Complex tax laws don’t deter foreign investment

Complex tax laws don’t deter foreign investment

The complexity of Vietnam’s business tax climate is not impeding the attraction of foreign investment, and oddly enough, is appealing to a corrupt element of investors using complexity and legal loopholes to their advantage.

A World Bank recent report on Vietnam’s business tax climate in 2013 reflects it took a typical foreign invested small business on average 872 hours annually to comply with the nation’s income tax laws, four times higher than the average for other countries in the Asia-Pacific region.

However, in spite of the general consensus by leading economists that Vietnam’s business tax climate is said to be the poorest of all Southeast Asian region countries, foreign direct investment (FDI) keeps pouring into the S-shaped Southeast Asian country.

Economists generally attribute the strong FDI inflow to Vietnam’s emerging status as the most politically stable country in the region, as well as its macro-economic stability and vast potential for economic growth.

Speaking at a recent seminar, Central Institute for Economic Management (CIEM) Deputy Director Dr. Vo Tri Thanh, said foreign investors in Vietnam are expecting to earn high profits, and they view political stability and the country’s economic potential favourably.

“Investors are not aiming to get involved in charitable programmes,” Dr. Thanh emphasised, adding “this is an advantage Vietnam has over other countries in the region”.

However, Dr. Thanh pointed out a number of shortcomings in Vietnam’s FDI attraction, saying that the country needs to pay more attention to improving the competitive environment and the connectivity between producers and consumers.

Vietnam is offering numerous investment incentives which includes a preferential tax policy that negatively impacts the national economy to the advantage of foreign invested firms.

“Tariff incentives are only one factor to attract FDI businesses,” he emphasised, adding that, “Sometimes these incentives lead to corruption.”

Professor Le Cao Doan from the Vietnam Institute of Economics (VIE), in turn echoed Dr. Thanh’s view and elaborated on the point that some foreign businesses are taking full advantage of Vietnam’s legal loopholes to increase their profits.

“They are doing this by effectively taking advantage of complexities in the laws and evading paying the nation’s income tax altogether,” Doan said.

In other words, the foreign invested firms make their profits in Vietnam but those profits get effectively allocated to other countries the firms operate in, where the income tax rates are lower. Another issue of concern is the lack of laws regulating environmental pollution. Other countries throughout the world carefully consider the green growth model and its enforcement.

Vietnam has not yet paid proper attention to this issue and as a result, is suffering negative consequences caused by environmental pollution compounded by the utilisation of out-dated technology, Doan said.

Not transparent – an opportunity to earn money

One peculiar aspect to Vietnam’s FDI attraction is that complicated procedures are not adversely affecting the flow of funds to Vietnam. Factually, many foreign investors don’t consider them as disadvantages, or alternatively, they find ways to make profit from the complexity.

Instead of promoting production and increasing capacity, some foreign investors are eager to participate in corruption, or other schemes to corner the market and distort trade in order to make fast money.

To support his assertions, Prof. Doan cited the Formosa project as a case in point, saying that many large investors are still injecting money in this project although there’s a rising inventory level in the local steel industry in the face of frozen property market.

Vietnam is expected to lure more FDI to increase the country’s capital source and facilitate its economic restructuring process. However, the country is unlikely to achieve its set targets. “The national economy is still sputtering despite its positive outlook,” Doan added.

According to him, those foreign invested firms who do not have a close relationship with State agencies will find it hard to run business, particularly small-and-medium-d enterprises (SMEs). Thousands of businesses have gone bankruptcy due to tough competition.

The country should take a step back and re-evaluate the offering of investment incentives, Doan suggests and the nation’s focus should be on modernising the nation’s production methods to avoid transforming itself into an outsourcing venue.

vietnamnet