Turning Point in Tax System Reform Strategy to 2030

Following several years of delay due to Vietnam’s post-pandemic economic recovery objectives, experts agree that it is now time to resume the implementation of the Tax System Reform Strategy through 2030. Currently, a number of significant tax laws are under discussion, with anticipated adjustments including potential tax increases in accordance with the established roadmap or expansions to the tax base.

Several significant tax legislation reforms are under consideration, with potential adjustments including tax increases in line with the planned roadmap or expansions to the tax base

Sharing at the Seminar on “Tax policy environment in Vietnam: Current background and international experience” organized by the EU-ASEAN Business Council in Hanoi on July 24, Mr. Hoang Thuy Duong, Head of Tax at KPMG in Vietnam and Cambodia, said that Vietnam's tax collection efficiency met targets in the first half of 2024. However, current tax policies remain focused on supporting post-pandemic economic recovery and boosting consumption.

However, the Tax System Reform Strategy and law amendments have been delayed for 2-3 years. "This is the right time to pass important tax laws to support economic recovery and its sustainable development in the long term," he added.

Big spending demand, seeking room for revenue growth

Looking back at the economic picture and Vietnam’s fiscal policy management in recent times, Mr. Jochen M. Schittmann, Resident Representative of the International Monetary Fund (IMF) in Vietnam, said that, during the pandemic, Vietnam adopted many tax reduction and exemption policies on a large scale, which affected budget revenue, like slashing value added tax (VAT) or reducing environmental protection duty on gasoline to support businesses and people.

According to the Ministry of Finance, in 2020-2024, the financial sector advised and proposed the Government to submit tax, fee, charge and land rent reduction and extension beyond its jurisdiction to competent authorities for introduction in a bid to assist businesses and people. The value was up to over VND900 trillion amid difficult economic conditions.

According to the IMF representative, Vietnam is also making efforts to address medium-term challenges it faces such as climate change because it is one of the most environmentally vulnerable countries. So, it needs big investments. Vietnam faces significant investment needs across various sectors, including infrastructure - such as railways, roads, and wastewater systems - as well as human capital and education.

Thus, substantial spending will be required next year, necessitating both private and public investment. However, Vietnam’s state budget mobilization as a percentage of GDP is significantly lower than the global average, as well as compared to emerging markets and advanced economies.

“Therefore, we believe that the progress made in the tax reform strategy in 2021 - 2030 is very important," said Mr. Jochen M. Schittmann.

Suggesting a tax reform strategy in the coming time, he said that Vietnam can review incentives, expand the revenue base for value added tax, and increase environmental duties to achieve some goals.

Mr. Phan Vu Hoang, Deputy General Director of Deloitte Vietnam, representative of the UK Association of Chartered Certified Accountants (ACCA), said: The mobilized state budget rate of Vietnam in 2022 was equivalent to about 19% of GDP, the average of Asian-Pacific countries. But if social insurance contributions were excluded, the rate would be relatively low.

In terms of tax structure, Vietnam relies heavily on value added tax and taxes on goods and services, at 43%, which is relatively low compared to ASEAN (47%) and significantly lower than the Asia-Pacific region (55%).

Vietnam still has room to widen collection, especially personal income tax, when it is compared to countries in the Organization for Economic Cooperation and Development (OECD). Increasing personal income tax revenue is not achieved by hiking tax rates, but increasing income for workers and adding formal employment.

Small business size fuels concerns over budgetary sustainability

Looking back at the change in the proportion of revenues and taxes in the total state budget revenue from 2008 when Vietnam joined the World Trade Organization (WTO) till now, Dr. Nguyen Quoc Viet, Deputy Director of the Vietnam Institute for Economic and Policy Research (VEPR), said that the proportion of VAT revenue in the total state budget revenue has significantly increased from 22% to approximately 26%, marking a 4% rise. Special consumption tax revenue has grown from 6% to 8-9%, a 2.5-3% increase. Personal income tax revenue has surged from 2.3% to 8-9%, reflecting a 6% expansion. In contrast, import-export tax revenue has declined from 11% to 6%. Meanwhile, corporate income tax only increased from 16% to 17%. "We must find out why Vietnam's corporate income tax has the lowest growth,” he emphasized.

Citing the above figures, he said that there are still many issues to be addressed to increase sustainable budget revenue. First of all, it is important to ensure that domestic consumption remains robust. Additionally, global experience suggested that increasing the special consumption tax may not effectively boost budget revenue and could even lead to a decline.

“25% of spirits consumed globally is illegal. So, we must consider whether raising the tax rate will uplift budget revenue, let alone causing VAT reduction due to consumption shrinkage,” he noted.

Vietnam depends heavily on external demand from export activities, Viet stressed, adding that we must return to the domestic market and domestic production, given global uncertainties.

However, the “tiny” size of Vietnamese businesses is what experts are very concerned about. For that reason, in the coming time, it is essential to focus on developing the domestic market because otherwise the “two economies in one country” reality will continue.

“While the foreign direct investment (FDI) sector is performing well, the domestic economy remains highly unstable,” he worried.

A more detailed analysis will be represented by VEPR in the insightful research on tax reform, expected to be announced at the end of 2024.

Many major tax revisions

Also at the seminar, Duong highlighted some upcoming major changes in tax policies. He said, Vietnam's import-export value equals up to 200% of its GDP, showing its broad openness. Therefore, many tax policies to be adjusted in the coming time will affect FDI attraction and importing and exporting activities of Vietnam. First of all, in the fourth quarter of 2024, the Government will issue a decree on the Investment Support Fund to adapt to the global minimum tax.

When the global minimum tax comes into effect, preferential corporate income tax policies and tax rate exemptions will be less important, making it difficult to attract global firms with revenue of EUR750 million or more when they choose Vietnam as an investment location, he said.

Therefore, to maintain Vietnam's competitiveness in attracting FDI, the mindset on tax policy needs to change.

Regarding incentives to attract big FDI investors, there is still much debate about cost-based incentives (such as training costs and fixed asset investment costs) that are being eagerly awaited by multinational corporations, said Duong.

Currently, the draft decree proposes high-tech companies with annual revenue of VND20,000 billion or a yearly investment value of VND12,000 billion. Some new fields such as artificial intelligence (AI) and semiconductor chips are also included, with a lower condition and requirement.

Second, the Law on Value Added Tax (amended) is expected to be passed at the National Assembly session in October 2024.

According to Mr. Duong, in the past, value-added tax was mainly applied to goods, but Vietnam's role in the global value chain has now changed and businesses are participating more deeply in the service sector.

“The current VAT on exported services is 0%. We must have a more open mindset and create conditions for Vietnam to be a service exporter,” he emphasized. According to the draft, in the coming time, there will be many services that will not be applied 0%, which may cause obstacles for businesses.

With regulations on input deductions and tax refunds, value-added tax is essentially levied on end consumers but, in many cases, it becomes a cost burden for businesses such as fertilizers.

Third, in May 2025, two other important tax laws are expected to be passed, including the Law on Special Consumption Tax (amended).

However, according to Mr. Duong, the draft is currently quite preliminary. In particular, the special consumption tax on spirits pursues many goals. In addition to regulating budget revenue, it also has to adjust consumer behavior. He believed that the policy should be amended to reduce direct harmful factors, including the amount of alcohol consumed, and consider applying a mixed tax method.

Besides, to achieve the goal of zero net emissions, the special consumption tax on electric vehicles also needs to be carefully studied.

Fourth, the Law on Corporate Income Tax (amended) is also expected to be passed in May 2025.

When the global minimum tax is implemented, it presents an opportunity for Vietnam to overhaul its corporate income tax system. This redesign will enable the country to participate more effectively in the global market, attracting significant projects and major companies in the global value chain. Additionally, revising tax policies to support small and medium-sized enterprises (SMEs) is essential.

By Binh Minh, Vietnam Business Forum