Experiences from developed countries show that tax incentives do not influence capital inflows into the economy, stated Nguyen Thu Huong, senior program manager – governance of Oxfam in Vietnam.
Overview of the conference. Source: Ngoc Thuy.
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Huong stressed that Vietnam's tax incentive policies are quite preferential compared to other countries in the region. Oxfam's report assessing Vietnam's tax incentive policies in 2017 pointed out that the coverage of the incentives is lengthy and scattered. Vietnam's tax holidays are longer and broader in scope than in other countries in the region.
Moreover, Vietnam also applies generous tax incentives for investment projects in economic zones and less developed regions. Consequently, tax incentives may potentially lead to transfer pricing, profit remittances, and erode the tax base.
Referring to the Global Competitiveness Report of the World Economic Forum, Huong pointed out that the three most important factors for investors are infrastructure, human resources and social stability.
Additionally, a World Bank report released on 2014 concluded that 85% of foreign invested companies said that tax incentives are unnecessary.
Huong stated that Vietnam should review all existing tax incentives to avoid overlapping and waste. The government should prevent tax incentives from becoming scattered and fragmented. Additionally, tax holidays - which accounts for the highest proportion of revenue forgone - need to be restricted.
PPP not a solution for fiscal expansion
Vietnam would need huge financial resources to achieve the sustainable development goals (SDGs), for which effective state budget management is key, said Marthew Martin, director of Development Finance International (DFI) at the conference.
"One of the key solution is to expand the fiscal space, which is the budgetary room that allows a government to provide resources for public purposes without undermining fiscal sustainability," Martin continued.
According to the International Monetary Fund, fiscal space exists if a government can raise spending or lower taxes without endangering market access and putting debt sustainability at risk.
Huong from Oxfam added that the issue is particular important for Vietnam, as the country is undertaking the restructuring process of public finance system.
"The aim of the process is to address arising challenges such as high public debt and a lack of state budget revenue for development goals," Huong stated.
Huong said that there are many solutions to expand the fiscal space. However, solutions such as tightening the fiscal policy or borrowing for development investment are out of question, especially in the context where the government is trying to control the inflation rate and the public debt is approaching the limit of 65% of GDP set by the National Assembly.
Among those solutions, Martin said that the public-private partnership (PPP) model should not be considered a solution for fiscal space expansion, which is based on OECD's experiences. Martin added that the model would cause high cost due to the involvement of private financial funding.
"They often ask for a high level of profit, which are normally three to four times more expensive than borrowing government bonds. PPP should only be used if you have a project that really needs private sector expertise," Martin concluded, adding that this case happens rarely.
Nguyen Quang Thuong, vice director of Center for Development and Integration, said it is vital for Vietnam to increase efficiency in state budget expenditures through transparency and monitoring.
Experiences from many countries showed that a good legislation system is crucial but not sufficient for effective state budget management. People contribute to the state's budget by paying taxes, fees, and natural resource revenues; and they are also final beneficiaries in many programs funded from the state budget.
Therefore, the state budget is spent more effectively with people's oversight. However, the state budget is still a challenging topic for public engagement in Vietnam, since budget management used to be viewed as the function of research institutions and policy makers, Thuong said.
Vu Sy Cuong from the Academy of Finance recommended enhancing efficiency in state budget allocation, which could be done through the close cooperation between government agencies in developing state budget planning for common development goals.
“Vietnam should focus on three measures, including the restructuring of state budget expenditures, increasing transparency and efficiency in state budget spending with people's oversight, and avoiding tax evasion and unnecessary tax incentives," Huong concluded.
