– Pursuant to Article 4 of Circular No. 96/2015/TT-BTC dated June 22, 2015 of the Ministry of Finance amending and supplementing Article 6 of Circular No. 78/2014/TT-BTC (amended and supplemented in Clause 2, Article 6 of Circular No. 119/2014/TT-BTC and Article 1 of Circular No. 15/2014/TT-BTC) as follows:
“Article 6. Deductible and non-deductible expenses when calculating taxable income
1. Except for the non-deductible expenses prescribed in Clause 2 of this Article, every expense is deductible if all of these following conditions are satisfied:
…2. The expenses below are not deductible when calculating taxable income:
…2.19. Provisions made and used against instructions of the Ministry of Finance on making provisions: … provision for bad debts,… “
– Pursuant to Circular No. 48/2019/TT-BTC dated August 8, 2019 of the Ministry of Finance guiding the making and settling of provisions at enterprises, Clause 1, Article 1 stipulates:
“1. This Circular provides guidance on making and using of provisions for…, losses of bad debts…, of which the result is used to determine the deductible expenses when calculating the enterprise income tax in accordance with law.”
Clause 3, Article 2 stipulates: “3. “Provision for bad debts” means the provision for the loss on overdue debts and undue receivables which are likely to become overdue.”
Clause 1, Article 3 stipulates: “1. Provisions prescribed in this Circular are deductible expenses when determine the taxable incomes of an enterprise in its annual financial statement and constitute a financial source for enterprises to offset possible losses in the plan year so as to preserve their business capital; …”
Clause 1 and Clause 2, Article 6 stipulate:
“1. Provisions shall be made for receivables (…) which are overdue or not past due but hardly recoverable and:
a) The unpaid debts are supported by original documents, including:
– One of the following original documents: economic contracts, loan agreements, promissory notes;
Record of contract liquidation (if any);
– Records of debt reconciliation or requests for debt reconciliation or payment reminders (with confirmation of postal units) in case there is no record of debt reconciliation.
– Lists of liabilities;
– Other related documents (if any).
b) There are sufficient grounds to be recognized as bad debt:
– A receivable has been overdue more than 6 months (calculated according to the original repayment date on the economic contract, loan agreements, promissory notes, regardless of the extended date agreed by both parties) but the enterprise is unable to recover such receivable through sending the record of debt reconciliation or payment reminder.
– A receivable is not past due but the enterprise has evidence that the debtor of such receivable is unable to repay on time as prescribed in point c, clause 2 of this Article.
2. The levels of provision:
…c) As for undue receivables, if the enterprise has evidence that the debtor of such receivables is unable to repay on time since the debtor is bankrupt, filing for bankruptcy or has absconded; or being prosecuted, detained or tried by law enforcement bodies or serving a sentence; or suffering from a serious illness (certified by the hospital); deceased ; or those remains irrecoverable after the enterprise filing a lawsuit due to its debtor had fled from his/her residence, the enterprise shall estimate the irrecoverable amount of such debts (the maximum amount shall not exceed the book value) to make provisions.
3. When making the annual financial statement, if receivables are recognized as bad debts, enterprises shall make provisions for them in accordance with regulations prescribed in clause 2 of this Article and the following regulations:
…4. Handling irrecoverable receivables:… ”
Based on the above regulations, the general principles when calculating corporate income tax expenses for bad debts are as follows:
To be included in deductible expenses when calculating income subject to corporate income tax, the enterprise’s expenses must meet the conditions specified in Article 4 of Circular No. 96/2015/TT-BTC dated June 22, 2015 of the Ministry of Finance mentioned above.
In case an enterprise has a receivable that is determined to be overdue or not past due, but the enterprise has collected evidence to determine that the debtor is bankrupt and has opened bankruptcy procedures… and the enterprise is unable to collect debt on time, the enterprise can make a provision for loss of “bad debt” for the above debt. And accordingly, to be included in deductible expenses when calculating income subject to corporate income tax in the annual reporting period, this provision for loss of “bad debt” must simultaneously ensure the conditions specified in Clause 1, Article 6 of Circular No. 48/2019/TT-BTC of the Ministry of Finance mentioned above.
In case an irrecoverable receivable has been included by the enterprise in deductible expenses when calculating income subject to corporate income tax, the enterprise must monitor it in the enterprise’s management system and present it in the financial statements for a minimum period of 10 years from the date of inclusion and continue to take measures to recover debt. If the debt is recovered, the recovered amount, after deducting costs related to debt recovery, will be accounted for by the enterprise as income and declared for tax payment in accordance with regulations.
The provision for loss of “bad debt” is carried out according to the instructions in Article 6 of Circular No. 48/2019/TT-BTC dated August 8, 2019 of the Ministry of Finance guiding the making and settling of provisions.