“Reasonable” vs. “Valid” Expenses: The Thin Line That Determines Tax Disallowance

In tax finalization practice, many businesses encounter a situation often described as “spending correctly, yet still being wrong.” Expenses that clearly serve business operations—even those that directly generate revenue—can still be disallowed by tax authorities. The root cause typically does not lie in the nature of the expense itself, but rather in the company’s failure to properly distinguish between “reasonable” and “valid.” Although these two concepts may appear similar, they carry entirely different meanings in tax management. Misunderstanding this boundary can not only result in disallowed expenses but also lead to tax reassessments and related penalties.

The Nature of “Reasonable” Expenses: Correct in Business, Not Necessarily in Tax

From a business operations perspective, an expense is considered reasonable when it supports production and business activities. This may include marketing costs aimed at increasing sales, training expenses to enhance employee capabilities, or hospitality expenses to maintain partner relationships. These types of costs share a common characteristic: they are grounded in clear economic logic and create value for the business.

However, it is important to emphasize that tax authorities do not evaluate expenses based on business logic, but rather on legal frameworks. Therefore, even if an expense is entirely reasonable in terms of operations, it may still be rejected if it does not meet the required legal conditions.

In other words, being “reasonable” is a foundational condition—but it is not sufficient for tax deductibility.

“Valid” Expenses – The Factor in Tax Finalization

Unlike “reasonable,” the concept of “valid” is directly tied to compliance with specific tax regulations. An expense is considered valid when a business can fully demonstrate its legality through a complete system of documentation and supporting evidence.

In principle, an expense is deductible for corporate income tax purposes only when all of the following conditions are satisfied:

• The expense is related to the company’s production and business activities

• It is supported by lawful invoices and documents in accordance with regulations

• For expenses of significant value (from VND 20 million or more), payment must be made via bank transfer

• It does not fall under categories of non-deductible or restricted expenses as prescribed by law

However, in actual tax audits, “validity” goes beyond merely having invoices. Tax authorities increasingly focus on the substance of transactions, requiring businesses to prove that transactions genuinely occurred and directly served business operations. This means that invoices are only one part of the story—not the whole story.

The Thin Line: When Expenses Are Reasonable but Not Valid

This is the most common scenario and the primary cause of expense disallowance.

A business may incur real and effective marketing expenses that clearly contribute to revenue. However, if there is no signed contract, no valid invoice, or insufficient supporting documentation, the entire expense may still be disallowed during tax finalization.

Similarly, hospitality expenses—even when incurred for business purposes—can easily be classified as personal expenses if there is no clear evidence identifying the guests, the purpose of the meeting, or its connection to business activities.

Even when a company possesses full invoices and payment documents, risks still exist if the supplier is considered a “high-risk” entity or lacks actual business operations. In such cases, not only may the expense be disallowed, but the company may also face risks related to invalid invoices.

These examples highlight a crucial reality:
“Doing it right” is never enough if you cannot “prove it right.”

The Opposite Case: Valid but Not Reasonable

Conversely, there are cases where expenses are fully supported by documentation but are still disallowed because they fail to meet the “reasonableness” criterion.

For example, a company may purchase a high-value asset with complete legal invoices and documentation. However, if that asset does not serve business operations or is disproportionate to the company’s scale, tax authorities may reject the expense or deny depreciation.

This demonstrates that legal validity cannot replace economic substance.

Why Do Businesses Commonly Confuse These Two Concepts?

From a practical standpoint, there are three main reasons:

First, the difference between accounting and taxation.
Accounting records expenses based on their economic substance, while tax authorities evaluate them based on legal compliance. These two systems overlap but are not identical.

Second, the lack of internal control systems.
Many businesses fail to establish proper cost control procedures from the outset, resulting in incomplete documentation when explanations are required.

Third, subjective attitudes.
Some businesses accept “low-risk” expenses under the assumption that tax authorities will not review them. However, during audits, small errors can accumulate into significant risks.

The Right Approach: Managing Costs from a Tax Perspective

To minimize the risk of expense disallowance, businesses need to shift their approach from merely “recording expenses” to “managing expenses from a tax perspective.”

First, for every expense incurred, businesses should ask:
“Do we have sufficient documentation to prove both its reasonableness and validity?”

Second, companies should build a comprehensive documentation system, including not only invoices but also contracts, payment records, and supporting materials related to the execution of transactions.

Finally, control should be implemented at the time the expense arises—not delayed until tax finalization. Once documentation is incomplete from the beginning, later supplementation often holds little legal value.

Conclusion

The boundary between “reasonable” and “valid” expenses is extremely thin, yet the consequences of crossing it are significant. An expense is truly safe only when it satisfies both criteria: it is justified in terms of business substance and compliant with legal regulations.

If either condition is missing, businesses risk not only losing the right to deduct expenses but also facing tax reassessment and penalties.

In a context where tax authorities are increasingly tightening control, properly understanding and managing these two concepts is no longer optional—it is essential for sustainable business development.

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