This article was first published in the March 2012 Singapore edition of Accounting and Business magazine.
As Vietnam goes through a rapid period of social and economic change, so do the nation’s laws. Tax governance and policy reform are crucial for the development of the tax sector as well as the economy, and they are a rising priority for both local and foreign businesses in the country. But, as lawmakers have set and amended tax law in the country, it has become more complex, particularly for corporates.
Vietnam is the second fastest growing economy in Asia, and over the past two decades Vietnam’s tax framework has had to work fast to keep pace with development, while also maintaining budget revenue for the state. Currently, Vietnam relies heavily on indirect tax as a key source of revenue.
Vietnam’s value-added tax (VAT) system is one of the most complicated, if not the most, in the region. Unlike New Zealand’s goods and services tax (GST), which is considered one of the simplest in the world, Vietnam’s has two methods of declaration: a tax credit method applied to corporates; and a direct method applied to individuals and households.
‘VAT is applied either to actual or presumed turnover. This has a cascading effect as VAT is not able to be claimed as an input,’ according to Tom McClelland, partner and tax leader at Deloitte Vietnam. McClelland has been heavily involved in tax policy since he arrived in the country in 1998 and contributes to the development of Vietnam’s tax regime.
Around 76.5% of Vietnam’s 90 million people live in rural Vietnam; and 62.5% of the country’s entire gross domestic product comes from rural areas. Until now, the biggest Vietnamese and foreign companies have been in the biggest six cities: Ho Chi Minh, Hanoi, Nha Trang, Da Nang, Hai Phong and Can Tho.
Types of industry and business vary but there are countless family run stores and small businesses both in cities and rural areas. In the big six cities there are around 90,000 traditional grocery stores, according to Nielsen Vietnam’s 2010 census. Despite rapid changes in the retail landscape with the introduction of modern trade and supermarkets, traditional trade is still predominant. And while the use of debit and credits cards has increased significantly over the past five years (8% of bank account holders had a debit card in 2006 v 43% in 2010 according to Nielsen), Vietnamese people still use cash for purchases. That’s often because they have to – it isn’t possible to pay for fresh food from a street stall or market with a debit card.
Hoang Vu is a tax consultant with Ernst & Young in Hanoi. He says one of the reasons for the complicated system is the vast use of cash, together with the underdeveloped banking system.
‘Cash is still the most popular means of payment, which means it is easy for suppliers to under-declare VAT-taxable revenue by not issuing invoices to consumers,’ he explains.
‘This causes a lot of difficulties for the government in trying to collect taxes, with complicated mechanisms aimed at controlling and monitoring the output and input invoices.’
The direct method of VAT is complicated and has caused issues for banks and businesses alike, but there was a reason it was introduced.
‘The direct method was no doubt introduced to accommodate the large number of individual, and particularly household businesses, in Vietnam,’ says McClelland.
‘The Vietnam VAT system has been adapted to the local business environment and structure, for example the various VAT rates and the unique direct VAT method.’
VAT was introduced in 1999 and initially levied at four different rates: 0%, 5%, 10% and 20%, with many discretionary exemptions. It has undergone minor surgery since then, with the government reducing the number of tax rates to three (0%, 5% and 10%) and decreasing the number of discretionary exemptions. But accountants still find the system overly complicated and call for further simplification.
Loc Huu Phan, chief accountant for shipbuilding company Strategic Marine Vietnam, thinks Vietnam’s VAT system must be simplified further: ‘Vietnamese law changes so often, we are very confused about how to apply VAT law. The government tried to overhaul it, but even now the VAT regime is still complicated.’
It’s commonly agreed that complicated tax systems impact
the economy negatively. But are there any benefits?
‘There are no advantages in complexity, however there are advantages in more detailed tax legislation where it gives taxpayers more certainty,’ say McClelland.
‘A harmonisation of the VAT rates to one rate (other than 0%) should also be an objective and the government is working towards this. Moving to a threshold system where only taxpayers having turnover over a certain threshold are required to register for VAT as in several other countries, eg Singapore, may be preferable. The New Zealand GST system is probably the purest in the world with one rate and minimal exceptions.’
Less reliance on cash
Hoang also agrees more needs to be done. He says a more effective solution would be to encourage the use of electronic payment in transactions and from there, more effectively control transactions in the economy, reducing the complexity in the VAT system.
‘The introduction of the 20 million dong limit for cash settlement with one supplier in one day is the first step, but this needs much further progress,’ he adds.
Australia’s Monash University recently took up the challenge of trying to simplify the system. James Giesecke and Tran Hoang Nhi of the Centre of Policy Studies managed to create a model which kept tax revenues for the government at the same level, but with reduced tax collection costs. It was based on a core VAT simplification that removed all discretionary exemptions and all VAT rates on non-exports equalised at a single revenue-neutral rate – 8.3%.
Leading the way
Meanwhile, the General Department of Taxation (GDT) is in the process of reforming the tax system, and is slated to finish in 2020. Ultimately, it aims to improve administrative procedures to the point where Vietnam is a leading South-East Asian country in terms of its tax system. The GDT hopes to have at least 90% of all enterprises using e-tax services; 65% carrying out tax registration and declaration via the internet; and perhaps the most difficult task – 80% of taxpayers satisfied with services provided by tax offices.
Vietnam is often criticised for its lack of efficiency in the public service sectors, including in taxation. But since the end of the war in 1975, Vietnam has overhauled its centrally planned economy to a mixed one. More recently, it has instituted radical simplification of the entire public sector along with tax reform. In 2007, the government launched Project 30, which planned to cut administrative bureaucracy by 30%. As of December 2011 that goal had not been reached, but it has reached what the Organisation for Economic Co-operation and Development (OECD) calls a ‘crucial stage’ in attempting to implement its radical cuts.
The OECD believes that one of the keys to Vietnam’s success is having a strong coordinating unit at the centre of government, with backing from senior politicians. Nguyen Xuan Phuc, the minister who led the reforms, is now deputy prime minister.
Whether Vietnam will succeed in reducing red tape or further simplify its VAT is yet to be seen. Whether it’s ready to undergo further changes at this pace is another issue altogether.
Asha Phillips, journalist
VAT at a glance
VAT applies to goods and services consumed in Vietnam. The standard VAT rate is 10% and a lower rate of 5% is applicable to provision of essential goods and services. For exported goods and services, the rate is 0%.
Activities exempt from VAT include:
- The transfer of land use right.
- Certain credit services, loans, finance leasing, investment fund, capital assignment and securities trading.
- Medical examination and treatment services.
- Public passenger transportation by bus.
- Teaching and training.
- Life insurance, student insurance, livestock insurance, and types of non-commercial insurance activities.
- Certain agricultural production.
- Imports for humanitarian and non-refundable aid.
- Transfer of technology and computer software.
- Post, telecommunication and internet services under government programmes.
- Machinery and equipment and special means of transport which are not yet produced in Vietnam and which are imported by a foreign-invested enterprise (FIE) or business cooperation contract (BCC) parties as fixed assets of the enterprises (see below).
- Construction materials not yet domestically produced and imported to form fixed assets of a FIE or to carry out a BCC.
- Goods and services of business with income below a certain threshold.
- Materials of a FIE or BCC imported to produce products to supply to an enterprise which directly produces products for export.