Nguyen Thu Huong, Senior Program Manager-Governance of Oxfam in Vietnam.
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This is a global issue. Unfairness in tax obligation is one of the reasons behind greater inequality around the world. That said, citizens and small enterprises are on the receiving end and bear the burden of paying taxes for large corporations.
For example in Eastern Europe, in 2017, the biggest 11 corporations accounted for 25% of the GDP but paid only 2% of corporate tax. In Latin America, more than half of the region's revenue came from taxing consumption in 2015, more than eight times than what was collected in direct taxes on properties that tend to be held by the wealthiest sectors of the population. It has been estimated that every year, Nigeria loses US$2.9 billion of potential revenue to questionable tax incentives, 13 times higher than the country's total health budget in 2015. In Vietnam, foreign invested enterprises (FIEs) accounted for 45.9% of the total profit generated by the economy, but pay the least amount of tax, according to the General Statistics Office.
In addition to preferential policies at the central and local levels, what factors impact tax payments by FIEs?
In Vietnam, we consider 3 factors influencing the tax amount paid by FIEs:
Firstly, Vietnam's tax incentive policies are quite high compared to 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. 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 eroding the tax base.
In recent years, several countries have gradually phased out tax incentives as the focus of the tax policy shifted to the achievement of tax equity and neutrality. In 2008, China has abolished most of the tax incentives for FIEs, such as tax holidays of 3-10 years and reduced corporate tax of 24, 15, and 10%.
Secondly, "Over-the-top" tax incentives offered by local authorities. The report also stated that over the past five years, large investment projects in Vietnam frequently sought very high tax incentives, which may also fall outside the scope of current legislation. In the case of Samsung's project in Thai Nguyen province, in accordance with Resolution No.63/NQ-H_ND dated December 12, 2014 of the provincial People's Council, in addition to the incentives stipulated in the CIT legislation, this project will also enjoy additional three years of 50% CIT reduction.
Thirdly, multi-national corporations are capable of evading tax through shifting profits to tax havens. Following a report by the General Department of Taxation, 720 out of 820 FIEs in Vietnam engaged in tax fraud in 2013, and these companies have been ordered to pay back nearly VND400 billion (US$19 million) in taxes and penalties.
In the coming time, what measures should be taken so that the tax amount paid by FIEs will be proportional to their profit?
Firstly, with regard to tax incentives, the National Assembly and the Government should review all existing tax incentives to avoid overlapping and waste. They 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.
The government should establish a data collection mechanism on tax incentives on the following: the number of projects subject to tax incentives and projects' contributions to the economy. Moreover, it is important to publish information regarding the annual revenue costs of tax incentives and tax expenditure for supervision. Several countries have also started to publish data on tax expenditure, such as Malaysia, India, the Philippines, and Pakistan. By doing this, the Government and the National Assembly will have updated information on tax expenditure, in turn setting up appropriate policies. Moreover, enterprises and the public will also participate in supervising tax incentives.
We are concerned that if the draft Law on Special Administrative-Economic Units is approved in May, it will create more tax incentives that carry negative impacts. Specifically, preferential policies proposed in the draft law are based on profit. Experiences from developed countries show that tax incentives based on profit do not influence capital inflows into the economy. That said, credible investors will decide to invest regardless of receiving preferential policies or not. Preferential policies, thus, are seen as "additional bonus" for investors and an amount of revenue forgone.
Expanding existing preferential policies to fields such as real estate, tourism, and casinos will raise questions on the objective of the preferential policies. Property developers have been investing in special economic zones such as Phu Quoc and Van Don without receiving additional preferential policies (Quang Ninh has attracted around US$1.5 billion investment since 2015), while the most important issue for casino investors is the permission for Vietnamese residents to gamble in casinos. For investors in the field of research and development, as startups and research centers do not have stable revenue streams, a short-term tax holiday will not provide much benefit for investors in this field.
Secondly, with regard to profit remittance, we welcome the Vietnamese Government to provide a legal framework and take drastic measures to prevent losing revenue from profit remittances between affiliates, such as Decree No.20 and Circular No.41 on avoiding losing revenue from transfer pricing between related parties.
In order to implement these regulations efficiently, the General Department of Taxation and the Ministry of Finance should release a report on the legal compliance of multinational enterprises after Decree No.20 was put into effect. The report will support enterprises and the public to supervise multinational enterprises in fulfilling their tax obligations.
In the future, the General Department of Taxation and the Ministry of Finance should set up a mechanism for multinational enterprises to announce their country-by-country profits on an electronic platform. The move is aimed for the public to supervise the tax payments of these multinational enterprises in each country. The European Union (EU) has applied this for enterprises operating in mining and banks with head offices in the EU. At present, the EU expects to request corporations with revenue over EUR750 million (US$923 million) to report their country-by-country profits, with the exception of enterprises showing proof that the announcement may threaten their commercial interests.
