Communist Party grapples with how to raise state revenues without stoking perceptions it taxes the poor more than the rich
Vietnam’s ruling Communist Party perennially stresses that it serves both the interests of the people and business, the poor and rich, but never more so than when talking about taxes.
However, years of low value-added tax (VAT) rates, cuts in corporate taxes and generous tax holidays for foreign investors have left some with the impression that money-makers, not wage-earners, have been given government priority. The communist regime’s latest taxation reform campaign poses the same question about who is expected to keep the Party financially afloat.
The Ministry of Finance has made two conflicting proposals in recent months on how to restructure the personal income tax (PIT) scheme. The first option would double the minimum threshold for payment from US$220 to US$440 per month, meaning many poorer workers would be exempt from income tax while also slightly reducing the tax load for slightly higher wage earners.
The second option would keep the minimum threshold intact, in which those earning between US$220 and US$440 a month pay a 5% income tax rate, while workers with monthly salaries of between US$440 and US$1,320 would pay 15%, instead of 10%. A similar percentage increase would be levied on higher earners as well.
The first option would be an improvement for ordinary workers, analysts say, but could reduce state revenue by US$58 million a month. The second option would take away more money from the emerging middle class, as most formally employed workers earn between US$440 and US$780 a month. The latter option, however, would raise state revenue by an estimated US$22.5 million per month. The government has yet to make up its mind on which plan to implement.
PIT isn’t the only tax under consideration for reform, however. Plans are also afoot to start levying e-commerce businesses, including part-time vendors who sell their wares over social media. As many as 13,000 people are thought to conduct commerce over Facebook in Vietnam, but only 2,000 of them are registered tax payers.
Last month, the Finance Ministry also proposed new taxes on sweetened beverages – a 10% excise tax and 12% for VAT – that it thinks will raise US$220 million annually for state coffers, though consumers aren’t too happy about it.
Salaries may be rising in Vietnam, but arguably not quickly enough to cope with higher taxes and a surging cost of living. Last year’s increase on the environmental protection tax for petroleum stoked streams of angry commentary on social media, the usual platform for venting spleens in Vietnam.
Many ordinary Vietnamese wonder why, rather than debating low-earner income tax rates, the government isn’t doing more to tax the rich and resolve the chronic problem of white-collar tax evasion.
The government is making strides but inspectors are running up against domestic corporations artful in the ways of cooking their books and foreign firms who know how to use international loopholes to avoid paying tax.
Moreover, the government is looking to increase consumption taxes, including the VAT, which has typically been lower in Vietnam than elsewhere in Southeast Asia. Tax authorities aim to raise VAT to 12%, from today’s 10%, by 2019. Since 20% of the richest households in Vietnam pay close to 40% of the total VAT, according to the World Bank, an increase would levy more money from the wealthy.
Regional tax departments have also been bolder in investigating large, powerful corporations. PetroVietnam Gas Joint Stock Corporation (PV Gas), a public-listed subsidiary of state-owned PetroVietnam, was last month ordered to pay US$4.7 million in tax arrears and administrative penalties for late payment.
Two other firms listed on the Hanoi Stock Exchange were penalized for false declarations or arrears last month, and ordered to pay back millions in penalties. “The majority of tax-related violations [are] intentional,” Nguyen Van Phung, director of the Ministry of Finance’s Taxation Policy Department, told local media.
The tax department of Ho Chi Minh City (HCMC), Vietnam’s economic hub, is up against the coalface. It has ntoched some victories: in 2014, it collected corporate tax for the first time from Coca-Cola’s Vietnam subsidiary after the firm said it had made losses for 20 years.
But the HCMC taxation department’s latest battle with Uber, the ride-hailing firm, illustrates its shortcomings. At first, the department had planned on collecting US$2.3 million in back payments from Uber by January 10.
But Uber Vietnam, a subsidiary of Uber International Services Holding BV based in the Netherlands, then filled a lawsuit at a local court arguing that it didn’t have to pay tax in Vietnam because, it said, Hanoi had signed an agreement with the Netherlands to avoid double taxation.
The local court threw out Uber’s claim and ruled that it must begin paying its earnings into HCMC’s taxation department’s account, instead of sending income straight to its Dutch headquarters, until the US$2.3 million debt is paid off.
The taxation department later instructed local banks to redirect payments to its accounts. But the situation took an odd turn when the tax department discovered Uber Vietnam doesn’t have a bank account in Vietnam, throwing the whole case into disarray.
Apart from such pesky cases, the government’s tax collection efforts appear broadly to be moving in the right direction. In the first half of last year, Hanoi’s taxation department collected US$4.1 billion, including US$282 million in arrears – an 18% increase over the same period in 2016.
The World Bank’s latest ‘Doing Business’ report bumped Vietnam up 81 places to 86th of 190 nations for ease of paying taxes, making it the fourth best performer in Southeast Asia.
But the problem is that tax reforms and collection methods aren’t improving as quickly as the government’s wants and needs. Hanoi’s woes stem from its shortage of cash and rising public debt, both of which mean it lacks funds to invest in the infrastructure projects necessary to continue Vietnam’s high growth rates.
As a percentage of GDP, Vietnam’s public debt is now around 61.3%, or roughly US$135 billion. This is an improvement on 64.5% from early 2016.
But there are questions about the latest lowered statistic’s accuracy. Last month, Prime Minister Nguyen Xuan Phuc reportedly asked the General Statistics Office to recalculate the country’s GDP to include “forgotten” sectors, possibly including profits made from prostitution and gambling, among other illegal activities.
According to Phuc, the addition of “forgotten” sectors would boost Vietnam’s GDP by as much as 30%, which would mean that public debt as a percentage of GDP is lower than officially recorded.
“If so, we can spend more money on investment and development,” he said. It is not clear if the government’s latest public debt figures account for this change to GDP calculation.
Such financial alchemy is unlikely to help Vietnam in the long run. The constitution mandates that public debt cannot exceed 65% of GDP, likely the real reason why the government wants to massage headline GDP figures.
But independent analysts think it could breach this limit in the next few years without significant fiscal consolidation. The World Bank last year estimated public debt could increase to 64.2% of GDP by 2019.
In search of more revenue, the government has sold off significant stakes in its state-owned enterprises (SOEs). It is thought to have made almost US$6 billion from share sales last year alone, including US$4.8 billion from the majority stake sale of Saigon Beer Alcohol Beverage Corp (Sabeco), Vietnam’s largest brewer.
Stakes in 245 different state companies will supposedly go on offer later this year. But these are only quick-fix injections of capital into state coffers; the longer-term solution will require increasing tax revenue in a sustainable way.
Timing is key. The HCMC taxation department’s latest figures show a massive drop in the amount of tax collected from SOEs, an inevitable consequence of divestment. It collected just US$694 million from national SOEs last year, down 77% from the previous year, while tax from local SOEs fell by 83%, local media reported.
At the same time, taxes collected last year from foreign-invested firms were up 18.8%, worth US$2.5 billion. Vietnam’s domestic private sector’s tax returns increased by 13.7%, worth US$2.1 billion, over the same period.
The monetary injection of cash from SOE sales will provide the government with much-needed short-term funds for infrastructure projects. But the more the government divests from SOEs, the more it risks losing profits and sources of tax revenue.
This means it will have to step up efforts to tax private businesses and ordinary workers, rich and poor alike – though to date the communist government appears to think the poor are easier collection targets.