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Vietnam

Author(s):
International Monetary Fund
Published Date:
January 2002
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I. Government Revenue Reform1

A. Introduction

1. This chapter reviews the factors behind developments in government revenue over the past five years (1996-2000). This period encompasses Vietnam’s continued transition to a market-based economy, the Asian financial crisis in 1997, and, towards the end, high world oil prices, which have led to both temporary and permanent changes in the revenue base. Understanding the nature of these changes is important for several reasons in the context of the current PRGF-supported program. First, it is key for assessing prospects for maintaining fiscal sustainability, as stronger revenue performance will be needed to cover stepped up spending for reducing poverty and for the envisaged structural reforms. Second, it is critical to designing improvements in tax policy and administration to shore up the revenue base. Third, it may help in better targeting technical assistance.

B. Recent Trends and Developments

2. Vietnam has maintained a cautious fiscal stance, but with a weakening revenue trend. During 1996-2000, the overall government budget deficit (on a cash basis and excluding onlending) averaged 1 percent of GDP and the level of public debt (including the state-owned enterprise sector) stayed in the range of 55-65 percent of GDP. This compares with an average budget deficit of 2½ percent in the first half of the 1990s. At the same time, however, government revenue declined as a ratio to GDP. In the three years leading up to the Asian financial crisis, this ratio averaged 22½ percent. Over the period 1997-99, government revenue fell by 3 percentage points to 19½ percent of GDP (Table I.1). It increased slightly in 2000 to around 20¾ percent, but due largely to a temporary run up in oil revenue associated with high world oil prices. Tax revenue, in particular, continued to decline, indicating that despite a start of an economic rebound in the second half of 1999, tax buoyancy remained constrained. It suggests that structural as well as transitory factors explain the recent deterioration in revenue performance.

Table I.1Vietnam: General Government Revenue
19961997199819992000
(In percent of GDP)
By type of revenue:
Total revenue and grants22.920.820.219.821.1
Total revenue22.420.019.619.220.7
Tax revenue18.515.815.415.214.9
VAT 1/2/4.13.83.34.34.0
Corporate income tax3.73.73.63.74.6
Individual income tax0.50.50.50.50.4
Excises (special sales taxes)1.71.51.51.11.2
Import and export duties5.64.34.13.63.1
Other taxes3.02.12.42.01.5
Non-tax revenue3.94.24.24.05.7
By source of revenue:
Oil revenue4.14.76.7
Crude oil 3/2.82.43.15.5
Petroleum products 4/1.71.51.2
Non-oil revenue15.614.514.0
Tax12.812.311.8
Corporate income tax2.62.62.32.6
VAT/excises/custotms duties 5/7.37.67.2
VAT3.4
Excises1.0
Import and export duties2.8
Non-tax2.82.22.3
Crude oil 3/2.82.43.15.5
Nonoii state-owned enterprises5.45.24.64.5
Foreign-invested enterprises1.21.21.01.1
Non-state enterprises2.11.81.41.3
Lottery0.40.40.40.5
Taxes on international trade 6/4.34.55.24.4
Others3.74.13.53.3
Grants0.60.80.60.60.4
Memorandum items:
Ratio of import duties to total imports10.38.58.37.75.5
Ratio of import VAT to total imports2.92.2
Sources: Ministry of Finance; and staff estimates.

Prior to 1999, turnover tax.

Starting in 1999, includes import VAT.

Consists of corporate income tax, income from natural resources, and profit after tax.

Consists of import duties, excise on gasoline, and VAT on other products.

Breakdown only available for 2000.

Includes import and export. duties, import VAT, and other taxes on trade.

Sources: Ministry of Finance; and staff estimates.

Prior to 1999, turnover tax.

Starting in 1999, includes import VAT.

Consists of corporate income tax, income from natural resources, and profit after tax.

Consists of import duties, excise on gasoline, and VAT on other products.

Breakdown only available for 2000.

Includes import and export. duties, import VAT, and other taxes on trade.

3. The most significant changes in Vietnam’s revenue performance since 1996 have been a gradual decline in tax revenue, an increased dependence on oil revenue, and a further drop in revenue from the state sector. Detailed data on government revenue by type and source reveal the following main developments in the second half of the 1990s.

By type of revenue

  • Tax revenue declined by 3 percentage points of GDP to around 15 percent in 2000, mainly on account of trade taxes and the associated tax relief and concessions granted to enterprises. The initial drop in 1997 (the largest as a ratio to GDP) was likely due to the effects of the Asian financial crisis, with the fall in import and export duties accounting for nearly two-thirds of the reduction in tax revenue.2 Significant tariff reductions were also made starting in 1996 as part of Vietnam’s ASEAN Free Trade Area (AFTA) commitments, which required the application of low tariffs to goods that did not compete directly with domestic production. However, a further sizeable drop in import duties and charges in 2000, when nominal import growth outpaced nominal GDP growth (in dong) by greater than a factor of four, suggests that the fall off was also due to structural factors, such as poor customs administration.3 Based on official estimates, the weighted average import tariff rate stayed virtually unchanged in 1999 and 2000 (at around 15½ percent). However, import duty collections declined as a ratio to GDP from 3.6 percent in 1999 to 3.1 percent in 2000.

  • Other taxes remained relatively flat as a ratio to GDP, including the value-added tax (VAT), which was introduced in 1999.4

  • Nontax revenue also stayed fairly constant (4-4½ percent of GDP) until 2000, when it jumped to 6 percent of GDP. Most of this change was due to the larger natural resource surcharges collected on petroleum production, mainly stemming from higher oil prices. The rest is related to smaller nontax collections resulting from a rollback in minor administrative charges and licensing fees.

By source of revenue

  • Vietnam has become dependent on oil as a major source of revenue. Between 1998 and 2000, oil revenue jumped by 2½ percentage points of GDP to an estimated 6¾ percent in 2000, reflecting 28 percent and 26 percent increases in volume of crude oil exports and petroleum product imports, respectively, and higher world prices. As a result, by 2000, more than one-third of government revenue was derived directly from taxes and charges on crude oil exports and petroleum product imports.5 On the production side, oil revenue increased by 3 percentage points of GDP between 1998 and 2000, aided by a near doubling in the average export price (in U.S. dollars).6 On the consumption side, while petroleum product imports were also up nearly 250 percent (in U.S. dollars), oil revenue from this source decreased by ½ percentage point of GDP, as the government at times reduced duties to soften the impact of high world oil prices on domestic prices.

  • The revenue contribution of the non-oil state sector is declining. Data broken down by taxpayer are incomplete, but available data since 1997 suggest a further slow but steady reduction in the contribution of state-owned enterprises (SOEs) outside the oil sector to total government revenue. In particular, revenue derived from the corporate income tax on the non-oil SOE sector fell sharply between 1997 and 2000 (from 46 percent to 33 percent of total collections) (Table I.2). Despite the economic slowdown, the corporate income tax collected from the non-state sector stayed constant as a share of GDP during 1997-2000, suggesting greater resiliency of this sector to the slowdown and its potential as a source of revenue during the recovery. Likewise, the sharp fall in foreign direct investment (FDI) during 1997–99 had little direct impact on government revenue performance. During this period, most existing foreign invested enterprises (FIEs) continued to operate in Vietnam. Also, many were already benefiting from investment incentives and tax exemptions and holidays, which minimized their overall contribution to government revenue (equivalent to 1–1½ percent of GDP)

Table I.2.Vietnam: Government Revenue by Sector
Domestic VATCorporate income tax
19971998199920001997199819992000
(In percent of total)
Total100.0100.0100.0100.0100.0100.0100.0100.0
SOEs49.952.452.149.045.545.239.333.4
Lottery10.29.310.311.11.42.82.23.3
Crude oil28.927.536.843.8
FIEs15.515.814.917.17.06.44.96.3
Non-state24.422.622.822.817.218.216.713.2
(In percent of sectoral GDP)
Total3.02.73.73.63.74.6
Slate sector 1/5.24.54.74.74.24.7
Crude oil88.366.837.040.8
FIEs3.63.52.92.31.52.2
Non-slate1.41.31.31.31.21.3
Sources: Ministry of Finance; and staff estimates.

Prior to 1999, turnover tax.

Includes SOEs and lottery.

Sources: Ministry of Finance; and staff estimates.

Prior to 1999, turnover tax.

Includes SOEs and lottery.

4. The government’s revenue base is expected to continue to shift from production-or income- to consumption-based taxation, owing to the relative ease in administration and better structuring of incentives in support of growth. Moreover, it is consistent with the envisaged direction of structural reforms, which is likely to see growth in the state sector outpaced by that in the nonstate sector over the medium term. Increasing reliance is expected to be placed on indirect taxation. In terms of the efficiency of current VAT and custom duties collections, Vietnam shows signs of both strength and weakness compared with other countries in the region (Table I.3). Domestic VAT efficiency is comparatively good, but import VAT efficiency is poor for the region, which is not surprising given the large number of ad hoc exemptions currently granted on the VAT for number of imported goods. As would be expected, import tariff efficiency is similarly poor in Vietnam, suggesting problems with customs administration. Overall, both VAT and customs administration will need to be strengthened, as discussed in Section D below.

Table I.3.Selected Asian Countries: Comparison of Value-Added Tax and Import Tariff Efficiency
YearTotal VATDomestic VATImport VATTariff
MainIn percent of GDPEfficiencyIn percent of domestic demandEfficiencyIn percent of importsEfficiencyAverage rate 1/In percent of importsEfficiency
(1)(2)(3)=(2)/(1)(4)(5)=(4)/(1)(6)(7)=(6)/(1)(8)(9)(10)=(9)/(8)
Vietnam200010.04.00.402.70.272.20.2216.25.50.34
Bangladesh1998/9915.02.90.191.20.088.80.5922.211.60.52
China199917.04.10.242.90.176.80.4014.44.70.33
India1999/0032.918.40.56
Indonesia1999/0010.02.70.271.60.164.50.458.81.40.16
Philippines 2/200010.02.80.281.60.162.70.278.02.80.36
Sri Lanka200012.53.60.291.90.153.00.2416.03.80.24
Sources: Vietnamese and other country authorities; and staff estimates

Figures for closest available year.

Based on GNP rather than GDP.

Sources: Vietnamese and other country authorities; and staff estimates

Figures for closest available year.

Based on GNP rather than GDP.

C. Need and Scope for Improvements in Revenue Performance

5. A substantial improvement in revenue performance is needed, for Vietnam to maintain a sustainable fiscal position while ensuring adequate funding for the envisaged costs of structural reforms and in sectors critical for poverty reduction. Under the baseline scenario described in Box I.1, public sector debt would be expected to rise from an estimated 63 percent of GDP in 2000 to 72 percent in 2003, then begin to gradually fall through 2006, taking into account the impact of envisaged SOE, banking, and trade reforms. In line with this scenario, revenue would need to increase from the current level to the range of 21-22 percent of GDP. Oil revenue would be expected to pull back to the range of 5-6 percent of GDP based on the recent price forecasts and production trends. Thus, non-oil revenue would need to rise by as much as 2 percent of GDP from its current level in the next three to four years.

6. The medium- to long-term impact of structural reform on government revenue is expected to be positive, as the reduction in barriers to trade and to business entry should further foster nonstate activity and improve the prospects for sustained growth (see Chapter III). However, over the near term, government budgets will not only need to take into account the temporary rise in expenditure associated with SOE and banking reforms, but the temporary (and in some cases permanent) fall in revenue associated with SOE and trade reforms.

7. The net impact of structural reform on government revenue from the non-oil SOE sector is likely to be negative in the near future. First, as the financial health of many non-oil SOEs remains poor and the restructuring process for most is just starting, government revenue from this source is expected to further decline in the near term (on the positive side, the 1,400 or so newly equitized SOEs envisaged by end 2003 could perform better, and thus serve as a larger potential—albeit limited—source of government revenue in the medium term). Second, the SOE sector is also expected to be affected by banking and trade reforms, which could have some temporary negative revenue consequences. Under the planned restructuring of state-owned commercial banks (SOCBs), SOEs may face harder budget constraints, which could constrain output. Also, trade measures aimed at removing quantitative restrictions (QRs) on imports, reducing import tariffs, and freeing up trading activity (on both the import and export side) are likely to be felt hardest by the SOE sector, which has benefited the most from the relatively high level of protection under past trade regimes.

Box I.1.Vietnam: Medium-Term Fiscal Framework and Revenue Reform

Over the medium term, the budget will need to accommodate the costs of structural reform and ensure adequate funding for the sectors critical for poverty reduction, while keeping public sector debt at a manageable level. Meeting these goals will require a moderate path of fiscal consolidation, entailing a decline in the overall deficit (excluding onlending, but including the current costs of reform) from between 3-4 percent of GDP in 2002 and 2003 to 2 percent by 2006. With steady implementation of the envisaged reforms, the augmented budget deficit (including onlending and the total costs of reform) is projected to rise from 5 percent of GDP in 2001 to the range of 8-9 percent of GDP in 2002 and 2003, but to drop back to 5 percent of GDP by 2004. Even with a temporary widening of budget deficit, revenue will need to stay in the range of 21-22 percent of GDP over the medium terra to ensure that the government has adequate funds for its share of the reform costs, as well as for critical spending on education and health and in operations and maintenance of a growing infrastructure.

During 2001–04, the costs of SOE and banking reforms and associated social spending are tentatively projected to total about 12 percent of GDP, comprising:

SOE reform

  • The capital costs, estimated to total 2 percent of GDP, are mostly in the form of absorbing nonperforming loans (NPLs) owed by SOEs to be equitized or restructured. They also include the cost of resolving losses in market value of physical assets, and dealing with bad debt of SOEs not currently covered under the equitization plan. The NPLs of SOEs that are not slated for reform will be dealt with through the SOCB reform.

  • The current costs, 2 percent of GDP, cover mainly severance payments to redundant workers and interest on newly issued government bonds for debt absorption.

Vietnam: Medium-Term Fiscal Framework

(In percent of GDP)

Banking reform

  • The capital costs, 7 percent of GDP, are chiefly for the provisioning for remaining NPLs in the SOCBs owed by SOEs and from raising the capital-asset ratio of SOCBs to international standards, and restructuring the joint stock banks.

  • The current cost, 1 percent of GDP, is mostly for interest on newly issued government bonds to finance the capital costs.

Public sector debt would remain manageable, provided the growth of new SOE debt is capped at about the nominal growth rate of the economy through strengthened financial discipline and SOCB reform, inter-enterprise debt is resolved with minimal fiscal cost, and the budget position improves overtime. As of end-2000, the level of public debt of Vietnam was about 63 percent of GDP (staff estimate), including bank debt but excluding inter-enterprise debt of SOEs. The government’s domestic debt (3 percent of GDP) is very small, and its external debt (27 percent of GDP) is all on concessional terms. Reforming the SOE sector will result in the government taking on some SOE debt, which by itself would not increase the level of debt of the public sector as a whole. Public debt is projected to peak at about 72 percent of GDP by 2003, and stabilize thereafter.

Vietnam Public sector debt

(In percent of GDP)

1/ Based on projections using end-1999 stock of SOE debt.

The sustainability of public debt depends critically on the success of strengthening tax policy and administration, curtailing (he growth of SOE debt, and improving the budget position. If, for example, the budget position were to worsen because of a continued decline in non-oil and/or tax revenue (as a share of GDP), rapid expansion of SOE debt, and further deterioration of banks’ asset portfolios (each of which might be associated with a delay in the reform of SOEs and SOCBs and a worsening of their financial plight), the required bank financing of the deficit and interest costs would rise significantly. Assuming the government’s oil revenue moderated and non-oil revenue stayed at current levels (i.e., with total revenue staying around 19½ percent of GDP), public sector debt would rise to around 80 percent of GDP by 2006.

8. However, the net impact of reform on government revenue from the nonstate sector should be positive over the medium term. The removal of QRs and replacement with tariffs on a number of imports by 2003 could provide a boost in revenue. More generally, bilateral and regional trade initiatives are expected to result in a broad-based reduction in tariff rates, but this could be partly offset by a larger volume of trade. Several other factors may counteract the immediate negative consequences of structural reform on government revenue. First, the expansion in small and medium-sized enterprises (SMEs) and upswing in FDI as a result of the new Enterprise Law and amended Foreign Investment Law should lead to a further broadening of the tax base. However, bringing this activity into the revenue fold could take time if the system of investment tax incentives needs to be revised and if new tax measures need to be introduced, given the current weaknesses in tax policy and administration (in particular, the introduction of the VAT or some form of presumptive taxation on SMEs, as discussed below). Second, structural reform in general should improve overall efficiency and competitiveness and the financial performance of firms.

D. Possible Improvements

9. For revenue performance to take full advantage of prospective structural changes, improvements in both tax policy and administration will be needed. In response to the Vietnamese authorities’ request, a technical assistance mission from the Fund’s Fiscal Affairs Department (FAD) recently reviewed areas for improvement and the needs for future technical assistance in tax policy and administration. The mission’s main findings are summarized below.

10. With respect to tax policy, the scope for raising tax rates is limited, but the design of several taxes, in particular the VAT, can be improved. Issues of fairness and equity in the treatment of foreign and domestic investors and high income taxpayers also need to be addressed. In the area of tax administration, recent efforts have concentrated on recruiting additional staff, providing technical training, computerizing some existing procedures, and implementing of a modern taxpayer identification number system. However the basic organization of tax administration is still cumbersome and in need of further modernization and computerization.7

11. Drawing on the work of the recent FAD mission, the main drawbacks to tax policy and administration are as follows:

  • VAT: Among the major deficiencies in the VAT is the treatment of goods subject to the special sales tax (SST), which in most cases are exempted from the VAT. This complicates the VAT rate structure and leads to two regimes for determining VAT tax liability. Other drawbacks to the current VAT policy and administration are the allowance of presumed VAT credit on purchases from business that do not issue invoices and the requirement that each branch of a firm file a separate VAT return. The ad hoc reduction in the VAT rate from 10 percent to 5 percent for a few items (see Summary of the Tax System) in 2000 has also resulted in foregone revenue and raised concerns about VAT integrity.

  • Other taxes: The corporate income tax needs to provide more uniform tax treatment of foreign and domestic enterprises. In some respects, Vietnam treats foreign investors more generously than domestic firms: the standard rate is lower (25 percent versus 32 percent); foreign investors enjoy a tax refund on reinvested profits; and only domestic firms are subject to the 25 percent surtax on excess income. On the other hand, profits remitted abroad by foreign investors are subject to a withholding tax. Also, the individual income tax needs to brought more in line with international standards by revamping the withholding tax on wages and other types of income and eliminating the supplementary income tax, which effective raises the top marginal rate despite its recent reduction.

12. The authorities have already committed to revising the VAT law to reduce the number of rates and exemptions, to be made effective in the 2003 budget. The recent FAD mission recommended a number of other improvements as follows.

Tax policy

  • With respect to the VAT, broaden its base by taxing goods subject to the SST, and cease the practice of imputing VAT credit on purchases without invoices. Also, streamline exemptions from the VAT, SST, and customs duties.

  • Under the corporate income tax, bring about a more uniform treatment of foreign and domestic enterprises and tighten tax incentives for investment, in particular by reducing preferential or discriminatory practices for foreign investors. In addition, streamline the individual income tax, including withholding allowances.

Tax administration

  • Introduce self-assessment procedures gradually, as part of the modernization strategy, beginning with the creation of a pilot office comprising improved programs in tax services and education, new collection (i.e., filing and payment) procedures, stronger collection enforcement systems (including appropriate penalties and appeals), and more effective audit programs, especially for VAT refunds.

  • On a broader scale, simplify basic VAT administration, including streamlining the criteria for subjecting enterprises to the VAT under the invoice method by introducing a simple criterion (e.g., annual turnover), developing a new mechanism that allows firms with multiple branches to file a single VAT return, and designing and implementing new audit systems and refund programs supported by computerization.

  • Over the medium term, develop a strategy for modernizing tax administration, including the design and implementation of a computerization project (during 2001-05) aimed at achieving this objective. Also, to increase effectiveness of computerization, conduct a comprehensive review of the organization and procedures of tax offices.

Furthermore, customs administration will need strengthening along the lines earlier recommended by the Fund.

13. Tax incentives for investment also need to be tightened. Like many other countries in East Asia, Vietnam provides generous investment incentives in the form of tax holidays and preferential corporate income tax rates. While it is recognized that these incentives are difficult to resist given the competition to attract investment, experience shows that lax holidays are a particularly inefficient method of promoting investment in new enterprises. The medium-term goal should therefore be to rationalize various preferences and broaden the tax base.

14. Vietnam has much room for substantially broadening the revenue base by simplifying its tax system. Further improvement in tax policy and administration would not only lower the costs of compliance and collection, but also enhance the confidence of both foreign and domestic investors. In light of recent revenue trends, taking the necessary steps to improve the tax system will be critical in the near future if Vietnam is to remain on a path of medium-term fiscal sustainability.

Prepared by David Cowen and Noriaki Kinoshita.

Import growth (in dong terms) averaged 8 percent a year during 1997-99, compared with 38 percent during the previous three-year period.

A 1999 technical assistance mission from the Fund’s Fiscal Affairs Department identified the major weaknesses in customs administration as (i) a large element of discretion in impoi valuation; (ii) an extensive application of suspension regimes, which resulted in customs duties and other taxes on imports being collected after goods cleared customs and thus put revenue at significant risks; and (iii) insufficient resources devoted to post-clearance control and audit.

The VAT, along with a special sales tax (excises levied on cars, gasoline, cigarettes, beer and other alcoholic beverages, and a few other items), replaced a cascading turnover lax. Prior to 1999, collections of the turnover tax was relatively stable, except in 1998, when domestic demand weakened sharply as a result of the Asian financial crisis.

On the export side, the government currently collects a corporate income tax, a charge on the use of natural resources, and an after-tax dividend from PetroVietnam—the large, state-owned petroleum conglomerate. In total, the government’s take is about one-half of the value to total crude oil exports, the rest of which is retained by PetroVietnam to fund its operations. On the import side, the government levies import duties on all petroleum products, an excise on gasoline (currently 15 percent), and a VAT (10 percent) on all other products.

Oil revenue is highly sensitive to changes in prices; currently, an increase in oil prices by US$1 per barrel raises government revenue by ½/sup percentage point of GDP.

Vietnam’s tax network is overseen by the General Department of Taxation headquarters in Hanoi and comprises 61 provincial tax offices (PTOs) and 620 district tax offices (DTOs). The PTOs have both operational and supervisory functions, in their administration of tax obligations for 70,000 medium- to large-sized enterprises and oversight of the DTOs. The DTOs administer the tax obligations of the other taxpayers, which comprise around 1 million small enterprises (mainly household businesses) and 10 million farmers.

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