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Vietnam: Costs of tax compliance’, 1995, Asia-Pacific Tax Bulletin, vol.1, no.1, International Bureau of Fiscal Documentation, Amsterdam, January, p. 22-25.

Authors:
Vietnam:
Cost of Compliance
The Taxpayers' Hidden Tax Burden
By Gitte Heij
(‘Vietnam: Costs of tax compliance’, 1995, Asia-Pacific Tax Bulletin, vol.1, no.1, International Bureau
of Fiscal Documentation, Amsterdam, January, p. 22-25.)
Introduction
State enterprises were for many years the main contributors to
Vietnam's tax revenue. However after the introduction of a
market-oriented system in the late eighties, the tax revenue from
state enterprises dropped significantly. The Vietnamese Government
faced declining revenues while at the same time its budget was
rapidly expanding. In order to solve the revenue problems, the
Government introduced a range of new tax laws. Currently, several
new laws are in place while others will come into force in the near
future.
The Vietnamese Government also uses tax incentives to attract foreign investment. Low
corporate tax rates, or even temporary tax exemptions, are offered to lure foreign companies, in
an effort to compete with other Asian countries for foreign investment. Currently, Vietnam
provides one of the most favourable corporate tax regimes in the Asian region. Tax holidays, tax
incentives, reduced rates - all are available in Vietnam. However, foreign investors are
confronted with a wide range of complex and inconsistently- applied tax laws. In addition the
General Tax Department warns for 'unofficial' fees deliberately being imposed by government
branches and regional and local authorities. Lack of clarity and transparency add to the
complication of tax laws in Vietnam. At the same time there is no proper procedure for those
taxpayers who disagree with their tax assessment. All these costs of compliance add to the tax
bill paid by foreign investors. This article examines the impact of these costs of compliance in
Vietnam. What can foreign investors expect when they have to estimate their compliance costs
as well as their actual tax bill?
Costs of tax compliance
General
In order to comply with the law the taxpayer has to fulfil certain conditions. For example the
bookkeeping of a taxpayer has to be conducted according to the requirements of the tax law.
Assessment forms need to be filled in, often with the assistance of an expert, and a tax
planning
i
needs to be undertaken, again probably with the assistance
of experts. Costs involved in these matters, or compliance costs
of taxation, can be defined as:
'Those costs incurred by taxpayers or third parties, notably
businesses, in meeting the requirements imposed upon them by
a given tax structure (excluding payment of the tax itself
and any distortion costs arising from it)'(Sandford 1989;10).
Although such costs are difficult to measure and very little
research has been done (Pope 1991;251), some components of these
costs can be identified
ii
, such as legal problems, the time required
to deal with the bureaucracy, the issue of hidden fees and the
objection and appeal process.
Legal problems
There are many different tax laws in Vietnam, which can themselves be rather complicated and
they do not always give guidelines for issues that the tax payers will be confronted with. These
ambiguities are evident in many tax laws in Vietnam.
One of the complicated tax laws is the import tax. For example, at the present time, many
foreign investors face a temporary tax levied on items imported for the production of export
goods. This rule was introduced in 1993, for the purpose of preventing businesses from
importing goods and selling them on the local market, rather than for the production of goods
for export. The import tax procedures are famous for being extraordinarily complicated and
time consuming.
Similarly, investors may get confused when dealing with more than one province, as tax rates
may differ from one province to another and separate negotiations with each need to be
conducted. The central government is not able (yet) to ensure consistent tax rules in the different
parts of the country.
Dealing with the tax department and other Government departments
The tax department employs more than 34.000 people, not including the 20,000 part-time
employees who collect taxes at the village level. The majority of these employees come from
the army. 75% of GTD employees have no training in tax issues. Thus foreign investors may
find it difficult to communicate with tax administrators; apart from language problems, the
accountancy and tax terminology foreign investors use in their own country may not apply in
Vietnam or may simply not be understood by tax officials with little or no basic training.
An example of the difficulties foreign investors may face is the case in the Hai Phong port city
in Vietnam. The Hai Phong tax department complained that foreign companies did not pay their
taxes as the projected tax revenue was much higher than the actual revenue. Four of the 21
foreign projects had not registered at all with the tax department. Other complaints ventilated by
the department related to those companies which had not registered their accounting system
with the Ministry of Finance or not submitted their annual accounting reports or did not use the
forms issued by the Tax Department (V.I.R. 5-11 September 1994:10). However, the
Department admits that foreign companies face many difficulties when they have to fulfil their
tax duties. These difficulties, according to the department, related to the lack of professional
knowledge and the lack of foreign language skills of the tax collectors. The complicated laws
form another problem for foreign investors, even with the best intentions foreign investors may
not comply with the law because of a lack of understanding of the Vietnamese tax system.
Although the Government policy has changed, the Government system itself retains many of the
socialist features of the 1960s and 1970s. Ministries are divided in many different compartments
with a strong vertical organisation structure which provides linkages between Hanoi and
provincial and even district levels. However horizontal communication between ministries or
even within them can be sadly lacking. Dealing with the different Government departments to
meet the wide range of tax obligations can be very time consuming and will add to the costs of
compliance for foreign businesses. Although the SCCI intends to be a one stop shop for foreign
investors also on tax matters, in practise foreign investors may have to deal with the Department
of Finance in Hanoi as well as with tax officials on provincial and local levels.
As in other countries, Government departments in Vietnam may not always agree among
themselves on tax policy matters. The Ministry of Finance (MoF) will have different priorities
from other Ministries which may be anxious to promote trade while the Finance department is
primarily interested in revenue. Political differences may also cause delays in the legislative
process and can confuse investors dealing with different ministries.
Hidden fees
An important issue in assessing overall taxation costs in Vietnam is hidden fees. Strictly
speaking they should not be mentioned under the tax regime. However, due to the fact that in
some cases they are levied as a "tax", it is worth a brief discussion.
Local authorities levy a wide range of taxes and fees and may seek "donations", many of them
with no basis in law. The tax department has warned investors that, apart from legal problems,
there seems to be a persistence of ?unofficial? fees deliberately being imposed by government
branches and regional and local authorities (Vietnam News, 18-4-1993).
For this reason it may be advisable for foreign companies to keep
a low profile. The more a foreign company exposes its wealth, the
more demands it can expect from local authorities who feel they
are entitled to share some of that wealth. If foreign companies
have to maintain a high profile, for marketing reasons or because
of sheer size, they may separate their marketing activities from
their other activities. Some companies may attempt to solve this
problem by hiring local staff who can deal with this issue. This
will in all likelihood still mean that unofficial fees will have
to be paid, but that they can be negotiated so as not to exceed
the "going rate".
Other costs of doing business
Another issue related more broadly to the costs of doing business are the requirements
companies may have to fulfil in order to conduct their business. In 1988 Hanoi’s first private
domestic construction company was established (FEER 20-2-1992). The company, Thai
Thanh Construction Enterprise, completed 23 construction projects in the following two years,
including schools, shops and student dormitories. In December 1990 the People’s Committee of
Hanoi requested that, for future bids for construction projects by private companies, these
companies had to make a deposit equal to the total value of the projects. Unable to fulfil this
requirement the company appealed against the People’s Committee’s decision, without success.
The company was shut down.
The story of Thai illustrates a feeling among some that Government officials' harassment
prevents them from being successful. They argue that such harassment is still taking place in
1994. Foreign and domestic investors may, indeed, be encouraged by the Vietnamese
Government to start a business. But, once established and doing business successfully, they may
contend with high, sometimes illegal taxes, harassment by tax officials, and the problems of
hidden fees. Some foreign investors estimate that corruption adds five to ten percent to
operating costs (Australian Financial Review 2-6-1994;67).
Negotiation of taxes
There are different levels of negotiations for foreign companies investing in Vietnam. Most
negotiations will be held in Hanoi. Here the level of corporate taxes will be discussed with the
SCCI. Many tax issues are subject to negotiation. Once the business registration is completed,
including the tax rates, the arrangement made in the agreements is guaranteed for the lifetime of
the company. How successfully a foreign company can negotiate its tax rates depends on the
willingness of the Vietnamese government to promote investment in a certain sector. Another
factor in the equation is the size of a specific project, and very large investors usually pay a
lower tax rate depending on the sector.
In the process of negotiation it should go without saying that foreigners should show respect and
be reasonable in their demands on taxation levels. Making enquires with other companies about
the average tax rates for foreign companies in a certain sector may be useful before starting the
negotiation process with the SCCI.
Although the SCCI presents itself as a one stop shop for foreign investment, some taxes may be
negotiated at provincial or local level. For example the turnover tax is often subject to
negotiation with lower levels of Government. Even if the SCCI agrees, approval from lower
levels is required. It is also important to recognise that the SCCI consults, on any given
investment application, with a range of relevant Ministries, including the MoF. The tradition of
consensus decision-making means that the wise foreign investor will speak with those
Ministries during the process of submitting an application to build that consensus. The same
applies to the Ministry of Finance.
Objection and appeal process
No proper procedures are in place to serve those taxpayers who disagree with their tax
assessment. This can be a costly problem, for the particular taxpayer involved. It also means that
there is no publicly available access to precedents that could be used for tax planning for other
companies. In theory a corporate taxpayer who disagrees with the tax assessment can put a
complaint in to a higher tax office or to the General Department of Taxation of the Ministry of
Finance which makes a final decision. Pending this ruling, the taxpayer has to obey the initial
decision. Thus with no independent body to deal with taxpayers' appeals, the GTD is both
umpire and player in tax disputes.
Tax planning
Tax planning, due to the factors mentioned earlier, is very difficult. Frequent tax law changes,
lack of expertise to give advance rulings and appropriate legal interpretation, add to these
difficulties. Companies should try to collect as much information as possible to obtain an
overall picture of the tax regime. They should try to find out which costs are acceptable as
deductible expenses, what is the policy on depreciation, what is the average tax rate for turnover
tax, etc.. This is far from easy, as hard information is scarce, and the rules are often
contradictionary, as well as subject to frequent changes. Companies should prepare themselves
for a difficult and rather expensive time in sorting out their net tax liabilities.
Conclusion
In conclusion, bureaucratic difficulties in the tax area and more broadly, throughout the
economy, are very significant in Vietnam. They form an important component of the costs of
tax compliance and generally to the costs of doing business in Vietnam. It may be useful for
those investing in Vietnam not to be too easily persuaded by the corporate tax incentives and
holidays, but instead to look at the overall level of taxes, and the costs of meeting those
liabilities. These costs - in the form of actual payments eg. hidden fees or in the form of time
taken to clear up bureaucratic difficulties and legislative ambiguities - all need to be balanced in
any assessment of whether Vietnam's tax regime compares favourably with other countries in
the region also competing for foreign investment dollars.
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i
...The term 'tax planning' refers to the organisation of the
taxpayers business in such a way that the lowest possible tax is
payable.
ii
... Unfortunately not much research has been done on this subject,
and mainly focuses on Canada, USA, Great Britain and Australia.
Dr. Jeff Pope came to the conclusion that the compliance costs for
public companies in Australia in 1986-1987 are estimated between
11.4 to 23.7% of total revenue. In the UK over the same period this
is estimated at 2.2% of total revenue. In the UK 10% of taxpayers
needs the assistance of a tax professional while in Australia 70%
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Tax Reform in Developing Countries: Agenda for the 1990s', Asian Development Review
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Dick, John, 1993, 'Taxation in Vietnam', 10th Asian-Pacific Tax Conference, Asian-Pacific Tax and Investment Research Centre, Singapore. General Department of Taxation, 1994, 'Evaluation of 1991-1993 Vietnamese -Swedish co-operation project in the field of tax policies & tax administration', Hanoi. General Department of Taxation, 1994, 'Vietnamese-Swedish tax administration cooperation. Fields of cooperation;Tax Policy and Tax Administration Period:1994-1997', Hanoi, Vietnam.
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Gordon, R.K., 1990, 'Income tax compliance and sanctions in developing countries', in Readings on Taxation in Developing Countries, ed. R. M. Bird and O. Oldman, Duke University Press, Durham. Guardian The, 1994, ?Vietnam: Tiger hunters set sights on Vietnam?, 4 of June, Newsgroup:bit.listserv.seasia-l
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Mission Report Mineral Law: Vietnam, United Nations development Support and Management Services Vietnam
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