The Inadequate Vietnamese Tax Incentive System
The Vietnamese tax system still leaves much to be desired. It's not very effective in preventing tax dodging by companies and its incentives are very generous at the expense of the state budget.
That is the assessment Oxfam made recently at an event titled “Tax equality: a view from the operation of multinational companies and banks.” This event aimed to introduce the three latest reports produced by Oxfam on the use of tax havens by Europe’s biggest banks, the “rigged” tax reform proposed by the new US administration, and the global race to offer the lowest corporate tax, respectively, and assess Vietnam’s tax incentive policies.
Corporate tax avoidance schemes have been costing developing countries like Vietnam $100 billion annually, Oxfam's research states.
According to Francis Weyzig, policy advisor on tax justice and economic inequality at Oxfam Novib, Decree No.20/2017/ND-CP, which was recently issued by the government and regulates tax administration with respect to enterprises having transactions with related parties, actually makes the Vietnamese tax system more advanced than those of the OECD. To make it more affective Vietnam should however consider making the mandatory country-by-country reporting public.
“The European Union’s public reporting requirements have shown benefits. If data is available publicly, it allows investors and the public to assess a company’s tax behaviour. It stimulates less aggressive tax behaviour. It enables monitoring of profit shifting developments, provides information about tax incentives, and helps to hold governments accountable,” he said.
In Vietnam, tax incentives take the form of reduced tax rates, tax holidays, investment allowances, tax credit, partial or full exemption from import tax or indirect taxes, accelerated depreciation, and incentives provided in economic zones and export processing zones. These tax incentives are both generous, seeing as the corporate income tax is now lower than the regional average and the country provides more incentives than Thailand, Malaysia or Indonesia, and scattered among sectors, areas, and situations, with 30 encouraged sectors, 27 specially encouraged sectors, 53 out of 63 provinces, and over 300 economic, high-tech, and export processing zones as well as tax rulings. Regulations regarding tax are also scattered in different legal documents issued by multiple ministries. This, according to Oxfam, creates loopholes for tax avoidance.
Many tax incentives are also ineffective. Tax holidays for example encourage companies to change their investment strategy once it ends in order to qualify for a new tax holiday.
In order to overhaul the tax incentive system Vietnam needs to establish a mechanism to collect information on tax incentives, which includes the number of qualifying projects, the economic contribution of these projects, and the budget loss from tax incentives, and then make this information public. Also, before and after implementing tax incentives, a cost-benefit anaysis should be made. In order to avoid redundancy and loopholes the government should gather and review all incentive policies and limit the use of tax holidays and reduced tax rates which have the highest cost in terms of budgetary revenue.