit prescribed at Point a, Clause 3, Article 116 of the Law on Administrative Procedures; the case falls under the jurisdiction of the People's Court of province H, as stipulated in Article 30, Clause 3, Article 32 of the Law on Administrative Procedure in Viet Nam.

[2]. With reference to the procedures and competence to issue administrative decisions on tax matters, After completing the signed contract, the Company has carried out dissolution procedures and notified to the tax authority; on July 14, 2015, Director of Tax Department of province H issued a decision on inspection; and sent an inspection team to fix the tax code with the Company. After checking, they proposed collecting arrears of VAT, CIT and PIT with the total amount of VND 2,616,184,972.  Based on the proposal in the Tax Examination Record dated November 23, 2015 of the inspection team, on November 27, 2015, the Director of Tax Department of province H issued Decision No. 5106/QD-CT on handling of tax violations against the Company. This decision was made with due process, procedures and authority as prescribed by law.

[3]. In the Decision No. 5106/QD-CT dated November 27, 2015, the Director of Tax Department of province H decided to collect the tax arrears from  the Company, including:  VND 33,553,265 of VAT, VND 81,754,826 of PIT and VND 2,500,876,881 of CIT. The company only proceeds against the decision to collect the CIT arrears with the reason:  The company is only subject to the tax rate of 2%, so the application of the 5% tax rate is not right.  And the Company does not require review of other taxes.

Examining the legality of the administrative decision being sued, the Trial Panel finds that: On December 23, 2010, Company G (the main contractor) signed a contractual agreement with Company CP (the investor) to execute the Project of building a cattle feed mill in Tan Truong industrial park, Tan Truong commune, district C. The total contract value is EUR 15,500,000.  In the course of contract execution, the two parties added addenda to the contract, which adjusted the value of the main contract, the final value was EUR 15,368,193.10 and VND 43,322,829,575; In the aforementioned contract, there is no provision on the assignment of part of the work value under the contract in which the Company is a contractor signed with a Vietnamese company.  However, during the execution of the contract, the Company signed contracts with 10 Vietnamese subcontractors; the total settlement value is VND 404,543,918,062.

The company is not involved in building a feed factory. The remaining difference of the contract is VND 83,285,376,911, which is exactly the value of services that the Company receives due to the difference between the contract price agreed with the investor and the contract price agreed with the subcontractors, to perform services to complete the construction of factory building.  The representative of the company also acknowledged hiring workers from enterprise BT to provide services with the cost of more than VND 3 billion.  The company's employment was for cleaning, not related to the supply of construction machinery and equipment.

According to Point 3.2 b (b1), Section III, Part B of the Finance Ministry's Circular No. 134/2008/TT-BTC dated December 31, 2008 on guidelines for tax obligations performed by foreign organizations and individuals doing business in Vietnam:

“With regard to main contracts and sub contracts covering many different business activities, when determining the payable CIT amount, the application of the rate of CIT on assessable revenue shall be based on taxable turnover for each business activity conducted by the foreign contractor or the foreign subcontractor under contract.  In case it is impossible to separate the value of each business activity, the highest CIT rate applicable to the business line shall be applied to the whole contract value”. The above-mentioned provision of the Circular has mentioned the nature and type of business activities of the enterprise (providing goods, machinery and services with different tax rates, etc.)  in order to calculate the tax rate, not refers to any specific type of business as indicated in the appeal of the Company.  However, in this case, the construction part has been separated for subcontractors; Company G's operation is mainly to provide design services.  For this business activity, under the provisions of Points a, b and l, Clause 3.2, Section III, Part B of Circular No. 134 of the Ministry of Finance, the tax rate to be imposed is 5%. The Court of First Instance was right when refusing the Company's lawsuit petition for cancelling the company's decision to collect the CIT arrear of VND 2,500,876,881.  It was seen that there was no valid reason to accept the appeal of the Company.

[4]. The appeal is not accepted, so Company G has to pay the appeal court fee as prescribed.

Therefore,

HEREBY DECIDE

1. Pursuant to Clause 1, Article 241; Clause 1, Article 349 of the Law on Administrative Procedures; Article 34 of Resolution No. 326/2016/UBTVQH14 in Viet Nam dated December 30, 2016 of the Standing Committee of the National Assembly on court fees and charges; the decision to reject the appeal of Company G France SA and uphold the decision of the First Instance Judgment No. 05/2018/HC-ST of June 20, 2018 of the People's Court of province H.

2. Company G France SA must pay an appeal court fee of VND 300,000.  It is confirmed that the Company has paid (submitted by Mr. Hoang Van T) such appeal court fee as stated in the advance receipt of court fee No. AA/2017/0001562 dated July 2, 2018 of the Civil Judgment Execution Department of province H. The Appeal Judgment takes effect from the date of pronouncement.