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Navigating Legal and Tax Challenges in Southeast Asia

We interviewed the founders of a group of retail companies that started in 1999 and now operate in three countries across Southeast Asia. We asked them what their greatest legal and tax challenges have been and how they have overcome them.

One of our first and biggest challenges was figuring out how to set up and operate our businesses in Vietnam. Although the law has changed since we first started out, at the time it wasn’t possible for a retail business to be owned by a foreigner. We had a production company there which we fully owned, but for the retail side we had to be creative. We followed a well-used route at the time that involved setting up an agreement with a trusted Vietnamese partner to establish the company, with written contracts to back it up. Although this route was legal, it wasn’t clear cut and wasn’t always easy to know how to navigate the situation.

Each time we have registered a new company in one of the countries we’ve hired a local law firm or business consulting firm to help us go through the business registration process. This has been essential because where we operate, this is not something you want to do on your own. We use a lawyer and we check with consultants locally about the process. We got our Vietnam registration completed in six months, whereas others have taken years. Getting that expert input is essential – if you don’t have everything right, it can really come back to bite you.

In Vietnam it is difficult to process anything without paying extra ‘fees’. We don’t pay bribes (i.e. offering money to receive a service we are not entitled to), but we do occasionally get extorted for money (i.e. being forced to pay extra for a service we are entitled to). Although we do try and resist being extorted, it does happen from time to time.

One common situation is that government departments will come round, especially before major holidays, and they will want the equivalent of US$20-30. The first year we were in Vietnam we refused to pay those little extra fees, until the government department that controlled business licenses made our lives miserable and in the end threatened to put us out of business the next day. The issue had gone right up to the head official over all of the districts and our refusal to pay was having a ripple effect through the area! It was a painful and costly situation and even a personal friend in one of the Western embassies advised us to pay it and not try to fight it.

Vietnam does actually have a policy in its tax laws on how much you can add as a ‘gift’ per transaction – about US$20 – so these gifts are fully accepted in the system. It’s a bit like giving tips in a good restaurant in the USA, legally you don’t have to tip, but you will deeply offend if you don’t and it will have an unpleasant result. This is essentially the situation we were in in Vietnam, we were not doing what was expected as part of the system. 

When we are being extorted, we will always resist and try not to pay a fee. Sometimes we fight it to the bitter end, but will pay if we really can’t find way forward. We do have a policy on corruption that helps us keep things clear with our staff. Our policy outlines the difference between offering bribes and being extorted for ‘unofficial fees’, and shares our values about why it’s important not to pay bribes. It ensures that no staff ever deals with a situation on their own, and that everything is recorded clearly. The policy gives a step by step process for our staff when dealing with unofficial fees, which includes first attempting to avoid paying the fee, pushing back by asking for a written receipt, being prepared to wait more time for the service if possible, and so on – before giving parameters if the fee really does have to be paid. We never ask any of our staff to do anything they are uncomfortable with and we let them know we will support them completely.

In the early days, if we felt at risk, we would hire a consultant to get some processes done and we’d pay them a flat fee. We might pay 800 to get a work permit done instead of the 500 it should cost, but they provided a service, it was clear in our accounts and we didn’t need to know how they got it done! We did that for the first couple of years and it was helpful for us to avoid dealing with extortion while we were going through other business startup challenges.

After a while we understood the business environment better, we got more experience and we learned how to tackle things ourselves. We understood more about what is acceptable in the business culture and so did our staff. These days we only have a handful of more significant corruption situations per year. Things have changed a lot since we started. Company registration and other legal requirements are now much more clear, and there are guidelines for how long processes should take.

Two of the countries we work in now have very clear tax laws, and one other is starting to get clearer recently. It means that for most of our branches, taxes can be declared cleanly and above board. There is now a clear system for reporting everything and for every question we might have, there is a rule or law about it. However, companies are still expected to pay an additional ‘fee’ as if they are doing it all under the table. This is just expected behaviour because the majority of businesses are hiding something in their accounts for tax benefit. Government officials in the tax department routinely take advantage of this to skim off money. They’ll ask a large company to give them US$10,000 or more to close their taxes, but that company knows they are saving a lot more in tax avoidance. The gift asked for will be in relation to size of the company, whether its hundreds of dollars, thousands or tens of thousands.

Officials are crafty and at times will pressure or threaten you with things they know will spark fear. One official told us we were liable for US$200,000 in fines on a particular tax ruling if he reported it to the big boss. However, he offered to charge just a portion of the amount to look the other way and close the past accounts. We knew were weren’t in the wrong and consulted with a few tax firms. We realized this tax official wasn’t coming with authority from the tax office and that it was unofficial interference – we guess he was hoping to buy a new car should we have caved in! We fought for nearly a year to clear things the official way, which ended with almost no cost to us.

We do everything above board and declare what we should declare, but we are still expected to give a financial gift to the tax officials. Sometimes we get a receipt for this, sometimes not! We will routinely question what we are asked to pay, especially when it comes to government fees and taxes. We will research and ask other company owners about what is acceptable and what is normal, and we benchmark from there. We use tax advisors to direct us about our company taxes and we work with them and our CFOs to negotiate down to a fee which seems somewhat reasonable. All senior managers in our company are aware of any transactions made.

Every company in Asia has to deal with these challenges, and although it can be difficult we have also found it is a chance to unite our team together and align them with our company values. It also enables our staff see Godly business principles lived out in practice.

We have had tricky situations that have helped us weed out those who haven’t bought into our values. In one instance we were importing a large piece of equipment into a country and the shipping company suggested that we declare half its value and thus only pay half the import tax. This is a normal part of their service, they were just trying to help their client! We asked our Country Manager, Office Manager and Chief Accountant at the time how we should handle it. Since they knew our company values, the Office Manager and Accountant said to declare and pay the full amount, but the Country Manager said we should pay half the tax. After this and a few other issues, we realised this manager wasn’t a good fit for the company. For the other two staff, the situation brought a lot of buy in and loyalty to our company. They were reassured by working for a company with integrity and expressed to us that they hated working in situations that involved bribery and corruption. These two staff ended up fighting on our side on some internal issues and worked hard for our company. We feel this is one reason that we have relatively low senior management turnover, because our staff see that we stick to our word, even when dealing with grey areas. Most of them have worked for other companies where they didn’t like participating in deceitful measures.

One thing we have learned is to go into a country as learners. We can have our moral high ground and the principles that we want to stand by, but it’s important to really listen to people in that country. Don’t come in as foreigner who ‘knows it all’. For us, it has been important to evaluate our own worldview. Something like tipping at a high-end restaurant doesn’t seem wrong to us at all, it’s just normal. It is equally normal for people here to expect small financial gifts for services, but to us it looks like corruption. We have had to really think these things through and take into account the cultural context when designing policy.

In the end you have got to get to the point where you can sleep peacefully at night! We often ask ourselves, Does this feel right? What are we comfortable with? We have policies that guide us, and we research the cultural norms of the system, but so much of what we decide comes down to our ‘gut feeling’ and our experience.

With thanks to the business owners, talking to Jo Plummer for The BAM Review.

 Jo Plummer is the Co-Chair of the BAM Global Think Tank and co-editor the Lausanne Occasional Paper on Business as Mission. She has been developing resources for BAM since 2001 and currently serves as Editor of the Business as Mission website. 

Join us on The BAM Review Blog this month as we explore the topics ‘BAM in Hard Places’ and ‘Legal and Tax Issues’. Have your say on social media on this topic by following us on Twitter or Facebook.