Ongoing revisions of the Corporate Income Tax Law have brought back into the spotlight two demands businesses have been making for a long time. First, the sector seeks further tax reductions; second, it wants the Government to remove the limit on how much businesses can spend on advertising. Viet Nam News reporter Le Quynh Anh spoke to relevant stakeholders about this topic.
Dinh Thi My Loan, chairwoman of Viet Nam Retailers Association
|Illustrative image.—VNA/VNS Photo
Working closely with the Viet Nam Chamber of Commerce and Industry, my association drew feedback from representatives of business associations and we agreed on a common stance on the draft of the revised Corporate Income Tax (CIT) law.
The law would cut the general CIT rate from the current level of 25 per cent to 23 per cent and the small business tax rate to 20 per cent. It would also increase the limit on advertising spending from 10 per cent of total expenses to 15 per cent. While these changes are certainly welcome, they still do not satisfy the business community's demands.
The proposed tax rate of 23 per cent is still higher than the rate in other countries and territories and will not help enterprises accumulate capital for reinvestment and business expansion. Take a look at other countries and territories in the region. Singapore and Taiwan have some of the lowest corporate taxes – only 17 per cent. Hong Kong's corporate tax rate has been 16.5 per cent since 2008. Thailand has just put in place a 20 per cent rate.
Timing could not be better for a dramatic tax cut, as enterprises are facing a lot of difficulties due to the current economic slowdown. If the general CIT rate cannot be reduced to 20 per cent, at least it could be cut by one more point to 22 per cent.
One point we demand clarification on is how the law would categorise ‘small businesses' – those eligible for the preferential rate of 20 per cent. The draft law defines a small business as one that earns VND20 billion or less. This is not reasonable at all. Given the country's current economic structure, it would mean that 84.61 per cent of domestic businesses are SMEs. But even in a developed country, SMEs account for 92 to 95 per cent of all businesses. We propose that the cutoff be at least VND100 billion.
Apart from the tax reduction, we want to call once again for a removal of the cap on advertising expenses. There have been endless talks about this topic for at least 14 years, before and after the last time the law was amended in 2008, but nothing has changed – this threshold still remains one of the most significant impediments to an enterprise's growth. It is also among many barriers discouraging foreign investors.
As the financial capacity of many enterprises has grown and there has been exponential growth in demand for marketing and advertising activities, this rule is increasingly incongruent with reality. As long as Vietnamese enterprises are restricted from spending what they need to on marketing and advertising, their competitiveness is compromised –even in the domestic market –compared to their foreign counterparts.
We believe removing the cap will benefit the economy, consumers and enterprises. As our legal framework approaches international standards, our consumers will have a wider range of choices while enterprises will have more latitude to optimise their marketing strategies.
If the cap cannot be completely removed at this time, we hope to see the limit increase to 20 per cent and be accompanied by a roadmap towards a complete removal.
One can argue that these changes may immediately affect State revenue, but I do not agree with that. In addition, we have to raise the question of whether we have used the State budget effectively, as from what we observe there is still a lot of room for improvement.
Nguyen Van Phung, deputy director of Ministry of Finance's Tax Policy Department
The adjustment of tax rates proposed in the draft law is only one step in a bigger strategy to revamp the taxation system by 2020. This should dispel any notion that we are revising the law in order to save the current ailing economy. In fact, the move is part of a long-term plan.
If I represented an enterprise, I would also be asking for a tax cut. But as a policy-maker, I have to balance businesses' concerns with ensuring that the State budget can cover the welfare system, development and national security needs. If we keep cutting taxes, what could we use as a source of revenue?
We estimate that for each percentage point we cut taxes, funding for the budget will be reduced by about VND6 trillion. So if we adopt a 20 per cent tax cut, the total reduction will be VND30 trillion. This is a significant number. So during the law-making process, we came to agree that this time the 20 per cent rate would only apply to small business. But the number of SMEs is quite big, accounting for 88 per cent of enterprises, so I think a lot of enterprises will enjoy that rate.
One may argue that a tax cut will benefit the economy as well as enterprises because the deducted revenue will be used for reinvestment and consumption, which the State budget will eventually benefit from. However, those are only expected benefits that might occur quite far in the future. We face an immediate budget reduction. We have to analyse the costs and benefits of cutting taxes carefully.
The National Assembly's Financial and Budget Committee asked the Government to include concrete tax reduction targets in the law. For example, they want us to state that from 2012 to 2015 the general CIT will be slashed to 23 per cent (small businesses: 20 per cent) and that by 2020 the level of 20 per cent will apply to everyone except those in disadvantaged areas, who will pay less than 15 per cent. I think in the long term, the 20 per cent rate is acceptable, but I do not think it is a good idea to "fix" targets in the Law. This leaves us with little flexibility, while the ongoing economic difficulties mean there is still a lot of uncertainty – an environment in which flexibility is crucial.
Regarding the limits on advertising expenses, I believe many domestic enterprises will benefit from it. This is an invisible wall to protect them from foreign counterparts who are willing to pay a lot of money for advertising in their quest to dominate the local market.
Nguyen Ngoc Anh, chief economist, Ha Noi- based Development and Policies Research Centre
Tax breaks in general and reductions in CIT rate are often-discussed in times of economic difficulty. This is a sensible strategy and a good move in the right direction. If the tax rate is lower, it will help make Viet Nam a competitive destination for foreign direct investment. The trend is for countries around the globe to reduce their CIT rate. Businesses would love to see CIT reduction and the lower the better.
However, the Ministry of Finance also has a valid point. In any tax reduction proposal, we always have to worry about the Government budget. Proposing a particular tax rate, say 20 or 23 per cent, however, would require careful analysis and calculation. At the moment we have a single-rate regime so cutting the CIT rate to 20 per cent for all firms would be difficult. But it is possible that we could design a multiple-rate system, then we could be more flexible, and may have a lower rate.
Due to the fact that investment takes time, we may not see the big impact of tax reduction in the short term, but we will see the real and true impact of tax reduction in the longer term. I believe if we had a meaningful tax reduction, our economy would benefit in the long run.
The fact that Viet Nam has maintained a cap on the amount that companies can spend on advertisement and promotion activities should be viewed from a historical perspective. Removing the cap in the long term and raising the limit in the short term would be a welcome move.— VNS