Post-Tax Finalization: Risks from “Phantom Expenses” – A Wake-Up Call for CEOs from SMEs to Large Corporations

For many businesses, completing the tax finalization process is often regarded as a milestone marking the end of a financial year. However, from the perspective of auditors and tax advisors, this is actually the time when businesses need to review their entire financial management system to identify potential risks.

One of the most common issues arising after tax inspections, examinations, and finalization procedures is that certain expenses recorded by the business are not accepted by the tax authorities when determining taxable income. In practice, many CFOs and CEOs refer to these as “phantom expenses” – not because the underlying transactions did not occur, but because the business lacks sufficient evidence to demonstrate their legality, reasonableness, or relevance to its production and business activities.

What is particularly concerning is that this risk is not limited to small businesses. It also exists in many large corporations, where transaction volumes are high, processes are complex, and coordination among departments is not always fully synchronized.

What Are “Phantom Expenses” from a Management Perspective?

Vietnamese tax legislation does not officially define the term “phantom expenses.” However, from a management perspective, this term is commonly used to refer to expenses that:

• Actually arise in practice but do not meet the conditions for deductibility when calculating corporate income tax.
• Have supporting invoices and documents but cannot demonstrate a connection with production or business activities.
• Are recorded in the accounting system but do not satisfy requirements regarding documentation, contracts, or payment evidence.
• Are determined by tax authorities to be unreasonable, invalid, or unrelated to the company’s business activities.

In other words, an expense may be entirely legitimate from an accounting perspective but still be excluded from deductible expenses for tax finalization purposes. This represents the gap that many businesses overlook between financial accounting and tax risk management.

Why Do Businesses Still Incur “Phantom Expenses”?

Based on practical experience in auditing and tax advisory services, most expenses that are disallowed do not arise from fraudulent behavior but rather from a lack of synchronization in management.

1. Incomplete Supporting Documentation

A business may have an invoice but lack:

• An economic contract.
• An acceptance or completion certificate.
• Handover documentation.
• A service performance report.
• Documentation demonstrating the benefits received.

This situation is particularly common with consulting, marketing, training, management, or services provided by a parent company.

2. Failure to Demonstrate a Business Purpose

For an expense to be deductible, having a valid invoice is not enough; the business must also demonstrate that the expense serves revenue-generating activities.

For example:

• Hospitality expenses without a meeting schedule or information about the business partner.
• Advertising expenses without records documenting the implementation.
• Training expenses without a list of participating employees or training results.

Without these documents, the business may face difficulties when providing explanations to the tax authorities.

3. Transactions with Related Parties

Management fees, royalty fees, technical support fees, or intra-group services are always areas with a relatively high level of risk.

If the business cannot demonstrate that:

• The service was actually provided.
• The business actually benefited from the service.
• The cost is consistent with market prices.

the expense can easily be disallowed during a tax inspection.

4. Lack of Coordination Among Departments

Many businesses assign almost all responsibility for documentation to the accounting department.

Meanwhile, important supporting evidence may actually be held by:

• The procurement department.
• The sales department.
• The human resources department.
• The legal department.
• The project management team.

When documentation is scattered across departments and there is no standardized document-retention process, the business may spend significant time preparing explanations and may even be unable to supplement documents years later.

The Consequences Go Beyond Additional Tax Assessments

Many CEOs believe that having a few expenses disallowed simply means paying more tax. In reality, the impact can be much greater.

First, the business must pay additional corporate income tax because the expenses are not deductible.

Second, late-payment interest may arise on the amount of additional tax assessed, in accordance with applicable regulations.

Third, depending on the nature and severity of the violation, the business may be subject to administrative penalties for tax violations.

For businesses preparing for fundraising, listing, or M&A transactions, additional tax assessments can also directly affect the results of Financial Due Diligence, reduce enterprise value, or lead investors to request an adjustment to the purchase price.

More importantly, disallowed expenses often reveal weaknesses in the internal control system and document management practices – factors that investors and financial institutions pay particular attention to.

CEOs Need to Change Their Perspective on Expense Management

A common mistake is to view document management as the responsibility of the accounting department. In reality, demonstrating the reasonableness of an expense is the responsibility of the entire management system.

CEOs should build a management culture based on the principle that every expense must have a clear business rationale and supporting evidence. This means that businesses should not only retain invoices but also maintain the complete documentation relating to how the transaction was initiated, carried out, and what results were achieved.

This is the foundation for protecting the business when working with tax authorities, auditors, or investors.

What Should Businesses Do After a Tax Finalization?

Instead of waiting until the next tax inspection, businesses should proactively conduct a review immediately after each tax finalization period. Recommended measures include:

• Reviewing high-value or special-nature expenses.
• Checking the completeness of legal documentation and supporting evidence.
• Assessing transactions with related parties.
• Standardizing the retention process for electronic and paper documents.
• Establishing a mandatory document checklist for each type of transaction.
• Training non-accounting departments on tax documentation requirements.
• Conducting periodic reviews with support from an independent advisory firm to identify risks at an early stage.

Investing in document management from the outset is always significantly less costly than dealing with the consequences after a tax inspection or finalization.

From Expense Management to Enterprise Risk Management

As tax authorities increasingly strengthen the use of technology, integrate electronic invoice data, and apply risk-based management methods, the assessment of businesses is no longer limited to the validity of invoices but increasingly extends to the substance of transactions.

This requires businesses to shift from the mindset of “having enough documents to record an expense” to “having enough evidence to defend the expense.”

This is also a modern financial management trend that multinational corporations have adopted for many years and is gradually becoming an essential requirement for Vietnamese businesses.

Conclusion

After each tax finalization period, businesses should assess not only the amount of additional tax payable or the level of penalties imposed, but, more importantly, the root causes behind the expenses that were disallowed.

These “phantom expenses” are essentially warning signs of gaps in internal controls, document-retention procedures, and tax risk management. If not addressed promptly, these deficiencies may continue to recur and affect financial performance, corporate reputation, as well as future fundraising, M&A, or business expansion plans.

For CEOs, investing in expense management is not merely about meeting compliance requirements. It is also a strategic decision to build a transparent and sustainable financial foundation that is prepared for tax inspections, audits, and future opportunities to cooperate with investors.

Viet Australia
Viet Australia Auditing Company is an independent auditing organization licensed and established in 2007 in the Socialist Republic of Vietnam.