During recent years, Vietnamese government has issued many favourable tax incentive policies to foreign investment in order to attract resources for the national socio-economic development. Besides positive results, there are still some problems. Solution recommendation to increase effects of the tax incentive policy for foreign investment in Vietnam is also mentioned in this article.
Tax incentive policy for foreign investment in Vietnam
In order to attract investment, especially foreign investment, Vietnam has called to attract foreign investment through providing many favourable policies, investment incentives, including tax incentives. Law on corporate income tax issued on 2008 and Decree No. 32/2013/QH13 Amendments to the Law on corporate income tax issued on 19 June 2013 and became effective from 01 January 2014 have been reviewed to have strongly positive change with many policies encouraging investment.
Tax rate of ten percentages (10%) shall apply for 15 years and twenty percentages for 10 years), carrying forward losses shall apply for five years from the year following the year in which the loss arose, tax refund shall apply for plough, tax exemption shall apply for profit transfer abroad, etc.
In order to enjoy these incentives, the Law on Corporate Income tax (2008) and the Amedments to Law on Corporate Income tax (2013) provide tax incentives for different areas such as location, economic zones, high technologies, scientific research and techonology development, investment in crucial infrastructure of the State; software production; production of composite materials, light building materials, rare materials, renewable energy, clean energy, energy from waste destruction; development of biological technology, and environment protection;
These policies have helped encourage investment in general and foreign investment in particular. However, according to contribution ideas from experts, finance organisations and institutions, enterprises, the tax incentive policy still remains problems such as inefficiency, complexity and lack of concentration.
First, the impact of tax incentive policy on division of investment resources is still limited, less concentrated on difficult socio-economic areas. Statistics issued by Ministry of Planning and Investment (2015) shows that the FDI mostly focuses on locations having good infrastructures such as Hanoi, Ho Chi Minh, Dong Nai, Vung Tau, Hai Phong, Hung Yen, Binh Duong, Bac Ninh, Vinh Phuc, etc., which accounts for 70% of total investment capital. Other highland or mountainous areas like Tay Bac, Tay Nguyen, the number is nearly 10%. Tax incentive policies to encourage foreign investment in less developing location and high technology areas have not been efficient. Facts show that despite high incentives for those locations, it is still difficult to attract investment. 80% projects are in high ROI and low risk such as oil finery, electronics, telecommunication, food processing, hotels, office leases, etc.
Second, some tax incentive forms have become tax loophole for tax avoidance. For example, companies establish new companies to have tax incentive or tax exemption, transferring profits from projects that are not eligible for incentives to projects eligible for receiving incentives, etc.
Third, tax incentive policy does not play crucial role in inducing investors to make investment decision. The reason is that in many cases, the foreign investors are not the beneficial parties, but the employers of the projects. Many foreign companies in Vietnam, beside paying tax in Vietnam, they still have responsibility to pay tax in their country. Therefore, the tax exemption or reduction policy is not so practical and attractive.
Solution to increase effects of the tax incentive policy for foreign investment in Vietnam
In order to attract FDI effectively and reduce tax loopholes, the enterprises income tax should be amended in a way that all tax incentives shall be removed, and standard enterprise income tax rate shall be lowered to encourage the national economic development on an overall scale. Let’s discuss about recommended solution by economic expert next.
Firstly, it is recommended to remove tax incentives for intinerary investment activities. Tax incentives shall be applied more selectively. This will make the law on corporate income tax easy, understandable, management cost saving and encourage enterprise savings. For example, until 2018, tax incentives shall only be applied for (i) High and new technology projects; (ii) Investment projects located in difficult and mountainous areas listed by the government.
Secondly, standard tax rate should be lowered to the optimum level. Since 2014, this has been done by Vietnamese government. The rate has been lower compared to other Asian countries, but still higher for companies investing in Vietnam from Singapore, Hong Kong, Malaysia, Thailand, Russia, etc. It is recommended to reduce the tax rate to one more level in order to increase the competitiveness to attract more foreign investment to Vietnam. The issue is how to set up an optimum tax rate. According to recommendations from expert, 18.5% is the optimum rate for Vietnam. The reasons are as follows;
- With applying enterprise tax rate of 18.5%, state income from total enterprise tax will not be reduced but increased. Decrease in tax will reduce the income from tax but increase savings, investments and reducing the chance for tax avoidance.
- Vietnam is a developing country. Capital for socio-economic investment development is very important. Decreasing enterprise tax rate will create a more active business environment, and help attract more foreign investment in Vietnam.
- The optimum corporate tax rate application will also help to avoid transfer pricing. Learning from experience of other countries in the region and in the world, the rate of 18.5% has helped to minimize transfer pricing of FDI enterprise aiming at tax avoidance.
It is recommended that reduction of enterprise income tax should be implemented in phases: From 2016, to 20% and from 2018: 18.5%.
In conclusion, removal of all tax incentives and instead, application of optimum enterprise tax rate will make the Law on Enterprise income tax to be easy, understandable, increasing enterprise savings, creating attractive investment environment and reducing tax avoidance intention.
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By Hang Do