TAX INCENTIVES IN VIET NAM IMF Tax Policy

TAX INCENTIVES IN VIET NAM IMF Tax Policy Seminar for Asian and Pacific Countries on Tax Incentives Tokyo, June 9, 2009 Financed by JSA by Nguyen Van Phung Deputy Director General Tax Policy Department, MOF 1 IMF TAX SEMINAR 2009

Outline of the Presentation: 1. Overall of reform of the Vietnamese tax system 1. 1. First phase of tax reform (1990) 1. 2. Second phase of tax reform (1998) 1. 3. Third phase of tax reform (2009) 2. Tax incentives in Vietnam 2. 1. 2. 2. 2. 3. 2. 4. 2. 5. Period 1990 – 1998 Period 1999 – 2003 Period 2004 – 2008 Period from 2009 Experience of the CIT incentives 2 IMF TAX SEMINAR 2009

1. 1. First phase of tax reform (1990 s) n Introducing nine important tax legislations 1. Import and export duties: from 1988, 36 tax rates 2. Turnover tax: Effective from October 1990; 11 tax rates, ranging from 0. 5% to 40% 3. Special consumption tax : Effective from October 1990; Tax rates of from 20% - 50% 4. Profit tax: Effective from October 1990, Tax rate : Ø Domestic invested enterprises: 30%, 40%, 50% Ø Foreign invested enterprises paid at lower rates in accordance with the Law on foreign direct investment 3 IMF TAX SEMINAR 2009

1. 1. First phase of tax reform (cont. , ) 5. 6. 7. 8. Agricultural land use tax, effective from 1993 Tax on the transfer of land use right, ef. Nfective from 1993 Natural resource tax (ordinance), effective from 1990 Income tax on high income earners (ordinance), effective from April 1991 9. Tax on land housing (ordinance), Effective from October 1992, Imposed on land, not on house n Reform the system of tax administration Ø Established General Department of Taxation Ø Tax system is vertically organized from the central to the local (province, district tax offices) 4 IMF TAX SEMINAR 2009

1. 2. Second phase of tax reform (1998) n n n Introducing VAT and enterprise income tax Amending the regulations on import and export duties and on special consumption tax (excise tax) ensure consistency in the tax system Amending the Ordinance on income tax on high income earners: tax exemption threshold increased (from 3 million VND to 5 million VND); Reformed taxes related to land Adopted the Ordinance on fees and charges 5 IMF TAX SEMINAR 2009

1. 2. Second phase of tax reform (VAT) n n Three tax rates: 0%, 5% and 10% (1999 to 2003, there were four rates: 0%, 5%, 10% and 20%) Ø Zero rate: Applies to exported goods and services Ø 5% rate applies to essential goods and services, Ø 10% (standard tax rate): other goods and services which are subject to the 0% or 5% rates Issues: Ø Too much VAT exempted goods and services (26 categories of goods and services); Ø Lack of adequate VAT threshold; 6 IMF TAX SEMINAR 2009

1. 2. Second phase of tax reform (EIT) n n Introduced in 1999 and amended in 2003 Scope of coverage: Ø Enterprises, household/business individuals, partnerships Tax rate: Ø Standard tax rate: 28% (1999 to 2003, there were two different tax rates applied separately to domestic enterprises (32%) and foreign invested enterprises (25%) Ø Preferential tax rates: 10%, 15%, 20% and 25% Tax incentive (tax reduction & exemption, loss carry-forward): Ø Investment encouragement areas (invested in remote and mountainous areas) and sectors (e. g. high-tech sector) Ø Investment in industrial zones, special economic zones 7 IMF TAX SEMINAR 2009

1. 2. Tax system of the 2 phases of the reform n Export and import duties n Value added tax (VAT) n Special consumption tax (SCT) n Enterprise income tax (EIT) n Agricultural land use tax n Tax on land use right transfer n Personal income tax on high income earners n Land & Housing tax n Natural resources tax n Fees and charges 8 IMF TAX SEMINAR 2009

1. 3. Third phase of tax reform n n Amending VAT legislation (2008, effective from 2009); Ø Reducing the number of goods and services which are VAT exempted; Ø Expansion the scope of 10% tax rate Amending SCT (2008, effective from 2009 April) Ø Reforming tax rates Ø Reviewing SCT reductions and exemption Ø Applying non-discrimination principle between domestic produced goods and imported goods 9 IMF TAX SEMINAR 2009

1. 3. Third phase of tax reform n n Reforming EIT (2008, effective from 2009): Ø Reducing tax rate Ø Narrowing the scope of tax exemptions and reductions Ø A single corporate income tax regime for all economic sectors Reforming personal income tax: Introducing personal income tax law (PIT) in 2007 with expansion of tax base and taxpayers n Abolishing the tax on land use right transfer n Introducing Law on natural resource tax (2009) n Introducing Law on land housing tax (2010) n Introducing environment protection tax (2010 afterward) 10 IMF TAX SEMINAR 2009

1. 3. Third phase of tax reform n n n Reforming tax administration Ø Modernization tax administration system Ø Organization Ø Personnel Ø Technology Applying self-assessment mechanism Tax education and dissemination of information 11 IMF TAX SEMINAR 2009

2. Tax incentives in Vietnam 2. 1. Period 1990 – 1998 2. 2. Period 1999 – 2003 2. 3. Period 2004 – 2008 2. 4. Period from 2009 2. 5. Experience of the CIT incentives 12 IMF TAX SEMINAR 2009

2. 1. Period 1990 – 1998 (Profit tax incentives) n Domestic invested enterprises: Ø Tax exemption granted to newly established which are relocated from delta areas to mountainous areas for some years; Ø Tax reduction granted to extended or in-depth investments; Ø Tax reduction applied to enterprises that manufacture import- substitutes; Ø Tax exemption granted to income portions earned from scientific research and technological services contracts; Ø Tax exemption & reduction granted to businesses facing difficulties due to natural disasters; exemption granted to transport using rudimental vehicles in mountainous areas and so on. 13 IMF TAX SEMINAR 2009

2. 1. Period 1990 – 1998 (Profit tax incentives) n Foreign direct invested enterprises: Ø Preferential tax rates were applied to certain projects but not higher than 25%; Preferential tax rates and their durations depend on business areas, locations, labor size, high-tech levels, export ratios, local contents. Ø Tax exemption for a maximum period of 4 years from the first year having profit & 50% reduction of profit tax payable for a maximum period of 4 subsequent years. Ø Since 1996, the tax incentives for FDI had been added as follows: encouraged business areas were enlarged; tax rates were 20%, 15% or 10%; high incentives for enterprises engaging in infrastructure, export processing, high-tech (maximum tax exemption duration was 8 years). 14 IMF TAX SEMINAR 2009

2. 2. Period 1998 – 2003 (CIT incentives) n n n The corporate income tax law was promulgated in 1997 (came into effect from Jan 1999). The common CIT rate for domestic enterprises was 32%, while the maximum rate imposed on FDI sector was 25%. In the context of the Asian financial crisis, the Domestic Investment Encouragement Law, including many tax incentives was issued The Law on Foreign Investment in Vietnam was amended comprehensively The tax incentives for the domestic sector were less favourable than those for FDI. 15 IMF TAX SEMINAR 2009

1998 – 2003: CIT incentives for Domestic enterprises n n Preferential tax rates: 25%, 20% and 15% were imposed on newly-established businesses, depending on business areas and locations. Domestic newly-established businesses were entitled to enjoy CIT exemption for the first 2 years and a 50% reduction for the 2 following years. If operating in encouraged areas or locations were granted maximum 4 -year exemption, and a 50% reduction for the 9 following years. In case of meeting both criteria on business areas and locations were entitled to higher preferential tax than those that meet one (lower tax rates, longer duration of tax exemption or reduction). Expanded investment projects of enterprises were entitled to CIT exemption on the increased portion of income of the first year, and a 50% reduction in CIT amount due for the next 2 years; If Expanded projects operating in the encouraged business areas or locations were granted maximum 4 -year exemption, and a 50% reduction in the next 7 years. BOT and BTO projects were entitled to CIT exemption for their first four years, and a 50% reduction on the CIT next nine years. 16 IMF TAX SEMINAR 2009

1998 – 2003: CIT incentives for FDI n n Ø Ø Ø Preferential tax rates of 20%, 15% and 10% for periods of 10, 12 and 15 years, respectively; FDI projects meeting one of the following conditions were entitled to enjoy preferential CIT rates in their whole operation: Investment in business sectors and industries under the specially -encouraged investment list; Investment in location under the list of socio-economic speciallydifficult locations; Investment projects building infrastructure of industrial, export processing, and high-tech zones; Investment projects on healthcare, education, scientific research BOT, BTO, BT projects on infrastructure; 17 IMF TAX SEMINAR 2009

1998 – 2003: CIT incentives for FDI (cont. , ) CIT exemption/reduction: Ø Maximum 2 -year CIT exemption, and a 50% reduction of tax for the next two years. Ø Projects that meet many criteria of encouraged-investment, they were entitled to have 4 -year CIT exemption and following 4 -year of 50% tax reduction. Ø For specially-encouraged cases, the maximum duration of exemption was 8 years. n CIT refund due to reinvestment: Foreign investors using allocated income for reinvestment would be entitled to a refund of the paid CIT amount of the reinvested income. n 50% CIT reduction was granted to foreign investors transferring n their equities to local enterprises. 18 IMF TAX SEMINAR 2009

2. 3. Period 2004 - 2008 n n The Law on CIT (2003) was to apply uniform provisions on CIT and CIT incentives towards domestic and FDI enterprises: The uniform rate of 28% replaced the rate of 32% for domestic enterprises and rate of 25% for FDI. New CIT incentives were applied to all forms of enterprises, in which deductions for fixed asset depreciation were doubled compared to those applied the straight line depreciation method. The 2003 CIT Law had to inherit all previous provisions on CIT incentives prescribed in the Law on Domestic Investment Encouragement and the Law on Foreign Investment in Vietnam under the principle of selecting the highest CIT incentives and the most favorable conditions to be uniformly applied. 19 IMF TAX SEMINAR 2009

2. 4. Period from 2009 n n Vietnam has revised comprehensively a number of important tax laws for their implementation since 2009. With regards to the CIT Law, the most outstanding revised contents include: i. Individuals and households conducting activities of production and/or business in goods and services are PIT taxpayers instead of CIT taxpayers as regulated in the 2003 CIT Law; ii. The CIT rate has been reduced from 28% to 25%; iii. Amending provisions on deductible expenses to create the most favorable conditions for taxpayers; iv. Reforming tax incentives in a simple and transparent way. 20 IMF TAX SEMINAR 2009

2. 4. Period from 2009 – New CIT incentives v Enterprises are allowed to establish Science and Technology Development Fund from pre-tax income. v CIT incentives have been reformed to: Ø Continue to encourage the establishment of new enterprises in areas of specially-difficult socio-economic conditions and areas of difficult socio-economic conditions; Ø Narrow tax incentives for business areas; Ø Removal of the preferential CIT rate of 15% to simplify the incentive regime and Ø Create CIT incentive differential among geographical areas and give higher CIT incentives for areas with specially-difficult socioeconomic conditions. 21 IMF TAX SEMINAR 2009

2. 4. Period from 2009 – New CIT incentives v Abolish all CIT incentives for expanded investments as these incentives are not transparent and can be easily abused. v CIT incentives for enterprises established before 2009 are reserved based on the principle that enterprises will decide the most favorable conditions for them: either applying the new regulations or the current incentives until expired. v The right to enjoy duration of tax exemption should be transparent, minimizing abuse: if an enterprise does not earn profit after 3 years of its operation, it is allowed to enjoy tax exemption or reduction from the fourth year (instead of duration of tax exemption/reduction was from the time when an enterprise had taxable income). 22 IMF TAX SEMINAR 2009

2. 5. Experience of the CIT incentives n Tax incentives are an important element in the tax policy system. It is one of the factors which enhances the competitiveness of a country compared to others that having similar conditions in a region. Tax incentives have brought positive effects on attracting FDI and encouraging domestic sources for investment and development in Vietnam. Tax incentives, therefore, have become a required factor for a country transforming from a centrally-planned economy to a market-oriented economy. 23 IMF TAX SEMINAR 2009

2. 5. Experience of the CIT incentives n Regulations on tax incentives need a transparent regime right from the designing of policies with specific conditions and clear procedures. Procedures for the implementation of these regulations should be simple to help investors minimize their expenses when enjoying tax incentives. Several studies have shown that Vietnam’s tax incentives seem “generous” but they are inefficient due to their complicated implementation and inconvenient procedures, leading to negative cases where both taxpayers and tax authorities could take unfair advantage of. This waste of social resources has undermined the role of tax incentives, which could lead to “redundant” tax incentives. 24 IMF TAX SEMINAR 2009

2. 5. Experience of the CIT incentives n Tax incentives could directly affect the investment attraction in the short term but could become a “burden” in the medium and long term if there were lack of a strategic vision and technical criteria in designing policies. Vietnam will face an inequitable business environment in the next few years. Enterprises established from 2009 could be less competitive than those established before as all the previous tax incentives shall be reserved in the new CIT Law until their expiration. 25 IMF TAX SEMINAR 2009

Thank you! 26 IMF TAX SEMINAR 2009