Lowering taxes to attract FDI is a ‘race to the bottom’: experts

By Dat Nguyen, Quynh Trang   November 15, 2020 | 05:07 pm PT
Lowering taxes to attract FDI is a ‘race to the bottom’: experts
Workers seen in a foreign-invested air conditioner manufacturing plant in the northern province of Hung Yen in December 2019. Photo by VnExpress/Vien Thong.
Competing for foreign investment with tax incentives will end up hitting governments’ revenues and be a lose-lose situation for all ASEAN members, experts warn.

The average corporate income tax rate in Southeast Asia has fallen from 25.1 percent in 2010 to 21.7 percent this year, showing that countries are competing with one another in a "race to the bottom" by offering aggressive tax incentives to foreign multinationals, a recent report by Oxfam, a global organization working on poverty alleviation, and its partners said.

In 2001 Vietnam offered a 10-year income tax waiver to Canon of Japan, but was out-competed by the Philippines with offered exemption of 8-12 years.

In 2014 Indonesia offered corporate income tax exemption for 10 years to attract investment from Samsung while Vietnam offered 15 years.

The average effective tax rate in ASEAN in 2015 was 12.28 percent, but it could have been 21.73 percent without the incentives.

ASEAN countries also use other incentives to attract FDI such as long land leasehold periods of up to 99 years.

These policies have resulted in an estimated revenue loss of 1 percent of GDP for Vietnam and the Philippines and 6 percent for Cambodia.

Vietnam gave corporate taxpayers VND46.83 trillion ($2 billion) worth of incentives in 2016, 75 percent of it to foreign investors.

"The costs of redundant fiscal incentives can exceed the benefits of additional FDI, undermining national tax revenues without evidence of return," the report said.

Offering tax incentives can also result in consequences such as increasing tax avoidance through profit shifting, or transferring profits from high-tax to low-tax countries, the report added.

Nguyen Duc Thanh, co-founder and chief adviser of the Vietnam Institute for Economics and Policy Research, said unnecessary tax and non-tax incentives affect countries’ capacity to mobilize revenues, affecting spending on essential public services.

"While competing through business environment is a race to the top, competing through tax and land incentives is a race to the bottom. The granting of land incentives, particularly the extension of lease terms, lacks transparency, which increases the risks of corruption."

Experts said ASEAN countries need to stop the unnecessary incentive race and start improving their business environment to attract foreign investors.

Vu Tu Thanh, deputy regional managing director and Vietnam representative of the U.S.-ASEAN Business Council, said tax incentives are not the top priority for his organization.

American businesses care more about the scale of a market, government policies to develop the economy, potential for per capita income growth, labor quality and costs, and how open the workforce is to a digital economy, he said.

To avoid the race to the bottom, ASEAN countries need to have policies to expand their markets and train more high-skilled labor, he added.

Dang Hoang Linh of the Diplomatic Academy of Vietnam said ASEAN member countries with similarities in infrastructure, labor and market should group together to attract foreign companies.

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