One option discussed by economists at a conference titled ‘Viet Nam: Policy challenges in transition to a middle-income economy' in Ha Noi yesterday was to raise revenue by broadening the tax base and increase the effectiveness of revenue administration.
The event was co-hosted by the State Bank of Viet Nam and the International Monetary Fund (IMF).
IMF data showed that Viet Nam's revenue peaked at almost 29 per cent of Gross Domestic Product (GDP) in 2008 and slightly declined to approximately 27 per cent last year due to lower oil prices.
Non-oil revenues continued to rise from 18.4 per cent of GDP in 2008 to 20.6 per cent in 2010, it noted.
Viet Nam has one of highest ratios of revenue to GDP in the region and in comparison with other emerging Asian countries, Viet Nam relies more heavily on Corporate Income Tax (CIT), Value-Added Tax (VAT) and trade, and less heavily on Personal Income Tax (PIT), property and excises.
Thornton Matheson, an economist from the IMF's Fiscal Affairs Department pointed out the trend of revenues shares that would see declining revenues from oil, a steady contribution of non-oil CIT and excises, growing importance of VAT revenue while trade revenues were also expected to decline somewhat due to World Trade Organisation tariff reductions.
In terms of VAT, while measures outlined in the Government tax reform plan for the 2011-15 period was to reduce the number of goods and services subject to the 5 per cent rate, Matheson said the IMF recommended Viet Nam to completely eliminate the lower 5 per cent rate as well as the refund threshold for exporters since exports should be zero-rated.
"We also recommend them to centralise payment of VAT with transfers to local Governments," she said.
Responding to this recommendation, deputy director of the Ministry of Finance's Tax Policy Department Nguyen Van Phung said in practice, the central authority for tax administration was still responsible for collecting VAT but the revenues were shared between the Central and local budgets at different ratios in accordance with the State Budget Law.
He said international practice would call for all VAT revenues to be accumulated at a central agency then further distributed to local authorities according to the consumption indexes.
"The recommendation is worthy of consideration along with a note that it wouldn't be feasible with reforms to relevant State budget regulations," Phung said.
In reference to CIT, Peter Mullins, a tax policy consultant to the IMF and the World Bank, said a rate of 25 per cent was internationally competitive yet there was room for improvement.
"Internationally, the country is facing a number of challenges. Tax incentives are a big challenge, especially for low and middle income countries," he said.
Tax incentives tended to threaten revenue and they could attract foreign investment but experience showed that other elements, such as good governance, the availability of land or judiciary systems were also important, he said.
"There are more important issues other than just tax rates offered to companies," he said.
Another issue was the question of profit-shifting with multinational companies currently operating in many economies around the world raising concerns about the ability of these companies to shift profit in the way they get the best out of tax advantages, Mullins said.
"So one question is how much can be done to reasonably control this. One possible solution may have to do with much closer co-operation between countries," he said.
He said possible reforms included further base broadening by rationalising incentives to give scope for a reduction in the CIT rate in the medium to long term and better alignment CIT deductions with international practices.
"One of the main complaints we hear from the private sector in the country is the limitations on advertising deductions. So we would encourage removing this cap," he said.
Mullins said another recommendation was to ensure effective implementation of rules to address abusive tax planning.
Overall, the Washington-based IMF team concluded that on tax, Viet Nam compared favourably in the region yet the reform agenda for the 2011-15 period was quite ambitious and needed to be carefully prepared and sequenced.
Although much had been done, more work was still needed on natural resources tax, environmental tax, property tax and revenue estimation, he said. VNS