Forgiving tax debts must be done transparently

April 03, 2018 - 09:00

A recent proposal by the Ministry of Finance to clear over VNĐ26.5 trillion (US$1.16 billion) of tax arrears, accounting for more than a third of all tax arrears and irrecoverable fines, has raised public concern about the fairness and transparency of handling tax debts.

Viet Nam News

Võ Trí Thành

A recent proposal by the Ministry of Finance to clear over VNĐ26.5 trillion (US$1.16 billion) of tax arrears, accounting for more than a third of all tax arrears and irrecoverable fines, has raised public concern about the fairness and transparency of handling tax debts.

The finance ministry’s statistics revealed that the total amount of tax debt, late payments and fines under the ministry’s management exceeded VNĐ73 trillion by the end of 2017. The amount of such funds under the management of the customs authority was more than VNĐ5.4 trillion.

Over VNĐ35.5 trillion, or half of total tax debts owed to both customs and the finance ministry, was deemed irrecoverable. 

Facing a heavy burden of rising outstanding tax arrears and irrecoverable fines, the finance ministry has proposed to free and eliminate tax arrears for a number of select groups.

The ministry plans to free tax debts – meaning it would temporarily cease collection of tax and fines for late tax payment – for firms that have terminated production and business activities for more than a year and those that have already had their businesses licences revoked.

It also recommended clearing tax arrears for cases in which collection is no longer feasible because the owing firms dissolved (except for cases in which the firm split or engaged in a merger or acquisition), went into bankruptcy or ceased production and business activities before 2017.

Uncollected taxes falling into this group are now estimated at more than VNĐ24.3 trillion ($1.07 billion), making up the majority of total tax losses.

These entities can no longer pay tax because their business registration certificates were revoked. Unpaid taxes from businesses and organisations was VNĐ22.2 trillion and over VNĐ2 trillion from household businesses.

Tax losses caused by enterprises that have received contracts to be paid from the State budget, but haven’t yet paid their taxes, are also under consideration for tax clearance. The amount of tax arrears is estimated at over VNĐ542 billion (roughly $24 million).

Current proposals stipulate that these firms’ tax debts will be forgiven only in cases in which the late payment was caused by late payment from the State. Public debt is very high in the construction sector, especially in infrastructure and public projects.

In many cases, the State owes so much money to enterprises that they lack enough cash to pay tax debts, leading to fines for late tax payment. Some have been forced to resort to high-interest credit loans, ultimately worsening their solvency problems.

Several years ago, the northern mountainous province of Hà Giang was disciplined for incurring public debt in basic construction that reached VNĐ1.1 trillion.

The accumulated public debt in the construction sector is estimated at around VNĐ30-40 trillion — indicating the scope of the problem for firms requiring payment from the public sector. 

Another proposal is to remove tax debts and fines originating before 2018 for taxpayers who were struck by natural disasters, fires, unexpected accidents or other force majeure circumstances.

Such exemption, however, only applies to late payments not exceeding the value of suffered damage. The finance ministry estimates all such payments to be valued at around VNĐ1.7 trillion in total by the end of 2017.

According to the ministry, the decision to forgive tax debts in some cases due to force majeure circumstances or objective obstacles is in line with new laws and regulations, as well as international precedent.

The 2007-13 period was a difficult time for the domestic economy, made more so due to the complicated global economic situation and the global financial crisis in particular. Many firms struggled, resulting in losses for taxpayers.

Many became insolvent, were forced to temporarily cease operation or even dissolve, but did not proceed with bankruptcy and dissolution procedures. Despite tax authorities’ efforts to recover tax debt, the amount of outstanding debts has risen constantly due to compounding late payment fines (0.05 per cent per day, about 18.3 per cent per year).

The cancellation of the irrecoverable tax loss will not only help reduce the tax burden for enterprises, enabling them to continue business and access loans, but also clean up balance sheet for both businesses and the State budget, reducing the ‘virtual debts’ which are irrecoverable.

To do so, it is essential to clearly define accountability and the obligations of related parties in these cases to avoid fostering a moral hazard, in which one party becomes careless and takes excessive risk because they believe they will be protected.

However, elimination of tax arrears is not a panacea. It could set a bad precedent for enterprises, create a legal loophole for enterprises to evade and reduce their tax obligation and create unfair competition.

Therefore, transparency and equality are critical to implanting this policy effectively.

Tax debt relief is to be extended only to enterprises have complied with the law and made efforts to pay tax, but failed to do so due to force majeure circumstances or objective obstacles.

The stipulation of force majeure circumstances should be defined, especially in the cases of enterprises whose business registration certificates were revoked or changed to do new business with a fresh name and business registration.

To prevent this situation, the finance ministry is also proposing new regulation which requests the founder or legal representative of the enterprise which was cleared of tax debt not be allowed to set up a new enterprise in the two years following the date of debt relief, unless the full amount of tax clearance is repaid.

Clearing tax debts is a rational policy but it should be done in an objective and practical manner to ensure transparency and equality and avoid abuse, tax evasion and excessive power of interest groups. Thus, clear principles to scrutinise taxpayers and their liabilities are necessary.

* Võ Trí Thành is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. The holder of a doctorate in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.