Tax reform should focus on raising tax revenues

July 20, 2017 - 09:00

Strengthening tax systems has emerged as a key priority in improving the resilience of the national economy and supporting its growth objectives. Việt Nam News reporter Mai Hương interviews Alex Mourmouras, chief of the ASEAN1 division at the IMF’s Asia Pacific Department and the Fund’s Việt Nam mission chief, about tax reforms.

Alex Mourmouras
Viet Nam News

Strengthening tax systems has emerged as a key priority in improving the resilience of the national economy and supporting its growth objectives. Việt Nam News reporter Mai Hương interviews Alex Mourmouras, chief of the ASEAN1 division at the IMF’s Asia Pacific Department and the Fund’s Việt Nam mission chief, about tax reforms.

Could you tell us about the latest developments regarding international tax reform in the ASEAN region?

Mobilising domestic revenue sources has emerged as an important priority in supporting national efforts to promote inclusive growth. The scope of reforms encompasses direct taxes, which include personal and corporate income taxes; indirect taxes, such as value added and excise taxes, and other revenue sources, including property and land taxes and fees.

For Việt Nam and other ASEAN countries in which export-oriented manufacturing is an important growth driver, the tax treatment of international companies with direct inward investments in the region is a key feature of countries’ attractiveness as investment destinations.

The establishment of the ASEAN Economic Community (AEC) in January 2016 has forged greater interdependence in the region and has brought to the fore the importance of coordination among ASEAN tax authorities to limit aggressive tax planning by multinationals and regional enterprises. ASEAN countries have started implementing the recommendations from the G20-OECD Base Erosion and Profit Shifting (BEPS) project that, while not specific to Asia, aims to limit the opportunities for tax avoidance for businesses that operate across borders.

Việt Nam recently joined the 2016 BEPS Inclusive Framework that brings together over 100 countries to collaborate on the challenges of international taxation. Indonesia, Singapore and Thailand are also members. 

Tax reform is a top priority for a developing country like Việt Nam in attracting foreign investment. What specific areas should the Vietnamese government focus on?

It is important to place Việt Nam’s tax reforms in the ASEAN and domestic contexts. Some countries compete with their neighbors in providing generous tax incentives to attract foreign direct investments. When other things are equal, multinational enterprises are naturally more inclined to invest in countries that offer tax incentives. However, the resulting international tax competition risks worsening countries’ fiscal accounts and undermining their ability to achieve sustainable economic development in the long term.

Turning to Việt Nam, the government has a relatively high debt level, which must be reined in. It is important to mobilise more revenue in order for the government to rebuild fiscal space and finance much-needed expenditure. This includes public infrastructure and social spending to improve heath and education and raise the skills of the labour force. Policymakers must also start preparing now for future fiscal needs: while Việt Nam’s population is young now, it is aging rapidly, which requires work to fortify the country’s pension system.

Strengthening Việt Nam’s public finances will require action on both the revenue and expenditure sides of the budget. Among the priority areas on the revenue side are: unifying VAT rates, raising excise taxes and energy and environmental taxes, and introducing a recurring property tax.

Consideration should also be given to taxing land transactions and better capturing revenues from state land sales to fund infrastructure investment. These reforms will help make Việt Nam’s revenue system more efficient and will help meet the country’s Sustainable Development Goal commitments.

Việt Nam is integrating more deeply in the regional/global economies and needs to develop a more sophisticated and internationally integrated tax system. What are the key factors in building an efficient tax system to ensure both goals of State budget collection and facilitation of business activity are met?

A country’s tax system is an important factor that businesses consider when deciding where to invest. Fair, simple and stable tax laws are easy to understand and help level the playing field for domestic and international investors. They also help lower compliance and administrative costs and make tax administration more transparent and less discretionary.

But non-tax considerations are often equally important in international firms’ direct investment decisions. Sound public finances that underpin macroeconomic stability, a skilled workforce and good infrastructure are vital for businesses, in particular multinational enterprises, in planning their long-term investment and production location strategies.

In today’s increasingly digital world, a country’s soft infrastructure matters more for a country’s business climate and international investors. That means property rights that are well defined and properly (and evenly) enforced, including those of the owners of tangible and intangible capital.

Việt Nam is developing new regulations to deal with profit shifting among big corporations. What is IMF’s suggestion in addressing this issue?

The IMF strongly supports Việt Nam’s tax reforms, including helping address BEPS challenges. As the 2017 host country for APEC, Việt Nam is currently leading the work to advance the BEPS initiative among these countries, and the IMF is an active participant in this process. As of May 2017, Việt Nam implemented a new decree dealing with the prices charged by different units of multinationals in internal transactions (transfer pricing) to bring its tax rules in line with best practices in the BEPS action plan.

While it is important to keep Việt Nam’s rules in line with internationally agreed principles, it is also a prerogative of the Vietnamese authorities to decide how to address profit shifting. At the same time, we believe that a more equal tax treatment of all investors in Việt Nam would help broaden and strengthen the tax base.

Could you share the recent cooperation and support between IMF and Việt Nam’s government in tax building capacity and future programmes?

In recent years, the IMF has been supporting the tax reform efforts of the Ministry of Finance and its General Directorate of Taxation. We have discussed options for tax policy reform in support of inclusive economic growth and to compensate for lower oil-related revenues. 

This year for example, the government and the IMF have worked closely to consider options for reorganising the structure of tax administration and supporting Việt Nam’s objective to steadily raise tax revenue as a share of GDP. The IMF stands ready to continue this close cooperation and is willing to provide further technical assistance and training in both tax policy and tax administration.