Tax Risk Management: Business Classification Under New Vietnam Regulations

Key takeaways

• Every business in Vietnam is automatically classified into 5 tax risk levels from “very low” to “very high”
• Classification is based on 97 detailed criteria covering compliance history, operational stability, and financial indicators
• Companies ranked as “high risk” become priority targets for tax audits and inspections
• Tax risk management is a strategic requirement to ensure uninterrupted business operations

Tax risk is the likelihood of non-compliance with tax laws, leading to potential revenue loss for the state budget. According to Circular 31/2021/TT-BTC, risk level is determined based on the combination of frequency and consequences of risk. A business subject to tax risk is a business that Vietnamese tax authorities, through data analysis, identify as having unusual signs or high potential for violations.

Vietnam’s risk level classifications

Vietnam’s tax authorities have established a comprehensive and scientific risk classification system that encourages businesses to voluntarily comply better with regulations.

According to Circular 31/2021/TT-BTC, taxpaying businesses are classified into 5 overall risk levels:

Level 1: Very Low Risk – For businesses with excellent compliance history and transparent operations. These organizations enjoy minimal oversight and priority processing for tax procedures.

Level 2: Low Risk – Applied to businesses with good compliance levels with minor areas for improvement. Audit frequency is reduced compared to average levels.

Level 3: Medium Risk – For businesses with some compliance issues that aren’t yet serious. Standard level of oversight and inspection applies.

Level 4: High Risk – Applied to businesses with many unusual signs or concerning violation history. These organizations face strict oversight and high audit frequency.

Level 5: Very High Risk – For businesses with serious violation risks or intentional tax evasion behaviors. This group faces the strictest controls.

For taxpayers classified as very high risk and high risk, tax authorities will apply strict management measures according to Article 22 of the Circular. This means these businesses become priority targets for inspections and audits, facing much closer oversight.

This classification is performed automatically through information technology systems, ensuring objectivity and transparency. Classification results are updated periodically based on actual business compliance behavior. To maintain low risk levels, businesses need effective employee record management methods and standardized payroll processes to ensure legal compliance.

Key criteria for risk assessment and classification

Vietnam’s risk assessment system is based on two main foundations: tax law compliance assessment results and 97 detailed criteria specified in Appendix II of Circular 31/2021/TT-BTC.

Tax law compliance assessment results

This is the foundational factor, based on the business’s history of complying with tax law regulations over the past two years. Tax authorities classify compliance levels into 4 categories: high compliance, medium compliance, low compliance, and non-compliance.

High compliance demonstrates that the business is operating stably, fully performing tax filing and payment on time, properly following invoice management regulations, and having no administrative violations regarding taxes. Conversely, non-compliance applies to businesses with tax shortfall behaviors, tax evasion, illegal invoice use, or non-compliance with inspection and audit decisions.

Detailed assessment criteria

Tax authorities analyze 97 detailed criteria grouped into important areas:

General business information

• Establishment and operation time
• Registered business address and business type
• Business sectors
• Appropriateness between staff numbers and business scale and nature

Tax filing and payment status

• Ratio of submitted tax files to required submissions
• Ratio of on-time submissions
• Adjustments and supplements to filing indicators

Financial indicators

• Revenue, cost, and profit fluctuations
• Assets and payment capability
• Key financial items like accounts payable, advance payments from customers

Violation history and tax debt

• Number of administrative tax violations
• Fine amounts and tax debt by age
• Invoice usage and suspicious related-party transactions

Newly established businesses, those frequently changing addresses, having unusual financial fluctuations, or violation history will receive higher risk scores. To avoid common payroll process errors and ensure salary and bonus compliance, businesses need strict management systems.

How risk classification directly affects tax inspections

Risk classification isn’t just an academic exercise but has a real, direct impact on daily business operations in Vietnam.

Priority selection for inspection targets

Businesses assessed as high risk will be on the priority list for tax audits and inspections by Vietnamese authorities. The probability of inspection for these businesses is significantly higher than those with low risk levels. Tax authorities allocate limited resources efficiently by focusing on targets with the highest violation potential.

Conversely, low-risk businesses benefit from reduced inspection frequency or even exemption from certain routine inspections. This helps businesses save time and costs, creating a stable business environment without unnecessary disruptions. An effective legal compliance system plays a crucial role in maintaining low risk levels.

Enhanced inspection efficiency

Risk classification helps Vietnamese tax authorities accurately identify businesses with unusual signs for focused inspections, rather than spreading resources ineffectively. When businesses with high violation risks are identified, tax authorities can better prepare for inspections, focusing on specific issues with higher violation detection potential.

Technology application for automation

Modern risk management systems integrated with advanced information technology can automatically analyze, score, and list high-risk businesses quickly and objectively. Using machine learning algorithms and automatic scoring methods helps eliminate subjective factors and ensures consistency in assessment.

Flexible inspection measures

For low-risk businesses, Vietnamese tax authorities can apply remote monitoring measures, minimizing direct interference with business operations. Conversely, for tax refund applications from high-risk businesses, authorities will conduct thorough inspections before deciding on refunds. Understanding the compliance overview helps businesses better prepare for inspection requirements.

Continuous monitoring and adjustment

Risk classification isn’t a fixed decision but is updated and assessed periodically based on actual business behavior. If a business improves its compliance level, it can be adjusted to a lower risk level and benefit from reduced oversight. Conversely, businesses with declining compliance behavior will be elevated to higher risk levels and face stricter controls. Selecting appropriate compliance service providers can help businesses sustainably maintain and improve compliance levels.

Vietnam’s tax risk classification system isn’t just a management tool for tax authorities but also a strategic “compass” for every business. Understanding and proactively managing your organization’s tax risk management position not only helps avoid legal and financial risks but also creates competitive advantages through reduced compliance costs and building credibility with regulatory authorities.

To avoid being classified as high risk, businesses need a solid internal governance system. Professional HR and compliance services play a crucial role, helping businesses build transparent systems and maintain good compliance with labor, salary, and tax procedure regulations. Particularly, having professional compliance consulting services helps businesses not only protect against legal and financial risks but also directly improve tax risk profiles, reduce oversight, and build foundations for sustainable development.