Tax incentives cause Vietnam’s public services to suffer: ActionAid

“In 2012, the tax revenues that Vietnam could have collected from foreign-invested enterprises were about three times higher than the total expenditure on health care and five times larger than the total spending on nationwide education,” said Hoang Phuong Thao, Country Director of ActionAid Vietnam.

Vietnam’s state budget revenues fell by $20 million in 2012 due to tax incentives granted to foreign-invested companies, Thao added, such lost revenues could have been used to finance the sustainable development of education and health care sectors, as well as “to improve public services, social welfare and social justice.”

Vietnam has been an attractive investment destination, consistently drawing strong foreign capital inflows since 1986 economic reform.

Actual foreign direct investment (FDI) inflow last year jumped 17.4 percent to a record of $14.5 billion, data from the General Statistics Office shows. The current trend of above‐average FDI inflows is expected to continue, said the National Financial Supervisory Committee, especially after Vietnam has entered a variety of free trade agreements (FTAs).

Vietnam concluded negotiations for FTAs with the Eurasian Economic Union, the European Union, South Korea and the Trans-Pacific Partnership (TPP) last year. The Southeast Asia country anticipates a sharp increase in foreign investment this year as manufacturing firms capitalize on its cheap labor and the prospect of the TPP slashing tariffs.

An ActionAid expert also thought that with the current tax policies, the government was creating an unfair playing field for domestic enterprises. This is especially true with small and medium-sized companies which are clearly less competitive than foreign firms in terms of technology and innovation capabilities, labor productivity and financing.

However, Nguyen Van Phung, head of the agency of Tax Management on Large Enterprises, under the General Department of Taxation, said the Vietnamese government has always treated foreign and domestic businesses equally.

“Tax incentives [granted to foreign invested companies] are opportunities costs that Vietnam must bear in order to attract foreign investment inflows,” Phung said, “We should not see these costs as losses in the absolute sense.”

At the workshop, experts also discussed the impact of tax revenues on vulnerable people in the society. Tax revenues, according to ActionAid, can fund infrastructure, housing and public services, reducing living costs and allowing women and men to live better lives with the wages that they earn.

Closing the tax loopholes

Vietnam is trying to fix the loopholes in the corporate- tax system so that foreign-invested companies, no matter how big they are, cannot escape the tax net.

Vietnam currently applies a tax rate of 20 percent on corporate profits. This has been significantly reduced from the rate of 25 percent in 2012.

“The corporate income tax rate of 20-22 percent is relatively low since other countries in the region have kept their tax rates as high as they can. For instance, Malaysia is at 37 percent,” said economist Vu Dinh Anh at the Institute of Economics and Finance.

The government, in attempt to shore up economic momentum through foreign direct investment inflows, has given foreign investors not only low corporate tax rates but also other tax incentives such as income tax deferrals or exemptions in a certain period of time.

However, tax authorities are constantly faced with foreign companies claiming losses to avoid tax.

American soft drink giant Coca-Cola reported losses during its 20 years of operations in Vietnam. After filing a loss of $170 million in two decades, the company paid $20 million in taxes for the first time last year. At the end of 2012, the soft drink maker’s losses exceeded its initial investment of nearly $135 million, said Ho Chi Minh City’s municipal tax department.

Coca-Cola is hardly alone. German-retailer Metro Cash & Carry was accused of falsely reporting losses over 12 years in Vietnam and failing to pay tax bills worth $23 million, according to the General Department of Taxation.

After the media reported that many foreign companies operating in Vietnam have been avoiding taxes for years, tax authorities have jumped in, looking for evidence of possible “price transferring” at these companies.

Price transferring occurs when firms book profits to countries with lower tax rates and allocate their debts and other costs to their subsidiaries in Vietnam, hence reducing profits here and increasing them elsewhere.

“I don’t think Coca-Cola or Metro have evaded taxes. They have, in fact, used the big loopholes in our tax system to avoid paying taxes. And that [tax avoidance] is perfectly legal,” ActionAid Vietnam director Hoang Phuong Thao said.

Tax avoidance was globally ubiquitous, she added, “Panama Papers” seemed to be the latest striking example of just how big tax loopholes could be at a worldwide scale.

“Tax authorities will impose measures to collect taxes from the allegedly loss-making Metro,” senior tax official Nguyen Van Phung said, referring to the tax consequences of the $700 million acquisition of Metro Vietnam by a major shareholder in Thailand’s consumer product group Berli Jucker.

Nguyen Van Phung, head of the agency of Tax Management on Large Enterpriese, under the General Department of Taxation. Photo by ActionAid

Experts at the workshop proposed serveral solutions to tax evasion and tax avoidance. They ranged from developing digital receipts, using interative database of tax data to conducting investigations into price transfering. But the quickest measure, agreed by all of these experts, is to call on consumers to exercise their rights and boycott companies who evade taxes.