Imposing administrative sanctions which are more severe for individuals evading income tax

Decree 125/2020/ND-CP on Regulating Administrative Penalties for Tax and Invoice Related Violation, which has just come into force since December 5, 2020, has added many new points related to administrative sanctions in the tax sector compared to the previous regulations. An important new point you should note is the regulation on imposing more severe administrative sanctions for individuals evading income tax. In the following article, DTD will clarify this provision in terms of law.

1. Which behaviors are considered personal income tax evasion?

Clause 1, Article 3 of the 2019 Law on Tax Administration provides the tax definition as follows:

“Article 3. Definitions

1. “Tax” means a compulsory amount payable to the state budget by organizations, households, household businesses, individuals as prescribed by tax laws.”

As such, we can understand that tax evasion is an act with a view to evading the obligation to pay for the State budget. Individuals who commit acts of personal income tax evasion are those who do not declare or misrepresent their personal income to avoid tax obligations.

This personal income tax rate is detailedly regulated in the 2007 Law on Personal Income Tax, amended and supplemented in 2012 and the Resolution No. 954/2020/UBTVQH14 on Adjustment of Personal Income Tax Exemptions. Accordingly, individuals with regular income of 11 million per month or more (after deducting the rate of family circumstances for taxpayers) have the obligation to pay personal income tax. The tax ranges from 5-35% of taxable income.

2. Administrative sanctions for individuals evading income tax following current regulations

Article 17 of the Decree 125/2020/ND-CP on Regulating Administrative Penalties for Tax and Invoice Related Violation has provisions on penalties for the act of tax evasion as below:

“Article 17. Penalties for the act of tax evasion

1. The fine which equals the amount of evaded tax shall be imposed on the taxpayer committing any of the following violations under at least a mitigating circumstance:

a) Failing to submit tax registration applications; failing to file tax returns or filing tax returns 90 days after the deadline or the extended deadline for submission of tax returns, except the cases prescribed in point b and c of clause 4 and 5 of Article 13 herein;

b) Failing to keep accounting entries of amounts collected from the determination of taxes payable, any deficiency in taxes amounts due to non-declaration or false declaration or any increase in amounts of tax refund, exemption or reduction, except the acts prescribed in Article 16 herein;

c) Failing to issue invoices for sale of goods or provision of services, except the cases where the taxpayer has recorded taxes on sold goods or supplied services in the corresponding tax term; issuing invoices for sale of goods or provision of services in which the invoiced items and amounts based on which tax declaration is made are less than those that actually exist if this act is discovered after the deadline for submission of tax returns;

d) Using illegal invoices; illegally using invoices for declaring taxes with the intention of reducing taxes payable or increasing amounts of tax refund, exemption or reduction;

dd) Using illegal evidencing documents; illegally using evidencing documents; using evidencing documents or records that do not correctly reflect the nature of transactions or actual values of these transactions for the purpose of falsely determining taxes payable, amounts of tax exemption, reduction or refund; preparing documents or records on destruction of supplies or goods which are not real, resulting in any reduction in taxes payable or any increase in amounts of tax refund, exemption or reduction;

e) Using goods not subject to taxes, or those qualified for tax exemption or consideration of tax exemption, to frustrate the prescribed purposes without informing tax authorities about the conversion of these purposes or registering tax declarations with tax authorities;

g) The violating taxpayer performs business activities during the period of business closure or temporary suspension without informing tax authorities, except the cases prescribed in point b of clause 4 of Article 10 herein.

2. The fine which is 1.5 times as much as the amount of evaded tax shall be imposed on any taxpayer committing one of the violations prescribed in clause 1 of this Article under neither aggravating nor mitigating circumstances.

3. The fine which is 2 times as much as the amount of evaded tax shall be imposed on any taxpayer committing one of the violations prescribed in clause 1 of this Article under an aggravating circumstance.

4. The fine which is 2.5 times as much as the amount of evaded tax shall be imposed on any taxpayer committing one of the violations prescribed in clause 1 of this Article under two aggravating circumstances.

5. The fine which is 3 times as much as the amount of evaded tax shall be imposed on any taxpayer committing one of the violations prescribed in clause 1 of this Article under at least three aggravating circumstances.”

As such, for 07 groups of violations of tax obligations listed in Clause 1, Article 17 of the Decree 125/2020/ND-CP, depending on the severity of the violation, an individual may be subject to a fine from 1-3 times the amount of tax evasion.

Compared with the previous Circular 166/2013/TT-BTC on Penalties for Administrative Violations Pertaining to Taxation, Decree 125/2020/ND-CP has some important amendments related to individuals facing penalties and fine levels. Accordingly, Decree 125/2020/ND-CP still maintains the regulation on fines for tax evasion is 1-3 times the amount of tax evasion, which is similar to Circular 166/2013/TT-BTC. However, Decree 125/2020/ND-CP no longer divides the fines separately for each group of subjects. Specifically, the fine level set by the Decree is generally applicable to both individuals and organizations. This is a new point compared to Circular 166/2013/TT-BTC, as this Circular stipulates that the fines incurred by organizations are as twice as the fines incurred by households and individuals (according to Point c, Clause 2, Article 6).

As such, compared with the previous regulation, the current regulation has doubled the sanction level for individuals who violate personal income tax obligation. This new regulation is aimed at preventing personal income tax evasion, which has been increasing rapidly in recent years and ensuring State budget revenues and efficiency in tax management of the competent authority.