VIETNAM'S SOCIO-ECONOMIC DEVELOPMENT No.10, Summer 1997

TAX REFORM IN VIETNAM

Dr. Ngo Dinh Quang National Economics University
Eng. Nguyen Tien Dung University of Transport

Taxation in Vietnam was until the end of the 1980s based on a simple system. Two types of tax applied: one to state enterprises, the other to the collectives sector. Fundamentally, state enterprises were subordinated to the state budget. Enterprises were required to hand over profits, and all expenditures had to be approved by the state budget. At that time, the socialist market system was not transparent, and the international economy did not recognise it.

A comprehensive tax reform was fundamentally adopted at the end of the 1980s. It was implemented step by step and met all targets. New taxes were established, the fiscal system was consolidated, and as a result the state gained new legitimacy and new sources of revenue. Although it is said that the new tax system is still incomplete and has significant loopholes, important achievements have been made. This paper describes policies and tax reforms. It outlines the structure of the current tax system in Vietnam. The second section presents the basic features of the tax system. The final section discusses plans for the new tax reforms.

Taxation in Vietnam until the end of the 1980s was based on a simple system suited to a centrally planned economy. Two types of tax applied: one to state enterprises and the other to the collectives sector. State enterprises were subordinate to the state budget. Enterprises remitted profits, and all expenditures required state budget approval. This tax system proved unsuited to a peacetime economy.

After this situation became apparent, a comprehensive tax reform oriented toward a market economy was fundamentally adopted at the end of the 1980s. It was implemented step by step and met all targets. New taxes were established, the fiscal system was consolidated, and as a result the state gained legitimacy and new revenue sources. Although the new tax system is said to be still incomplete, important achievements have been made. This paper describes policies and tax reforms. It outlines the structure of the current tax system in Vietnam. The second section presents basic features of the tax system. The final section discusses the new tax reform plans.

Source: General Statistics Office, Statistical Yearbook 1995; Fiscal White Paper 1996.

First, taxes are still unitary and apply to turnover and various other taxes. These three types of tax accounted for about 75% of total taxes. Second, the special consumption tax established in 1990 applied to only about 1% of total taxes. Two reasons: first, Vietnam remains a tax-unsuitable country; second, the complex administrative procedures for personal income tax collection are a major obstacle. Third, import tax and special turnover tax are the two major special taxes in the non-state sector. The special turnover tax reached 17% of state fiscal revenue in 1995. Customs and trading companies had similar dual functions. The State had to separate these functions from the State Budget and State enterprises from 1995 onward.

Vietnam's current taxation system comprises ten tax types that apply mainly to foreign sectors, except for a few special regulations. All these taxes were promulgated in the first phase of tax reform in 1989 and subsequently enforced. In 1995, taxes and fees accounted for 20% of GDP (75% from state fiscal revenue), and have become the main component of state fiscal revenue. The state enterprise sector, which used to contribute 50% of revenue, has declined to a supporting role. In 1992–1994, taxes and fees exceeded 90% of state fiscal revenue. From 1995, the State has been separating the functions of the State Budget from state enterprises.

Special consumption tax. Two major special consumption taxes are the special turnover tax and the import tax. The special turnover tax reached 17% of state fiscal revenue in 1995. The import tax applies to imports in foreign currency or gold, and to imports via foreign trading companies. Japan, Korea, ASEAN and joint-venture companies are mainly subject to this tax.

Import-export tax. Revenue from the import-export tax has met foreign aid requirements and has become about one-third of state fiscal revenue. In 1995 it reached about 6% of total state fiscal revenue. Gold, rice, ASEAN and joint-venture companies are mainly subject to it.

Policies concerning the state fiscal system have played an important role in the formulation of economic policies. State revenue has been policy-driven. The State Budget has been financed from state fiscal revenue and has reached about 10% of GDP. Since 1992, there has been a shift, and policies have been gradually implemented. The fiscal deficit has been addressed through inflation, and the State has separated these functions from the State Budget and state enterprises.

Policies concerning the state fiscal system have important implications for economic development. To secure sufficient revenue for expenditure, policies concerning the state fiscal system are necessary. Vietnam's taxation in the state sector is still weak, and further reform is easily foreseeable.

Fairness and efficiency are important objectives of economic policy. Taxes are not only for raising revenue for the state but also for the equitable distribution of income and the reduction of inequality. The tax system's role in shaping the economic behaviour of enterprises and individuals in various sectors is the core of this analysis. Tax structure is becoming increasingly complex. The import tax applies to 3,000 or more commodity types subject to 0–45% rates. In other countries this figure is 2–3% at most, but in Vietnam tax collection reaches about 10% of total taxes.

Source: World Development Report 1991; Vietnam Statistical Yearbook 1995.

Source: Vietnam household survey 1992-1993. World Bank.

The State aims to describe the policies and revenue implications of the fiscal system. The key conclusion is that tax reform has important implications, but many issues remain to be addressed. The tax systems imposed on the banking and economics sectors by decree and treaty reached 35% and 57% respectively. The State and trading companies had similar dual functions.

An important objective of Vietnam's tax reform is to promote justice. Taxes from land and state enterprises are enforced. Industry, trading and urban development have important implications for tax collection. The state has established a unified tax structure that applies to both domestic and foreign enterprises. Tax collection from the banking and economics sectors by decree and treaty reached 35% and 57% respectively. The state aims to establish a proper tax structure and to collect taxes equitably. Tax reform is incomplete, but significant progress has been made.

In 1995, the State initiated the second phase of tax reform and the national tax modernisation plan. Its objective was to unify taxation and to bring Vietnam's economy into line with the world economy. The modernisation plan has been implemented. (See Table 6.)

Value-added tax (VAT) will become the main tax. An important instrument for consumption tax reform is the value-added tax. The VAT Law was universally agreed in the National Assembly and will come into force on 1 January 1999. The VAT is calculated on the basis of the tax law. Two issues arise in Vietnam regarding VAT: administration and tax structure. VAT has been established as the only tax structure that applies to all consumption quintiles, and five types of tax have been combined into a unified tax structure: enterprise tax, turnover tax, special consumption tax, business tax, and import-export tax. This has given rise to substantial preparatory work before the introduction of VAT. Internationally, it has given rise to a unified tax structure that applies to both domestic and foreign enterprises. Compared with Korea and Thailand, where similar tax structures apply at about 30% each, when the average reaches 75% from 75%, Malaysia has the same figure. In other countries this figure is 2–3% at most, but in Vietnam tax collection reaches about 10% of total taxes.

Improvement of bookkeeping and record-keeping systems. To implement VAT effectively, enterprises must improve their accounting systems. Double-entry bookkeeping, invoices, and vouchers must be properly maintained. The Ministry of Finance is preparing to expand the tax base and to establish tax schedules for both Vietnamese and foreigners residing in Vietnam.

Enterprise income tax. Under the VAT structure, the following two tax laws—foreign business tax and personal income tax—have been uniformly adopted. Foreign business tax applies to profit. It is a unified tax structure that applies to both domestic and foreign sectors and to the state and foreign trading sectors, using a single tax structure (33%). It is enforced on a unified scale internationally and serves as the first systematic tax collection. In the same way, foreign business tax applies to foreign and broader international sectors only. Personal income tax applies to regulated individual sectors. The tax collection method for personal income tax is that the tax threshold and fixed cost are 1,200,000 VND. This tax is a major tax imposed on Vietnamese residents (200k VND/month or more) and foreigners (500k VND/month or more). This tax is enforced on a progressive scale and applies to foreigners living in Vietnam. International tax reform has aimed to bring Vietnam's tax structure in line with the world and to simplify tax administration.

AFTA accession: tariff reduction for 3,000 items (5% or less by 2006). With the AFTA framework, Vietnam must bring its tariffs to 5% or less by 2006. At the end of 1995, the Fiscal White Paper announced Vietnam's commodity list for AFTA accession. This list covers more than 3,000 commodity items subject to tariff rates accounting for 75% of their total value. These items fall into two categories: (1) Immediate reduction list: commodity items subject to tax at a rate of 20% or less; tariffs will be gradually reduced from 1996 and fully reduced by 2006. (2) Normal reduction list: commodity items subject to tax at a rate of more than 20%; tariff reduction is being implemented over several years, and by 2006 tariffs will be reduced to 5% or less. At present, only 0–5% of tax rates apply to most of the commodity types that are subject to tax in Vietnam. In any case, when viewed in the short term, revenue from taxation will be collectable, and the fiscal structure must be diversified. To achieve this, more taxes must be brought into the fiscal system. The State and trading companies have similar dual functions. The former could be phased out, or if the latter had sufficient revenue, the other's corporate taxes would be reduced. The State Budget and state enterprises had to separate these functions from 1995 onward.

Other taxes and reform. Tax reform is incomplete, but significant progress has been made. Systematic reform is essential and cannot be implemented in full until the maximum scope of the tax law is ensured. The tax administration structure and the like, as well as the tax reforms that follow, are necessary for sectors and individuals to understand the tax structure. Agricultural products and natural resources tax have not yet been consolidated. Reform is also important and is recognised in the development sector.

Source: Fiscal White Paper 1997, General Statistics Office.

The key objective of the current tax reform is to fulfil one of the five important state policies for the fiscal system. In coming years, the main tasks of tax reform will be to unify the tax structure and to consolidate various taxes, so that the tax structure can be modernised. Tax collection and legislation are prerequisites for tax reform. Tax collection and consolidation are, therefore, the foremost prerequisites for tax reform.

Building a new tax system will serve Vietnam's development, policies, economic justice and trade, income distribution and mobilisation of resources. The necessary foundations for strict justice have been established in various sectors. Both development and justice are necessary. The new tax system will address Vietnam's development, renovation, economic justice and trade, income structure and resource mobilisation. Strict application in various sectors has been established. Reform is also important and recognised in the development sector. Various sectors such as industry, trading and urban development have important implications for tax collection.

Development, as well as reform, has important status and is recognised. The various sectors of industry and trading that have undergone reform, and the structure of justice, are necessary for both. The tax reform that follows international practice, and the structure of justice in various sectors, are necessary for development. Equitable growth and fair taxation remain central to Vietnam's long-term socio-economic objectives.

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