Vietnam is currently facing a challenge as its debt-to-GDP ratio continues to grow. The country’s public debt currently stands at 64.8 per cent of its GDP, only 0.2 per cent less than the threshold set for 2016-2018. 

It is also important to note here that Vietnam recently lost its development status, which allowed it to receive official development assistance (ODA) loans. The government is actively considering several measures to deal with the situation. 

Keeping this in mind, it’s pretty clear that recent proposals to raise taxes are aimed at increasing tax contributions and cutting public debt. 

The Ministry of Finance has recently introduced draft amendments to various taxes, such as value added tax (VAT), special consumption tax (SCT), corporate income tax (CIT), personal income tax (PIT), and natural resources protection tax, but a larger push also includes transfer pricing legislation and moving away from backing State-owned enterprise (SOE) debts. 

Managing debt will allow Vietnam to achieve a more creditworthy profile in the eyes of international creditors and in turn reduce the concerns of international investors. 

Role and influence of taxation

Proposed tax hikes will allow officials to include more spending in the State budget and ease the pressure to sell SOEs. 

Increased spending by the government could in turn be used to help boost consumer spending power and ensure that Vietnam continues to climb up regional value chains. 

Despite concerns that increased taxation will reduce the competitiveness of Vietnam’s economy, there are many reasons to believe it has room to maneuver when it comes to increasing taxes. 

Over the last few years, in contrast to most major economies, Vietnam has not increased its taxes. In 2016, 166 countries did so. 

In the EU, personal income tax has risen to an average of 21.5 per cent from 19 per cent in 2000. Similarly, OECD countries along with others such as Japan and India have also increased certain taxes.

Investors will also have until 2019 to consider the impact of currently proposed taxes. This will ensure that any changes will not come as a surprise to the business community and ensure that investors will be able to make adjustments prior to the implementation of taxes. 

With this in mind, some believe that the tax hikes will not affect businesses in a major way. On top of this, many investors in prioritized sectors will still benefit from a reduced or exempt rate of taxation.

A 5 per cent CIT will be levied on micro enterprises with annual revenue of less than VND3 billion ($137,000) and small and medium-sized enterprises (SMEs) with revenue ranging from VND3 billion to VND50 billion ($2.2 million) will be subject to a 17 per cent CIT rate. 

The government has also proposed an increase in SCT rates on certain products. Soft drinks are to be included on the list of goods on which a 10 per cent SCT is levied, from 2019, rates on tobacco-based products will increase from the current 70 per cent to 75 per cent in 2019, and an additional flat SCT of VND1,000 ($0.04) per pack of 20 cigarettes and VND1,500 ($0.06) per cigar will apply from January 1, 2020.

Given increases in SCT and VAT, corporations should prepare for a moderation in consumer spending growth, barring changes in prevailing pricing. 

However, they can also take into consideration the possibility that CIT rates may be lowered in the years leading up to 2019. This would allow the pricing of goods or profits of enterprises to remain static during a VAT increase. 

On top of the possibility of CIT reductions, the rapid growth of consumer spending in recent years also makes it unlikely that VAT increases will have a substantial impact on spending habits. 

Remarkably, it’s important to note that the tax hikes are not expected to impact on the poorest people, as they are unlikely to be paying VAT or other taxes. Also, the majority of goods being consumed on a regular basis by these communities are sourced locally by producers and do not include VAT.  

Fine-tuning tax policies

The most important factor for tax authorities when they raise taxes in the current economic context is enforcement. As with a number of countries in ASEAN, tax participation is a significant issue that has historically led to high statutory rates of taxation and uncompetitive investment environments. 

That said, government strategies against tax evasion, which ensure that taxes are collected and make it to the correct government office, could allow Vietnam to cut its debt burden without feeling any pressure to continue raising taxes. This, however, is easier said than done. 

Some believe that there is a paradoxical situation where, while the government aims to increase tax contributions and reduce public debt, on the other hand companies rely on lower taxes in order to perform better so that they can contribute more to the State budget. 

While valid in its reasoning, concerns of this nature often fail to account for the nuances that provide for a country’s competitiveness. 

Trade agreements are a good example of this. Vietnam is a member of the ASEAN Free Trade Area (AFTA). ASEAN members are committed to making the region a competitive trading area through the reduction of trade barriers and the harmonization of markets. 

Together with other ASEAN countries, Vietnam has signed trade agreements with Australia, Chile, China, Japan, India, New Zealand, and South Korea. On top of this, Vietnam has signed a bilateral trade agreement with South Korea and the Russian-led Eurasian Economic Union, and has recently completed negotiations on a massive free trade agreement with the EU. 

While investors may lose out as VAT rates are increased, they will still benefit significantly from the tax exemptions and reductions specified in these trade pacts. 

Other factors that need to be considered are the wage-to-labor skill ratio, investment zones, and tax incentives that make Vietnam a competitive and attractive location for investment and a thriving community for businesses. 

This means that, so long as Vietnam focuses on keeping its tax rates competitive over the long term, short term increases can be used to stabilize its economic fundamentals.

Tax rates, in our opinion, should be increased in order to ensure macroeconomic stability in the short term. However, over the long term, Vietnam should lower its rates on all fronts while stepping up enforcement of existing taxes and related regulations such as transfer pricing.

VN Economic Times