Philip Morris tax case still clouded in uncertainty

Philip Morris Vietnam S.A recently filed a lawsuit to Ho Chi Minh City People’s Court, petitioning the court to overrule a decision issued five years ago by Ho Chi Minh Department of Taxation.

Under the decision, Philip Morris Vietnam S.A, a branch of Philip Morris International Inc., must pay a VND103 billion (US$4.76 million) tax debt, of which VND41.54 billion (US$1.9 million) covers penalty charges for late tax payment.

Back in 2010, soon after Philip Morris Vietnam S.A informed the taxation department of its closure due to the expiry of its business license, the department announced the firm’s debt obligation.

As part of enforcement efforts to collect the sum, the department froze Philip Morris Vietnam S.A’s bank account and deducted more than VND10 billion (US$458,715) from the account.

The sum, which the department considered as “taxable income”, originated from the mother company’s deletion of the interest on a loan previously given to Philip Morris Vietnam S.A. Since Philip Morris Vietnam S.A had already declared the interest as an expense in previous fiscal years, it reversed the sum by listing it in its dissolution report as “other revenue” in 2010.

In letters sent to the department, the firm argued that “the sum” was not taxable as it belonged to the mother company, according to Cao Van Ty, head of the department’s legal division.

Philip Morris Vietnam S.A cited Vietnam’s Commercial Law 2005, which states that branches are dependent units of the foreign trader, and as such the mother company should be held responsible for all activities of their Vietnam-based branches, thus implying that the sum should be ultimately owned by Philip Morris International. 

However, the tax agency pointed out that the tax obligation must be fulfilled by the innate local branch, pursuant to the Ministry of Finance’s Circular dated February 14, 2007 on implementation of the Law on Corporate Income Tax.

According to Vietnam's law firm BASICO, as Philip Morris Vietnam S.A was a Vietnam-based branch of Philip Morris International Inc. the case is quite complicated, especially given that legal documents relating to the concept “branch” overlapped and were inconsistent.

With the petition currently being processed by the court, the tax agency has expressed its weariness in regards to the overall case. On December 3, 2015, the General Department of Taxation allowed its Ho Chi Minh City subordinate to classify the debt sum as “non-performing debts”, implying the acknowledgement of how complicated this case is.