Exploring CHANGE’s Tax Evasion Charges-Part 6: The Legal Risks in Non-profit Corporate Income Tax

Exploring CHANGE’s Tax Evasion Charges-Part 6: The Legal Risks in Non-profit Corporate Income Tax

Thuy Tung wrote this article in Vietnamese, which was published in Luat Khoa Magazine on October 3, 2023. Lee Nguyen translated the article into English.

The verdict against Hoang Thi Minh Hong revealed that the Vietnamese government applied a method of direct taxation to calculate the Value-Added Tax (VAT) she owed the state. This was also applied to determine CHANGE's corporate income tax (CIT). [1][2]

The investigation accused Hong of ordering CHANGE employees to neglect several accounting and tax affairs, specifically:

  • Failure to comply with accounting standards and invoice issuance according to legal tax regulations
  • Failure to prepare financial reports
  • Failure to declare VAT
  • Failure to declare and file CIT settlement with the tax authorities
  • Failure to identify expenses and income of the business to evade taxes

As a result, they concluded that CHANGE owes the government nearly 3.4 billion dong in VAT and about 3.4 billion dong in CIT on a total revenue of almost 68 billion dong from cooperation agreements, service contracts, and personal sponsorships.

It is unfair and unreasonable for CHANGE to be considered a non-commercial legal entity with no profit-seeking objectives and for the Vietnamese government to consider it a business. The state charged CHANGE with tax evasion for taxes that - ethically and legally - should have been refunded to the organization or their sponsors.

The state also charged CHANGE with CIT evasion for profits that did not generate income because all of the sponsorship money was spent on environmental protection, wildlife conservation, climate change mitigation, and promoting sustainable energy transition.

Overall, the situation surrounding Hoang Thi Minh Hong and CHANGE highlights several tax-related risks non-profit organizations face in Vietnam.

Methods of Calculating the CIT and the Potential Risks for Non-profit Organizations in Vietnam

The mechanism for calculating CIT for non-profit organizations primarily relies on the two VAT taxation methods discussed in Part 5: direct taxation and deduction.

Regardless of the chosen method, tax procedures for non-profit organizations must be linked to tax or financial reports submitted to the state. Even if an organization does not have service contracts and only has cooperation agreements with sponsors, it must adhere to one of the three existing accounting regimes, even if it does not generate profit.

With the direct method, the Vietnamese state imposes a one-time tax of 10% on the value of sponsorship-type service contracts, comprising 5% VAT and 5% CIT. This method only applies to organizations with annual revenue below one billion dong.

Under the direct method, organizations only need to gather sufficient documentation, papers, and receipts to prove they have spent the funds under the sponsors' commitment. If profit is generated from this type of contract, it will not be subject to CIT.

If the revenue comes from sponsorship agreements, organizations must follow the project approval, aid confirmation, tax declaration, and tax exemption procedures, as discussed in Part 5. Otherwise, the risks will be similar to those discussed later in this section.

The deduction method is much more complex. This method applies to organizations with annual revenue exceeding 1 billion dong.

Organizations need to collect sufficient valid documentation and invoices to have a proper basis for reporting VAT and calculating CIT. This means that every dong spent by organizations must be accompanied by VAT or directly issued invoices, as the Ministry of Finance prescribes. Otherwise, they must pay personal income tax (PIT) to the state.

Direct expenses for the locals in the community or money spent for transportation and meals when participating in activities away from home are not subject to PIT deduction. Some other goods the locals purchase at the project site may not require invoices. As a result, these expenses can be considered unreasonable and absurd for scientific and technological service contracts. Consequently, these expenses incur a 20% corporate income tax liability, which falls upon the sponsor or the non-profit organizations themselves.

Naturally, if profit is generated at the end of a scientific and technological service contract, non-profit organizations must pay a 20% CIT on the profit generated from these agreements.

However, this practice is a gray area for cooperation agreement-based sponsored projects. If tax authorities understand the non-profit nature of certain projects, they will let these projects pass. Consequently, these expenses are considered reasonable and valid, and no CIT will be imposed on them.

If the tax authorities do not understand the nature of these projects, none of these above-mentioned expenses will be considered as costs. Therefore, non-profit organizations may have to pay CIT for them.

This is considered the first risk for organizations registered under the deduction method. The level of this risk can be minor or significant depending on the scale of sponsorship agreements and the operational history of each organization.

What are other potential risks?

This cannot be definitely answered because the law itself is not clear.

The law stipulates that non-profit organizations can receive sponsorships to implement educational, scientific research, cultural, artistic, charitable, humanitarian, and other social activities in Vietnam.

The organizations receiving sponsorship for these activities must be established, operate under Vietnamese law, and comply with accounting and statistical regulations. [3][4]

Simultaneously, the law stipulates that non-profit organizations must be transparent in managing foreign aid, using it efficiently, and ensuring it is used for its intended purposes while adhering to the commitments made to sponsors. These funds can be used for the following purposes:

  • Spending on regular operations;
  • Spending on research, education, and training activities;
  • Spending on procurement and construction of the organization's working facilities and
  • Other expenses of the organization

In cases where organizations use foreign aid for purposes other than what is intended, the recipient organizations must calculate and pay CIT on the portion of the misused funds in the tax assessment period when the misuse occurred.

This raises a few questions:

  • Which authority or organization has the jurisdiction to conclude whether the funds were used for their intended purposes: the state or the sponsors? 
  • Can aid that was not approved or lacked the authorities’ determination on its not-for-profit character be deemed that it is used for unintended purposes?

If the answer to the first question is that responsibility falls under the sponsors' jurisdiction, then funds used for unintended purposes will be reimbursed to the sponsors. This process is known as rejected expenditures. In this scenario, the heads of the organizations have to refund sponsors using their own money since all the project funds have been spent.

If the answer to the first question is that it falls under the state's jurisdiction and the answer to the second question is "yes," then non-profit organizations may get into trouble because the money spent can be viewed as funding for a business or part of its income.

In this case, the state will impose a 20% CIT rate on each sponsorship agreement between non-profit organizations and embassies, the United Nations, or foreign non-governmental organizations. [5]

This is also one of the reasons why non-profit organizations and sponsors choose to transform aid into "services" and enter into service supply contracts in Vietnam. This approach increases the administrative burden for tax-related tasks but reduces the administrative load for project approval and sponsorship confirmation. Consequently, it minimizes financial and potential legal risks for non-profit organizations.


1. Investigation conclusion No. 554-25 dated August 24, 2023, of The Police Investigation Agency under the Ho Chi Minh City Public Security Department.

2. Indictment No. 467/CT-VKS-P3 dated Aug. 30, 2023, of the Ho Chi Minh City People's Procuracy.

3. Circular No. 109/2007/TT-BTC of the Vietnam Ministry of Finance.

4. Clause 7, Article 8, Circular No. 78/2014/TT-BTC of the Ministry of Finance.

5. Article 10 of Decree No. 218/2013/ND-CP dated Dec. 26, 2013 of the government.

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