Consolidated Financial Statements: Navigating the Complexities

 3. Understanding the Scenario

The scenario can be summarized as follows: a foreign-invested corporation based in one province wishes to unify its financial statement with that of an independent branch in another province or city. This merger necessitates a shift in the accounting mode of the branch, transitioning from independent to dependent. Two fundamental questions arise:

• Is the corporation entitled to change its branch's accounting mode from independent to dependent?

  To address this, we need to examine the tax registration process for both the company and its subsidiary. A crucial element in this process is the accounting mode, as detailed in Tax Registration Declaration Form 01-DK-TCT and Form 02-DK-TCT under Circular No. 80/2012/TT-BTC. Changing the accounting mode entails altering the information provided during tax registration.

  Under Circular No. 80, Article 11.3 and Article 13, if a taxpayer needs to modify the information in their tax registration, they must inform the relevant tax management authority within five days of the change. The submission should include a Declaration Form for Modification of Tax Registration (Form 08-MST), a copy of the Business Registration Certificate, Investment Certificate, or Establishment License (if applicable), and a list from the initial tax registration declaration (if any). Although there is no explicit regulation granting the corporation the right to change the branch's accounting mode, the process is possible under this framework.

  Consequently, the branch should notify the Ho Chi Minh City Taxation Department, while the corporation must inform the Quang Ninh Taxation Department. The submission for this change should ideally include the corporation's decision regarding the shift in Ho Chi Minh City branch's accounting mode. This dossier must be submitted within five days after the change or on the date when the decision is made. Any outstanding tax obligations of the Ho Chi Minh City branch will be reconciled by the corporation at the end of the year with the Taxation Department of Ho Chi Minh City.

• What is the procedure applicable to this change?

  According to Circular No. 80, Article 11.3 and Article 13, the procedure for this transition is as straightforward as the notification process described above. However, practical application reveals a range of inconsistencies that have been officially and unofficially guided by tax authorities and officers.

  In the past, the Taxation Department of Binh Duong province provided guidance in Official Letter No. 56/CT-TT&HT dated November 7, 2011, stating that when a branch wishes to change from independent accounting mode to dependent, it must complete corporate income tax (CIT) finalization up to the time of change. This additional step introduces tax finalization into the process.

  This guidance was based on the legal ground of Ministry of Finance's Circular No. 60/2007/TT-BTC, but even though Circular No. 60 has been repealed, the essence of this regulation is still present in Circular No. 28/2011/TT-BTC. In contrast, the Taxation Department of Binh Duong province, in Official Letter No. 10776/CT-TT&HT dated October 19, 2012, offered different guidance for a branch transitioning from dependent accounting mode to independent. In this case, it required the branch to submit a dossier for registration of accounting mode to its local tax authority but did not demand tax finalization. These discrepancies in interpretation raise questions about the official requirements for such changes.

  Discussions with tax officers in various locations, including Ho Chi Minh City, Hanoi, and Quang Ninh province, revealed a lack of consensus. Some insisted that the branch must complete tax finalization, while others believed it was not necessary and that a simple notification to the Taxation Department of Ho Chi Minh City sufficed. A few suggested that the branch and its corporation should send official letters to the Taxation Departments of both Ho Chi Minh City and Quang Ninh province. Even within the same tax authority, two officers might hold different views on the matter.

  Similar discussions with experienced accountants who have dealt with these transitions confirmed that the branch was not required to perform tax finalization and that a notification of the change, often accompanied by the decision of its managing company, was sufficient. Any outstanding tax obligations of the branch would then be settled by the managing company following the notification to the local tax authority.

4. Analyzing the Legal Grounds

Considering the legal framework and practices described above, it becomes evident that the procedure detailed in Section 1 is a reasonable approach. It aligns with legal grounds, provides consistency with the experiences of accountants, and ensures a smoother transition.

In conclusion, this article aims to shed light on the possibility that tax authorities may require a branch undergoing an accounting mode change to complete tax finalization, and the uncertainty surrounding undisclosed internal regulations.

Frequently Asked Questions

• What is a consolidated financial statement?

•  A consolidated financial statement combines the financial data of a parent company and its subsidiaries, providing a comprehensive overview of the group's financial health.

• Why might a corporation want to change its branch's accounting mode?

• Corporations may seek to change the accounting mode to streamline financial reporting or to align with tax regulations more effectively.

• What documents are needed to change a branch's accounting mode?

• The process typically requires a Declaration Form for Modification of Tax Registration, relevant certificates, and a list from the initial tax registration declaration (if applicable).

• Is tax finalization always required when changing accounting modes?

• The necessity for tax finalization varies and can depend on specific interpretations by tax authorities.