Will Hanoi’s drive to collect more taxes alienate foreign investors and squeeze the life out of its economy?
Minh, dressed in the recognizable pistachio green garbs worn by Grab drivers, hailed the arrival of the app-based taxi services in Vietnam when they first arrived three years ago.
He previously earned more money per ride when he was xe om, as the locals call motorbike taxis, but these days he says he is guaranteed double the number of daily customers.
“It’s easy. And people just want to pay less,” he says, highlighting the main selling point of Grab, which is still commonly known by its former name, GrabTaxi, in Vietnam
But for Vietnam’s government, Grab and Uber, another foreign-owned app-based taxi firm, are paying less than they should to state coffers.
Last month, the General Department of Taxation, the agency charged with collecting domestic taxes, instructed local tax departments across Vietnam to increase inspection of both companies.
While taxation from standard taxi firms accounts for annual revenue of US$91.7 million, according to local media reports, the app-based businesses have contributed a mere fraction of the total tax haul.
Grab paid US$250,000 in taxes last year in Vietnam; Uber paid about US$1.7 million.
Grab claimed financial losses of almost US$20 million last year, which by some legal readings of the tax code exempts it from paying corporate income tax (CIT), which is set at a flat rate of 20% on profits.
Vietnam’s Finance Ministry, however, thinks the company owes nonetheless. This month it finally ruled on the matter, demanding that Grab pay back CIT and value added tax (VAT), but at a lower rate because of the company’s professed financial difficulties.
To be sure, the Vietnamese government is desperately seeking new sources of tax revenue. Government expenditure has reached unsustainable levels, with a budget deficit of 4.4% of GDP last year and public debt now near the state-imposed limit of 65% of GDP.
Social media businesses are also in the taxman’s sights. Last month, Hanoi and Ho Chi Minh City’s taxation departments began drawing up plans on how to collect taxes from e-commerce businesses that operate on social media platforms like Facebook.
An estimated 13,000 people across the country conduct commerce over Facebook, yet only 2,000 of them are registered tax payers.
Vietnam’s bid to collect greater taxes from new economy businesses is crucial to the state’s future financial health. For the last decade, the government has relied mainly on levies on imports and exports for its revenue.
Due to a growing number of free trade agreements signed in recent years, trade tax collections is set to decline steeply, Vũ Khắc Liêm, deputy director of the Finance Ministry’s Tax Policies Department, told media earlier this year.
The impetus now falls on raising more domestic taxes, including VAT as well as personal income taxes. Those earning up to 60 million dong (about US$2,500) per year are charged a basic rate of 5%. Rates increase progressively from there, with the highest tax bracket of 35% starting at 960 million dong (roughly US$42,000) per year.
As a percentage of total government revenue, domestic tax collection increased from 59% between 2006-2010 to 68% between 2011-2015, according to the ministry of planning and investment. In 2015, it accounted for almost 75% of government revenue. Last year, the state collected almost US$35 billion in local taxes, local media reported.
This month, Deputy Prime Minister Vuong Dinh Hue publicly instructed tax offices to “carry out measures to ensure high efficiency in tax collection and management.” That was apparently already happening.
In the first half of this year, Hanoi’s taxation department collected US$4.1 billion in taxes, including US$282 million in arrears, according to local media reports. That represents an 18% increase compared to the same period last year, reports said.
Nationwide, domestic tax collection is thought to have risen by 12% so far this year. Analysts say Vietnam’s tax system is relatively straightforward and modern, especially when compared to other Southeast Asian countries. In Hanoi, for example, an estimated 98% of businesses use the government’s online tax system.
Yet there are loopholes, particularly for the foreign companies that have propelled the country’s growth in recent years. Many were initially lured into establishing operations in Vietnam through generous incentives, including long tax holidays. Some have subsequently managed to avoid paying corporate taxes by claiming persistent losses.
After two decades of operating in Vietnam, Coca-Cola reported losses of more than US$180 million, exempting the company from paying corporate taxes. In 2014, the company reportedly made its first CIT payment ever of a mere US$20 million.
The following year, VietNamNet Bridge, an online English-language newspaper, quoted an unnamed representative of the Ho Chi Minh City City tax department saying Coca-Cola was ranked first on the agency’s list of suspects of so-called “price transferring,” a practice used to hedge tax liability by declaring financial losses.
“I don’t think Coca-Cola or [other firms] have evaded taxes. They have, in fact, used the big loopholes in our tax system to avoid paying taxes. And that is perfectly legal,” Hoang Phuong Thao, Vietnam director of ActionAid, an anti-poverty organization, told local media last year.
He was also quoted as saying that the amount the government failed to collect in tax from foreign firms in recent years was five times higher than its total annual expenditure on education.
In February, the government issued a new decree aimed at tackling transfer pricing by modernizing its CIT compliance process.
Some locals, however, sense an inequitable squeeze.
Pham Anh Cuong, a participant in previous pro-reform demonstrations, said that taxation is already too high for many people, especially when the average person must make numerous other “payments” every day.
By payments, he means official fees (like those charged on tolled highways) as well as unofficial “greasing money” – as some call it in Vietnam – frequently demanded by local officials. Something as simple as a farmer taking a slaughtered pig to the market, he said, can incur dozens of “payments” along the way.
Other reports have noted a growing expectation for bribes for everything from school placements to decent service at hospitals.
One government critic, who requested anonymity, predicted a public backlash against swelling taxes akin to the “taxation without representation” cry that helped to spark the American Revolution.
If ordinary Vietnamese are forced to hand over more of their earnings while seeing little return from the government, then more will begin to question where their tax money goes, he said. A fuel tax imposed in January under the guise of environmentalism is a case in point.
While new public transport projects are underway, including metro systems in Hanoi and in Ho Chi Minh City, insufficient funding has delayed the projects for several years. And with traffic congestion worsening, motorists are now also being asked to fork out more for petrol.
The question going forward, critics say, is how long will the people be willing to pay more while receiving less.