The World Bank issued its report Doing Business 2010 last September, ranking the business climate in 183 economies worldwide. This piece looks at why the issue of taxation was one of the weakest areas for Viet Nam in this year s report, which ranked Viet Nam seven positions lower than in 2009, and well below the average for both regional and OECD countries.
To compare tax regimes, Doing Business 2010 applied a fixed scenario with which it analysed each country. In the scenario, a medium-sized limited liability company (LLC) has been in operation since 2007 and profitable from its second year of operation. The definition of taxes was applied broadly to include all compulsory payments that impact the enterprises accounts, including compulsory insurance or pension payments for labour; social security obligations; health insurance obligations; taxes on the transfer of property; business licensing fees, fuel taxes, and value-added tax.
Criteria for evaluating the tax burden included the total number of taxes paid, the method of payment, and the frequency of payments; the amount of time required to collect information for, calculate and pay three major taxes; and the total tax rate, which was then calculated as the "share of commercial profits" paid into taxes after all exemptions and deductions were applied.
The numbers reported by Doing Business 2010 were revealing. In Viet Nam, the firm in the case study was required to make 32 separate tax payments, almost eight more than the Asia-Pacific average and 24 more than the OECD average. It took 1,050 hours for the LLC to gather all necessary information, calculate and pay taxes, four times longer than the Asia-Pacific or OECD averages.
Ultimately, the company in Viet Nam paid a total tax rate of 40.1 per cent, a number somewhere between the Asia-Pacific and OECD averages.
Following are some of the tax burdens not often counted as taxes though every enterprise in Viet Nam must consider their implications in calculating budgets and payrolls.
Social security obligations
Social insurance is required for all Vietnamese nationals employed by enterprises. The insurance is designed to compensate labourers for wage losses due to illness, injury, retirement, etc. The cost of the insurance is calculated based on the employees gross salary and consists of both compulsory and voluntary coverage areas. Employees are required to contribute 5 per cent of their salaries towards the insurance. Employers are required to pay an amount equal to the following percentages of the employee s monthly income: 3 per cent into the illness and maternity leave fund, 1 per cent into the labour accident and occupational disease fund, and 11 per cent into the retirement and survivorship fund.
Health insurance obligations
Health insurance is required for employees of enterprises governed by either the Law on Investment or the Law on Enterprises. The monthly premium per employee is not to exceed 6 per cent of that employee s monthly income. Of that percentage, employees are responsible for one-third of the premium rate and employers two-thirds of the premium rate.
Business licensing costs
Annual business registration fees apply to all business organisations and are calculated according to the nature of the ownership (foreign or non-foreign) and total capital contribution of the business organisation.
Value-added tax (VAT) applies to all goods and services used for manufacturing, business and consumption in Viet Nam. All enterprises who use goods and services in manufacturing or the conduct of business are obliged to pay VAT.