Quach Duc Phap
Vice Director, Financial Policy Department
Ministry of Finance
In carrying out economic reforms which, among other things, have led to the transformation from a centrally-planned to a market mechanism, Vietnam's National Assembly has promulgated a system of tax policies uniformly applicable to all sectors of the economy, including foreign-invested enterprises in Vietnam. This new tax system is comprised of 10 taxes and a number of fees, which can be described as follows:
1. A business licensing tax, with a tax rate of VND 650.000, is imposed annually on businesses.
2. A turnover tax, with eleven different tax rates ranging from 0 percent to 30 percent, is imposed on monthly turnover of businesses. The rates vary across different kinds of business activities which are conducted by them, and categories of goods and services (according to Amendment of Turnover Tax Law of 1995).
3. An excise tax, with tax rates ranging from 15 to 100 percent, is imposed on six categories of goods, namely cigarettes, alcohol, beer, firecrackers, cars and gasoline when imported or domestically produced (according to amendment of Excise Tax law of 1995).
4. Import and export duties:
Export duties, with eleven different tax rates ranging from 0 to 15 percent on a f.o.b. price basis, are imposed on agricultural, forestry and sea products which are exported in the form of raw materials, and several kinds of natural resources.
Import duties, with 34 different tax rates ranging form 0 to 80 percent on a c.i.f.price basis, are imposed on imported goods (according to Amendment of Import Export Duties Law of 1995).
5. A profits tax, with three different tax rates varying across business activities, is imposed on annual taxable profits of businesses: 25 percent with respect to heavy industry, transport and construction; 35 percent with respect to light industry, food-stuff industry and other production activities; and 45 percent with respect to trade, services and restaurants.
6. An income tax on high income earners is imposed on the monthly income of each individual. Vietnamese who reside in Vietnam and have regular incomes exceeding 1.2 VND million per month are liable to tax at progressive tax rates ranging from 10 percent to 60 percent; foreign individuals who reside in Vietnam having regular incomes exceeding 5 VND million per month are subject to tax at progressive tax rates ranging from 10 to 50 percent.
7. A natural resources tax, with different rates ranging from 1 to 40 percent, is imposed on the value of raw natural resources exploited. The tax rates depend on categories of natural resource.
8. An agriculture land use tax is imposed annually on agricultural land users. Six tax rates are determined according to the area and category of land used (taxable amounts are calculated in the form of rice and paid in cash).
9. A house and land tax is imposed annually on residential, commercial and industrial lands. The rates are determined as one to 32 times of agricultural land use tax rates depending on the location of land.
10. A tax on transfer of land use right is imposed on the value of land at the time of transfer, with tax rates ranging from five percent to 40 percent.
There are also other fees such as registration fees, public notary fees, highway, tolls, etc.
The above-mentioned tax policies are also applicable to foreign-invested enterprises in Vietnam. The Law on FDI in Vietnam (the Law in force), however, has several provisions on foreign-invested enterprises which are different from those on domestic enterprises, e.g. profits tax, tax on remittance of profits aboard, import duties, rent on land and water surfaces. Those differences are as follows:
1. Profits tax:
a.) The standard tax rate is 25 percent; the higher tax rates are applied to oil and gas exploitation companies, as well as to those who are engaged in the exploitation of precious and rare natural resources.
Investment projects, which need to be encouraged, could enjoy tax incentives, like tax holidays or tax reduction (to 10 percent, 15 percent or 20 percent).
b.) Foreign-invested enterprises which reinvest their profits earned during a period of three years or more, are entitled to a refund in the amount of profits tax paid on the part of reinvested profits.
2. Foreign-invested enterprises which remit their profits abroad are subject to tax on remitted profits, at tax rates of 5, 7 or 10 percent depending on each specific project.
3. Equipment, machinery, spare-rates, transportation means and materials which are imported into Vietnam for the purposes of capital contribution under the business cooperation contract or establishment of foreign invested enterprises in Vietnam, are exempted from import duties.
4. Foreign-invested enterprises are entitled to water surfaces rental for the period not exceeding 70 years with the rent higher than that of domestic-invested enterprises.
With preferential conditions provided in the Law on FDI in Vietnam, including the above-mentioned tax incentives, the Law has drawn the attention of many foreign investors since its promulgation. The implementation of the law on FDI for the past years has made certain achievements:
1.) The number of investment projects has increased from annually: There were 373 projects in 1988-1991, 193 in 1992, 272 in 1993, 362 in 1994, and 315 in the first nine months of 1995; the number of FDI projects by September 1995 stood at 1,515, with the total registered capital of US$ 18,641 million.
Besides a number of project licenses which have been revoked and those that have been completed, there are currently 1,280 projects in Vietnam, with a registered capital of US$ 17,280 million.
2.) With respect to investment from and duration of:
Among the existing projects, the number of joint venture enterprises account for 63.7 percent; 100 percent foreign owned capital enterprises for 28.9 percent and business cooperation contracts for 7.4 percent.
Projects that have a 50-year duration account for 2.1 percent; those that have a 40-to-50-year duration account for 3 percent; and those that have a less-than-four-year duration account for 93 percent.
3.) With respect to investment allocation:
Investment in the production sector amounts to 80 percent of the total number of projects and 60 percent of the total invested capital; the service sector accounts for over 20 percent and 30 percent, respectively.
At first, the FDI was mainly concentrated in Ho Chi Minh City. It is now expanding throughout the country. The amount of FDI in northern provinces accounts for 36 percent of the total investment capital, in central provinces 7 percent, and in southern provinces 57 percent. Until now, there were no FDI projects in some provinces such as Hagiang, Kontum, Thaibinh, etc.
4.) By June 1995, there were about 100 thousands Vietnamese working for foreign-invested enterprises, excluding those who supply goods and services for FDI enterprises.
5.) The export volume of Vietnam in 1986 was 823 million dollars-equivalent ruble (the year before the promulgation of the Law on FDl in Vietnam); in 1991 - over 2 billion; in 1992 - over 2.5 billion; in 1993 - over 2.9 billion; in 1994 - over 3.6 billion; and in 1995 an estimated 5 billion of this amount.
The share of foreign-invested enterprises is relatively significant.
6.) Budget revenues accrued from FDI enterprises increased rapidly from year to year, assuming that the share in 1991 is 100 percent, in 1992 - 162 percent, and accounts for nearly 20 percent of the total annual State Budget revenues.
It is worthy to note that, given the fact that Vietnam has issued the Law on FDI quite recently, and that it lacks both knowledge and experience, the increasing number of investment projects is an encouraging achievement, and tax policies have made important configuration in this regard.
However, despite the positive effects that preferential tax re gulations have on FDI, those regulations have clearly shown some weaknesses which need to be revised and amended. Those weaknesses are as follows:
a.) The purpose of the import duty exemption is to reduce the cost of investment. However, the rampant exemption applicable to all projects results in disadvantages: creating inequality between foreign and domestic investors; evasion of import duty on consumer goods (which are in the same containers of materials and equipment that are exempt from import duty); and not encouraging the use of raw materials available in Vietnam (especially construction materials, etc.).
b.) The collection of tax on remittance of profits abroard is to encourage investors to invest their returns in Vietnam. During the process of implementation, the effectiveness of this tax is relatively low as the collection of tax evasion by investors. This tax may cause concern to investors as they think that there are many taxes imposed on their profits. In practice, a few countries still apply this tax.
c.) Profit tax rates which are lower than that of domestic investment may lead to the thought of inequality. If we provide favorable conditions for FDI by means of low tax rates without signing and implementing any bilateral agreements, the FDI shall be less attractive to investors themselves, creating advantages for investing countries, but not Vietnam. The refund of the tax amount paid for profits which are reinvested does not focus on business sectors and activities that need to be encouraged.
d.) The present regulations on rent on land and water surfaces do not provide strong incentives to foreign investors to intensively invest in Vietnam, especially in remote areas.
In keeping with future orientations of economic development and with the tax reform at the second stage, we would recommend some additions to and amendments of the tax regulations provided in the law on FDI in Vietnam.
1. With respect to import duty:
The state should exempt the import duty on equipment, machinery and raw materials which are necessary, but which domestic enterprises are unable to produce, especially new technology. The law only works out the principles and assigns the government to issue a list of equipment, machinery and raw materials which are exempted from import duty from time and which comply with the requirements of national industrialization and modernization. The list shall be applied to both foreign and domestic investment enterprises.
2. With respect to profits tax:
The state shall conduct research to promulgate the Law on Corporate Income Tax (replacing the current Law on Profits Tax) in order to apply an equal tax treatment to foreign and domestic investors. The Law on Corporate Income Tax should have a single tax rate(approximately 30, 33 or 35 percent). The projects which invest in encouraged sectors such as infrastructure, agricultural production, forestry, aquaculture and agricultural product processing shall be subject to rates lower than the standard one (maybe only 10 or 15 percent). The projects which invest in remote, mountainous, and island areas may enjoy tax exemption in a couple of years; the duration of tax exemption and lower tax rates should be regulated differently, depending on projects and to the extent they need to be encouraged. On the basis of the promulgation of the Law on Corporate Income Tax, we remove the regulation on remittance of profits abroad.
3. With respect to rental on land and water surface
The following additions should be:
a. In some big cities such as Hanoi, Hai Phong, Da Nang, Ho Chi Minh, Dong Nai, Vungtau, Can Tho, etc., the state shall keep the present rental:
b. In delta provinces and coastal-central provinces, we should provide land rental equivalent to three to five times those of domestic investment ( currently over 10 times)
c. In remote, mountainous ares, the state should exempt the rental on land surfaces for the period from 10 to 20 years ( in China they exempt rental on land and water surfaces up to 30 years in some areas).