VietNamNet Bridge – Vietnam’s indiscriminate tax breaks for enterprises might lead to a shrinking State budget, putting sustainable development goals and critical welfare functions in danger, according to experts.

{keywords}

A mother and her three children crossing a crude bridge on their way to school in the northern mountainous province of Dien Bien. Excessive tax cuts and incentives for enterprises might result in budget deficit, leaving the Government struggling to carry out development and welfare programmes, especially in less developed areas. — VNA/VNS Photo Phan Tuan Anh


The comments were made during a conference held yesterday in Hanoi on international experience regarding budget tools, amid the Vietnamese Government’s efforts to restructure its public finance to address mounting public debt and juggle a constrained budget and the spending demands of a developing country. 

Matthew Martin, director of the non-profit consultancy Development Finance International (DFI) and a former World Bank official, said there were several ways to relieve fiscal space, defined as the “room in a government’s budget that allows it to provide resources for a desired purpose without jeopardising the sustainability of its financial position or the stability of the economy.”

However, in Vietnam, measures such as expanding fiscal or monetary policies, borrowing more money, and reliance on foreign reserves or development aid are ruled out, leaving collecting more tax and more effective use of budget the only ways forward.

He said Vietnam’s current corporate tax rate of 20 per cent, combined with several other incentives across provinces/cities and sectors, means actual tax collection came to just about 8-9 per cent, lower than most ASEAN neighbours and global averages even in the context of what he called a “race to the bottom.”

Contrary to general belief, Martin explained there is no concrete evidence globally that tax incentives encourage investment, as surveys of investors showed tax is low on their priority list, trumped by other concerns such as whether the country has an educated workforce or good infrastructure, “all of which requires tax to deliver.”

With the State lacking the budget to implement critical infrastructure projects, public-private partnerships are increasingly the go-to solution, however, the DFI director warned this is not a “magical tool” as examples have shown the actual costs might be much higher as the private sector’s priority is profit.

He also cited an Organisation for Economic Co-operation and Development study and recent discussions in the annual meeting of IMF-World Bank in Bali, saying social spending is more effective than infrastructure spending, recommending the Government focus on education and health, which would bring about more long-term benefits.

He recommended new taxes including a property tax, carbon taxes and heavier taxes on mining and financial transactions.

Agreeing with Martin, Nguyen Van Phung, director of the Department of Tax Administration and Large Enterprises under the General Department of Taxation, said there is a need to revamp the Government’s tax exemption and privileges policies, to see which ones are effective and drastically reduce or even eliminate unnecessary ones.

Phung said Vietnam is at risk of being a ‘tax haven, adding that progressively lower taxes and generous cuts over time were meant to encourage wealth accumulation within enterprises at the expense of lowered State budget collection, something the Government would need to re-balance.

He also added that its current legal system is not equipped to deal with multinationals’ exploitation of tax loopholes or the emergence of new types of companies in the sharing economy.

However, Phung also cautioned that any tax adjustment must be carefully considered, based on the economy’s shock absorption capacity.

A revamp of these policies would be nigh on impossible – at least in the near future – since promises have been made to foreign companies and a drastic U-turn would hurt the country’s reputation, according to the official.

Vu Sy Cuong, vice-dean of Financial Policy Analysis at the Academy of Finance, recommended the Government focus on making mid-term and results-based finance allocation plans, which would require deeper collaboration between ministries and State agencies for common development goals.

Nguyen Thu Huong, Senior Programme Coordinator on Governance of Oxfam Viet Nam, said Vietnam could learn from other countries’ State budget management tools and bolster public oversight to improve the efficiency of its spending and ensure stable funds for social welfare.

The conference held by Oxfam and the Non-state Actors Promoting Budget Transparency (BTAP project) will last for three days, with training sessions on public budget management for local governments. 

Source: VNS