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Finalizing the tax policy system to restructure budget revenues for sustainability
15/1/2020 13:37' Send Print
Illustrative photo. Photo: tapchitaichinh.vn
Building and finalizing process of the tax policy system over the recent years

Stable and sustainable revenues are particularly essential for the national finance and the macro economy’s security as a whole. As a norm, taxation serves as major and important revenue in most countries. Since the start of economic renovation in 1986 along with comprehensive policies for economic reform in each phase, the tax policy system has continuously been amended and improved to match the economic mechanism and has always aimed at sustainable development measured in such basic aspects as: 1- To promote manufacturing, business, investment, export and technology innovation, which helps to generate and foster long-term revenues and this, in its turn, will contribute to the State expenses; 2- To comply with the international practices, bilateral and multilateral agreements which Vietnam has signed or been part of, and synchronized them with the domestic system of relevant laws; 3- To contribute to the insurance of social equality; 4- To raise effectiveness of the State administration, law abidance and administrative reform; 5- To ensure important and stable revenues for the State Budget (SB) and the structure of the SB must be improved in an active, stable and sustainable direction in which revenues from manufacturing and business will see a gradual rise and account for increasingly higher proportion in the SB total revenue, and to expand the tax base in line with the development of the socialist-oriented market economy.

Prior to renovation, Vietnam’s economy was run on the centrally planned subsidized mechanism; therefore, the SB mainly relied on revenues on the state economic sector (up to 90%), non-state economic sectors were taxable in only several forms such as in-commerce tax, goods tax, agriculture tax, license tax.....Revenues were limited and the role of macroeconomic administration and regulation was hence restricted.

Over the period of 1990-2000, Vietnam initiated to build a multi-sectoral commodity economy, run by the market mechanism under the State administration. Accordingly, in order to match the new economic institution, the tax policy system in this period underwent two steps of important and turning reform: Over the period of 1990-1995, the Financial Sector took the tax reform step I in the context of internal and international socio-economic turbulences. The tax policy system was issued with 9 basic taxes (turnover tax, special sales tax, revenue tax, export duty, import duty, agricultural land use tax, land use transfer tax, natural resources tax, high income tax, house and land tax) in order to match a shift from an economy run by the centrally planned subsidized mechanism to five-sectoral economy in which the State-owned one played the leading role, thus shaping a legal framework for national economic and financial activities and serving as an initial foundation for Vietnam’s tax policy system.

Over the period of 1996-2000, Vietnam prepared for international trade agreements, starting with its participation in ASEAN Free Trade Area (AFTA) with a reduction of 98% of import taxes down to 0% - 5% for ASEAN members. In 1997, the Asian financial crisis had a certain impact on Vietnam’s economy despite, by no means, its low level of integration and development. Thus to implement the Party’s comprehensive renovation guideline with a policy for economic cooperation with other countries aimed at raising its competition, production capacity, export turnover and economic development to meet demands of industrialization and modernization, Vietnam began to negotiate for international tax agreements such as signing the double taxation avoidance agreement, coupling with the exercise of Step II of tax reform. The tax policy system has further been improved with the building of several advanced taxes to suit the increasingly diverse development of economic activities under the market mechanism together with the expansion of tax base. Accordingly, turnover tax has been turned into the value added tax (VAT) and income tax into corporate income tax (CIT); profit remittance and slaughter taxes were abolished in order to gradually approach regional and international practices....

After the first two steps of tax reform, the new content of tax policies has actively contributed to the creation of a more favourable environment for investment, production and business, thus more greatly supporting the industrialization and modernization and the market economy as a whole. VAT tax return on exports has promoted specialization and cooperation in manufacturing, boosted productivity and improved quality and effectiveness of exports, hence contributing to the fair competition between domestic and imported commodities; Special Sales Tax (SST) has helped guided manufacturing and consumption of special State-instructed goods and services; export and import duties with a principle of priorities for manufacturing and deep processing which has enhanced domestic manufacturing with a target to attract more labour and solve social problems of employment and income; Natural Resource Tax (NST) has contributed to the economical and effective use of resources and minimize environmental pollution and protect natural resources; The issue of Ordinance on Fees and Fees has supported the standardization of administrative procedures in all areas of socio-economic life.

Over the period of 2001-2010, Vietnam’s economy underwent significant stages of development, particularly with the preparation for WTO accession and became a WTO full member on January 11th 2007 and the compliance with international bilateral and multilateral agreements has caused a substantial cut of tax revenue from exports. To execute Strategies for reform and modernization of Vietnam’s tax system beyond 2010 (Decision No 201/2004/QĐ-TTg, dated December 12th 2004 by the Prime Minister) the tax policy system saw crucial reforms ensuring the correlation with a shift to an export-targeted economy considering export as a driving force of development; eradicated discrimination among economic sectors (between domestic and foreign direct invested (FDI) enterprises, and between state and private economic sectors); eradicated discrimination between domestically manufactured commodities and imports (abolished tax priorities to encourage exports, particularly for garment exports, in a roadmap,); standardized tax management process in a principle of self-calculation, self-declaration, self-pay, post-examination, ensuring transparent execution of tax law violations; broadened bases of Personal Income Tax (PIT) in order to contribute to the assurance of social equality; issued the Law on Environmental Protection to restrict consumption of goods with negative impact on the environment, eradicated VAT rate of 20% to promote consumption and simplified administrative processes; reduced Corporate Income Tax (CIT) rate from 32% to 28% in 2004 and to 25% in 2009 to promote accumulation and concentration of capital and reinvest it into manufacturing and business; detailed and reformulated CIT incentive and exemption to encourage development and scientific and technological application, attracted labourers and generated jobs, distributed investment capitals to socio-economically difficult and most difficult areas contributing to more equal and sustainable development; exempted Land Use Tax for farmers to save the people’s sources.

On the WTO accession, the global financial crisis together with the collapse of many worldwide banking systems, devalued stocks and currency in the USA and developed countries negatively influenced Vietnam’s economy such as increasing inflation rate, steeping stock market, prolonged frozen real estate, the annual economic growth rate standing at under 6% (5.68%) for many years (from 2008 until the end of first 6 months of 2013). In this context, in order to stabilize the macroeconomic situation and control inflation, a number of tax policies were enforced such as a 50% reduction of VAT for manufacturing input material commodities such as basic chemical substances, mechanical products for manufacturing, iron, steel, cement, garments, leather; reduction of 30% for CIT on trading and manufacturing activities of small and medium sized enterprises (SMEs) in the Fourth Quarter of 2008 and all year of 2009 and extend deadlines of tax pay for these enterprises;.....

Over the period 2011 to present, the global economy in general and Vietnamese economy in particular have always faced turbulences and unpredictable challenges, namely steeping downturn, reversely fluctuated oil price and public debt crisis in a number of countries and all these have posed a pressing challenge for social welfare assurance and sustainable economic development and increasingly deepened and broadened international integration alongside prepared participation in many multilateral new-generation trade agreements. The execution of tax system reform strategies over the period 2011-2020 (Decision No 732/QĐ-TTg by the Prime Minister dated May 17th 2011), the realization of the National Assembly’s Resolution No 25/2016/QH14 dated November 9th 2016 on the national five-year financial plan and the Politburo’s Resolution No 07-NQ/TW dated November 18th 2016 on instructions and solutions to reformulate the SB and manage public debts in order to ensure a secure and sustainable national finance, primary tax reforms (adding new regulations on VATs to suit newly emerged economic activities, cutting CIT rates from 25% to 22% in 2014, and to 20% in 2016 (on July 1st 2013 for SMEs) to boost capital accumulation and concentration and encourage the establishment of manufacturing invested and traded enterprises, continued exemption of agricultural land use tax on farmers to save the people’s resources, raised SST on health-harming and consumption-restricted commodities such as cigarettes, liquor and beer and adjustment of taxable prices for imports to guarantee an equal competitiveness between domestic and imported goods and contribute to state budget restructure in the context of declined revenues...); many tax policies were issued to ensure social welfare such as 5% taxation on social house price; a number of policies also were issued to solve enterprises’ problems such as extension of VAT pay and CIT pay, CIT cut for SMES and reduction of VAT, CIT and PIT for bodies, individuals and households who lease flats and apartments for workers, laborers, students, pupils, children care-takers, shift meal providers who participate in social welfare stabilization......

Important results of the tax policy build-up and reform process

Budget revenue sustainability is normally assessed on two major criteria of revenue size and structure. A sustainable revenue size not only meets the demand of budget balance but also facilitates manufacturing, consumption and sustains revenues based on the harmonious resolution of internal factors (design of tax system, tax base, tax rate and tax collection effectiveness) and external factors (developmental level and openness of the economy, structure of economic sectors, capacity of enterprises, lawful and institutional uniform and harmony). A sustainable revenue structure is necessarily dependent on fundamental revenues from domestic production, trade and consumption, thus ensuring the balance among indirect tax (sales tax), direct tax (income tax) and property tax and minimizing the reliance on revenues subject to external impacts or irregular revenues.

In reality, drastic reform of tax policy system over the past years has brought about positive outcomes oriented for stable and sustainable revenues which include continuously broadened SB revenue size, changed and diversified revenue structure in a direction of raising the ratio of domestic revenue collected from manufacturing and trading activities.

The first period of renovation 1986-1990, the average tax revenue accounted for only 75.6% of the total budget revenue equivalent to 14.2% of GDP (in 1990, GDP size was USD 6.4 billion) of which up to 64.2% was mainly collected from the State sector, 19.6% from non-State economic sector and 16.2% from other economic sectors.

After Steps I and II of tax reform, the average SB revenue accounted for 20.5% of GDP over the period 1991-2000; the SB revenue was 21% of GDP over the period 1991-1995 (GDP was roughly USD20.7 billion in 1995) and the SB revenue, though saw a downward trend (due to the economic crisis over the period of 1996-2000) achieved roughly 20% of GDP (GDP was USD31.17 billion in 2000). Structurally, tax and fee collection over the period 1991-2000 achieved 18.4% GDP in which tax collections from manufacturing and trade saw a gradual increase and less dependent on revenues from national property and natural resources.

Over the period of 2001-2010, the average SB mobilized revenue achieved 25.7% of GDP. In terms of revenue structure, revenue mobilized from taxes and fees (including revenue from crude oil and natural resources) accounted for 22.4% of GDP and the total SB revenue composed 23.7% from VAT, 29.3% from CIT, 12.2% from export and import duties, 14.8% from fees and other land fees, about 7.2% from SST, 6.8% from NRT and roughly 2.8% from PIT…..

Beyond 2011 to the present, the SB revenue size has risen 3.8 times compared to that over the period of 2001-2010 of which internal revenue has increased 5.1 times, crude oil revenue 1.3 times and import and export duties revenue 2.9 times. Over this period, the average mobilized revenue for the SB accounts for about 24.4% of GDP of which revenue from taxes and fees made up roughly 20.7% of GDP.

On the whole, the revenue rate mobilized from taxes and fees has seen a downward trend compared to that over the previous period (the current rate is about 21% of GDP), and this rate is mainly contributed by crude oil revenue as the revenue rate from export activities has undergone a radical decline. However, except crude oil taxes, revenue from taxes and fees has showed positive results (a rise from 16.5% of GDP over the period of 2001-2010 to the current 17.5% of GDP and expectedly 18% of GDP over the period of 5 years 2016-2020). The domestic revenue has accounted increasingly larger ratio in the total SB revenue with an average rate of 55.2% over the period 2001-2010 and 74.8% currently (80.6% in 2018 and expectedly 83% in 2020); achieving the objective 5 years earlier than the time set by Financial Strategy Beyond 2020 (80.5% in 2016 meanwhile the target beyond 2020 is over 80%); achieving the primary objective of Resolution No 07-NQ/TW (which set a target of 84%-85%)

Within the domestic revenue structure, there has been a contributive revenue shift from the state enterprises to non-state enterprises and FDI ones (revenue from state enterprises decreased from 44% in 2001 to 27% in 2011 and expectedly to 13.3% in 2020; in the same years revenue collected from non-state enterprises increased from 12.8% to 18.5% and 20.5% and from FDI enterprises rose from 10.8% to 16.9% and 17.9% respectively).

According to taxation structure, VAT (including VAT on export without tax refund) gained an average rise from 27% of the total SB over the period 2001-2010 to 33.8% over the current period (this figure was maintained at 31%-32% over 3 years 2016-2018), the Special Sales Tax achieved a similar rate from 7% to 8.3% (this rate was 8.7% over 3 years 2016-2018, an increase over the average rate in the whole period), Import & Export Duties saw a correlative cut from 12.2% to 6,7% ( a rate of 5.6% over 3 years of 2016-2018, a decrease compared to that in the whole period); average CIT rate rose from 13% over the period of 2001-2020 to 15.2% over the period of 2011-2020 (this rate was 14.4% over 3 years 2016-2018, a decrease compared to the average rate in the whole period); PIT gained a correlative rise from 2.8% to 6.2% (the average rate of PIT over 3 years of 2016-2018 was 6.2%).

Despite the above-mentioned positive results, the tax policy system posed certain shortcomings and is faced with challenges emerging during the finalization for sustainable revenues.

The SB size (based on the GDP ratio), sees a downturn tendency pressed by a need to ensure revenue for a big increase in the regular expense (which is expected to rise 2.04 times over the period of 2011-2015 whilst revenues collected from taxes, fees and charges including those from crude oil is expected to increase only 1.65 times). This trend has posed difficulties for the budget balance.

In terms of revenue structure, there has existed no balance between revenues from PIT, consumption and property tax. Revenues from PIT, housing and land tax (real estate tax), have, by no means, been limited; revenues from land use tax and non-agricultural land use tax applicable on January 1st 2012 have been restricted despite essential alterations. Revenues from import duties have seen a dramatic decrease since Vietnam started to realize all FTA bilateral and multilateral agreements about tax-cut and tariff. Policies for tax incentives still show their spread-out features. The effectiveness of these policies needs thorough and comprehensive assessment and analysis for appropriate amendments.

Targets and orientations to finalize the future tax policy system

In the coming period, the economic context is expectedly complicated and unpredictable, creating intertwining advantages and disadvantages, opportunities and challenges. Alongside with the deepening process of international economic integration, economic growth will be negatively affected by the increasingly intense strategic competition among the superpowers. Trade protectionism, trade wars and populism will hinder the overall growth. Internally, hidden risks are likely to cause instability for the macro economy and indirectly affects economic growth; national trade and financial openness is greater than the economic growth rate; financial market’s growth as well as its effectiveness are not satisfactory; restructuring of enterprises, especially that of state-owned ones and banks is still slow; economic growth depends on the FDI sector, which is evidently seen in the growth of manufacturing and food processing industries. Taking those issues into account, it is essential that Vietnam strategically shift to a new economic growth model based on productivity and innovation, fully utilizing its advantages to maintain high quality growth in the next period. Converting the economic growth model means that demanding requirements will be imposed on the finalization of macroeconomic policies including tax policy.

The trend of tax policy reforms in other countries over the past years mainly indicates the balance between budget revenue increase and growth encouragement. Due to inclusive globalization and increasing competition for capital, labor in the world, many countries introduced tax incentive policies to attract investment, solve difficulties in recovering the economy, offset revenue loss, and finally ensure stable and sustainable revenues for budget in the medium and long term, namely: Reducing CIT rates to attract investment and support domestic businesses (like in the US, UK, Portugal, Spain, Singapore, Malaysia, etc.); increasing PIT rates for high-income earners, lowering tax rates for low-income earners and increasing family allowances to narrow the wealth gap (such as in the US, UK, Croatia, China, Thailand, etc.); increasing VAT rate and SST with regard to expanding the taxable objects, reducing the duty-free items (166 countries worldwide including EU, Russia, China, Singapore, etc. have restructured their tax policies with increased revenues from indirect tax via raising VAT on consumption and SST); raising property-related taxes (Australia, Canada, Malaysia, etc.); increasing environmental protection tax.

From the above-mentioned countries with their economic conditions and revenue policy amendments, the objectives set by the financial services industry of finalizing the tax system are: 1- Institutionalizing the Party's views and guidelines and State's policies on perfecting tax policies in order to restructure the State budget revenues set by the Politburo and the National Assembly in Resolution No. 07-NQ / TW and Resolution No. 25 / 2016 / QH14 is: “Focusing on restructuring revenue sources; improving the revenue policy associated with the restructuring of state budget revenues by covering all revenue sources, especially the new ones, expanding the revenue base in accordance with international practices; increasing the proportion of internal revenue, ensuring a reasonable proportion between indirect taxes and direct taxes, making good use of taxes collected from properties and natural resources, environmental protection, minimizing the integration of social policies in tax policies and tax exemption, cut and extension, ensuring the tax neutrality, contributing to creating a favorable and fair business and investment environment, encouraging investment and regulating reasonable income”.
2- Ensuring the true nature of each tax, ensuring consistency and clarity, solving problems and shortcomings, removing difficulties for manufacturing and business activities, reducing administrative procedures to create favorable conditions for taxpayers. 3- Ensuring the consistency of the legal system corresponding with the newly enforced laws by the National Assembly, such as the law on SMEs support, the investment law, the civil code... 4 - Ensuring the goal of international economic integration in line with the development trend, thereby improving competitiveness of Vietnamese enterprises and creating more jobs, avoiding loss of state budget revenues, and combating trade fraud as well as transfer pricing ...

Accordingly, the Financial Ministry has set specific goals and orientations to perfect the tax policy system in order to restructure sustainable budget revenues as follows:

- Regarding the scale of state budget revenue, following the specific objectives claimed in Resolution No. 07-NQ/TW: “The average mobilization rate in the state budget over the period 2016 - 2020 is about 20% - 21% of GDP, striving for the total budget revenue about 1.65 times as much as that in the period of 2011-2015. Proportion of domestic revenue accounts for 84% - 85%, crude oil revenue and import-export income constitutes about 14% - 16%; and the proportion of central budget revenues is 60% - 65% of the total budget revenue. After 2020, the ratio of mobilization to the state budget over GDP will be maintained at a stable and reasonable level.”

-The revenue structure of each tax in the tax policy system will be adjusted without large impacts on SB revenue. The rates of direct taxes (CIT, PIT) tend to be kept intact or lowered while increasing revenues from some indirect taxes (such as SST, property-related tax...). Details are expected as follows:

CIT: Scanning to abolish tax exemption and reduction incentives that no longer conform to development and international integration requirements; minimizing the incorporation of social policies with tax exemption, reduction and extension policies, ensuring the tax neutrality; implementing CIT incentives for small and micro enterprises to nurture and create future stable source of income. Expanding the tax base by adjusting to reduce or remove loss carried forward in areas where investments are not encouraged in accordance with international practice; implementing procedures to prevent and combat price transfer and revenue erosion (BESP) such as thin capitalization, interest expenses, cross-border e-commerce...

SST: Reviewing, researching and adding special subjects to SST to guide consumption regulation in conformity with the socio-economic development; formulating a roadmap to raise taxes on cigarettes, beer and liquor, to limit consumer production and fulfill international commitments; combining proportional tax rates and absolute tax rates on a number of taxable goods and services.

Property-related taxes: Continue with exemption and reduction of agricultural land use tax in the coming period as part of the Party’s views and State's policies on agriculture, farmers and rural areas. Seek amendments and supplements to non-agricultural land use tax and housing tax at an appropriate time.

Accompanying with finalization of the tax policy system is the completion of the tax administration institution, implementing administrative reforms, creating a healthy business and investment environment, and facilitating the development of economic sectors; adopting international standards and practices to attract domestic and foreign investment; formulating a modern tax management system in the context of international integration; creating legal corridor for the application of information technology in tax administration, including the widespread implementation of electronic tax management, public and transparent electronic transactions; remedying current limitations and shortcomings./.

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Source: Communist Review (No 924, August 2019)
Dinh Tien DungMember of the Central Committee of Vietnam’s Communist Party, Minister of Finance