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Tax relief should not be “One size fits all”

The Private Economic Development Research Board, under the Advisory Council for Administrative Procedure Reform, has proposed a 30% reduction in corporate income tax for all businesses this year.

The proposal is faced with mixed reactions, however. The author of this article, from another angle, also believes it is not plausible.

Food to be delivered during social distancing a few months ago. It should be noted that not all businesses are equally in trouble, and thus there is no need to slash the corporate income tax for all of them. – Photo: Thanh Hoa

Specifically, according to the Private Economic Development Research Board (shortly known as IV Board), their tax cut proposal is in response to the aspirations of the corporate circle following their three surveys on the business situation as from March. During these surveys, a considerable number of enterprises pleaded for a 50% reduction in corporate income tax for both 2019 and 2020.

In other words, the proposal of IV Board are purely based on surveys and consultation with the business community. Still, it is customary for corporate respondents to whine about their hardships during a poll and then ask for things that benefit them most, especially in the current context of pandemic.

Therefore, if based entirely on the opinions of the surveyed enterprises, the results may tend to be distorted, exaggerated or overblown, making recommendations made from such results unreasonable, objective and unlikely to faithfully reflect reality. For this reason, they should not be used as the sole basis for economic measures that follow.

To be fairer and more objective and meaningful, all corporate tax relief proposals should be put forward on relevant evidence and more comprehensive calculations, with consideration of multiple aspects.

First of all, IV Board, or any agency that makes policy recommendations concerning corporate income tax cuts, needs to gather scientific evidence about the “majority” (70%, 80% or 90%) of enterprises that incur losses, or are unable to operate, or driven to the verge of bankruptcy. The number of enterprises surveyed may be a randomly selected sample from a variety of industries, occupations, scales of operation and localities.

Evidence of the hardships faced by the corporate circle may be the results of their business activities that have been quarterly audited or submitted to the tax authorities since the beginning of the year. It may also be as simple as proof that a certain company is struggling, similar to the regulation applicable to when one petitioned for assistance during the first and second economic aid packages of this year.

Next, IV Board needs to calculate how a corporate income tax break might affect the performance of the business community this year and the following year, at specific rate of relief, say, 30% or 50%. For example, one of such impacts may be at a tax cut of 30%, what the percentage of the surveyed enterprises do not have to shut down, or suspend their production and business activities.

What’s more, it is necessary to analyze or to consider other support measures the State has offered, such as granting them loans so that they can retain their workforce, or lowering other taxes and fees as has been proposed or implemented so far.

Only after evidence from such objective investigations and surveys is available can IV Board formulate a more appropriate tax relief policy for the entire business community or just certain groups of enterprises, and figure out how to set a reasonable corporate income tax cut.

It should be noted that not all businesses are equally in trouble, and thus there is no need to slash the corporate income tax for all of them. In fact, quite a few businesses are even benefiting from the pandemic. Therefore, all support measures must stick to the principle of avoiding a “one size fits all” approach, which is currently the shortcoming of the proposal by IV Board.

Last but not least, any recommendation on the rate of corporate income tax relief and the list of beneficiaries should take into account the capacity of the State budget, not simply based on an argument like what IV Board has put forward: without tax reductions, businesses will end up with negative revenue and the State is to gain nothing from taxes (hence reductions are necessary!).

Just as in any other country in the world, whether aid should be extended and how it should be done must always be designed and calculated relying on the capacity of the central budget. Again, businesses have a tendency to complain, and difficulties are always beyond the bailout range of every national budget. Thus, even in strong economies such as the United States and the European Union, there is virtually no bailout package whose scope of application is as extensive as the current tax break proposal for all businesses in Vietnam.

Therefore, given a limited budget which cannot afford large-scale relief packages like that of Vietnam, even though we know that some businesses are in trouble, they should be let be out of the game.

In this respect, at least what IV Board needs to do is measuring how the 30% corporate income tax reduction for all businesses in 2020 may impact the State budget. The Government has estimated that with a 30% income tax cut for any enterprise whose earnings in 2020 are below VND200 billion, as approved by the National Assembly, the central budget will lose VND23 trillion in revenue.

Therefore, it is compulsory to specify the revenue loss the State budget will suffer when the same degree of tax relief is applied to all enterprises. That will allow the Government and the National Assembly to consider whether the proposal of IV Board should be accepted. The qualitative argument presented by IV Board to justify their current proposal is not suitable for policymaking.


Tax cuts almost mean nothing to small enterprises

Under Resolution 116/2020/QH14, the National Assembly has given the nod to a corporate income tax cut at 30% in 2020 for any enterprise earning less than VND200 billion. The purpose of this resolution is to assist the business community and alleviate their difficulties brought by the Covid-19 pandemic.

However, according to the 2020 White Book on Vietnamese Businesses published by the Ministry of Planning and Investment, micro- and small-sized enterprises account for 93% of the total number of businesses. However, their total profit before tax in the 2011-2018 period was always negative.

In other words, micro and small enterprises made no profits even without Covid-19, so the reduction of corporate income tax for this majority does not mean much.

According to the 2020 White Book, the average pre-tax profit-to-capital ratio in 2016-2018 was 2.5% for the entire business community, and only 1.4% for private enterprises. The ratio is lower than both the bank deposit interest rate and the average consumer price index in 2018 (3.54%). Among all types of businesses, only foreign-invested enterprises (FIEs) had a relatively high ratio of before-tax profit to capital compared to their domestic counterparts, at approximately 7%.

Therefore, if the data provided by relevant agencies are correct, the reduction of corporate income tax will be basically a formality for domestic private firms and only FIEs will benefit from it. The Government should instead help enterprises in trouble by exemptions or reductions of social insurance payments. SGT

Phan Minh Ngoc/Bui Trinh

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