Vietnam has taken a giant leap in opting for value added tax, but only small steps to implement it, reports Le Duc Tan
"To tax and to please, no more than to love and to be wise, is not given to men," English statesman Edmund Burke said. More than 200 years later, Nguyen Thi Dinh, director of Tien Bo Printing Company, is certainly not pleased, but her displeasure stems from not being taxed. "We are trapped," she complains, and demands to be added to the list of those who are subject to the new value added tax (VAT). Banker Ngo Tuan Kiet is also displeased, but for the diametrically opposite reason. "Why are we not exempt?" he wants to know.
Welcome to the mad VAT world, where neither the authorities nor the taxpayers are very sure about what's happening since the new tax came into effect at the beginning of this year. Many firms, some of them totally outside the purview of the tax, have increased prices using VAT as a pretext; others say it has enabled them to lower their rates. Stuck in the middle, the General Department of Taxation (GDT) seems to have decided to leave it up to businesses to interpret the tax and then make its judgment on what they decide.
Where is the problem - in the law, or in its implementation? Both, say the experts. Tom McClelland, senior manager at accounting firm Ernst & Young in Ho Chi Minh City, believes an innate reluctance to abandon the previous turnover tax is reflected in the new law. Writing in VET last year, Brian Wurts of Pricewaterhouse Coopers said the 15 page legislation was "more a statement of the legislation's objectives than a detailed explanation of its operation".
When in 1995 the National Assembly ratified the decision to introduce VAT, one of the main aims was to eliminate the weaknesses of the existing turnover tax. It was believed the new tax would also improve the country's competitiveness in international markets and bring imports under some control as Vietnam prepared to adhere to Asean Free Trade Area provisions. The new tax was also intended to encourage domestic production and distribution of goods and services.
All this had to be done, of course, while ensuring that budget revenue did not suffer. The law was passed in 1997. The preparation period notwithstanding, circulars were being issued up until the week before the law took effect, showing the authorities had decided on a trial and error approach.
Nowhere in the world has VAT been an easy tax to implement and, given that there has been minimal compliance with accounting standards in Vietnam for decades, the complexity of its local application is bewildering.
Under the old turnover tax regime the calculation was simple. Your selling price already incorporated the tax, and tax liability was based on (recorded) turnover. VAT is separated from the selling price, and offers less scope for tax evasion. Manufacturers and traders now not only have to issue invoices that specify the selling price and VAT to be collected from buyers, they also have to ensure they get an invoice for every purchase they make. So for Ms Dinh at the printing house, her exemption, granted to favour her business as a vital cultural industry, means she has to pay 10% input tax on her materials, like paper and ink, but cannot claim a refund. She has no choice but to increase her prices. Hence her "we are trapped" lament.
Are law-makers aware of this trap? Pham Van Huyen, GDT deputy director general, deftly deflects the query. "Before it happened, some enterprises thought it would be better not to be subject to VAT. Now they want to change, but you cannot afford to make changes all the time."
His reply underlines the fact that most businesses did not want to think about VAT before it took effect. Ms Dinh herself was not aware of the trap until she saw a film about VAT on television. But Mr Kiet, chairman of the Vietnam Bankers Association, does not seem to have realised all the implications and wants not just credit but other banking services to be exempt. The local version is a puzzle even for multinational investors used to the tax from the 120 other countries where it is applied.
Despite the low level of awareness, the government was determined not to waver from its intention of introducing VAT on January 1. Leaders claimed VAT would help to encourage production and enable businesses to lower their selling prices. That is the theory, anyway. "No way," says Ms Dinh, who reckons her company would suffer a loss of VND3bn if its prices remain unchanged.
Mr Wurts applauds the government for its desire to introduce VAT, but says implementation is the key to its success. Experience in the rest of the world has shown the one essential is a simple law with one tax rate and as few exemptions as possible. But here, "simplicity has taken the back seat", he says.
In Vietnam, VAT has four different rates - 0%, 5%, 10% and 20% - and many businesses have found that clear distinctions are very difficult to make. At Ms Dinh's printing house, newspapers, political and educational books and legal documents are exempt, while a 5% rate is applied to technical, scientific, cultural and children's books.
"When you've got to deal with four tax rates or exemptions, it's not just four times harder for accountants, it's at least ten times more difficult," GDT deputy director Nguyen Van Dau admits. Another peculiarity is that export services are not zero-rated, they are exempt; the difficulty lies in defining them.
Successful implementation hinges on one other important factor: having as few businesses as possible under the tax. This is particularly true of Vietnam, where a great majority of businesses are household enterprises that do not keep the detailed accounts VAT requires.
To their credit, the authorities solved this problem with admirable simplicity. They divided their 1.2 million businesses into two groups. Larger businesses will be VAT taxpayers in the conventional sense, filing returns and claiming credits for their purchases. The others will pay VAT using a simplified calculation. The business calculates the "value added" figure, sales price less value of purchases. The appropriate VAT rate is then applied to this figure. "I give Mr Huyen his colleagues high marks for their decision to have two methods of calculation," says Mr Wurts. "Otherwise it would be impossible to administer." There are, however, concerns that this approach might influence a shift to purchases from businesses in the first group, because companies buying goods or services supplied by those under the direct method will not be allowed to claim input credits.
The reason behind the complex approach to VAT chosen by the country's leaders seems to be that they do not want too abrupt a change to a completely new system. Such a change, from the old turnover tax with 11 rates ranging from zero to 30%, to a VAT with just one rate, could send prices soaring. It could also send some businesses into the red.
At the GDT office, Mr Huyen is relieved that his fear of volatile prices has not happened after a fortnight of VAT. "Basically we have succeeded. For countries which are taking the first steps into a market economy like we are, a multi-tax rate approach should help people get used to it. The losers will not lose much and the winners will not win much."
One day at a time
Opting for VAT is a giant leap for Vietnam. It is the most significant tax change in the country's fiscal history. There has been extensive media coverage, even a film that has a shop assistant falling in love with a taxman teaching her the VAT ropes. The Politburo, the country's most powerful political body, is on record as supporting the government's decision. But through two and a half years of preparation, the approach has been very cautious, a puzzle for those who have aided it, like Sweden, Canada, France, Japan, the UNDP and the IMF.
Questions asked by taxpayers reveal huge gaps in public education. Dao Van Tan at the Ministry of Finance, in charge of answering queries about VAT, says a call comes through on the ministry's hot line every two minutes to ask about how to fill in a VAT invoice.
"There are some crucial issues no one at the GDT was aware of when we asked," says Mr McClelland. When the law was passed two years ago, his firm was quick to send the GDT over 50 questions on grey areas. It is yet to get a reply. The legislation is 50% of the framework, Mr McClelland says; subsequent circulars make up another 30%, leaving another 20% that still needs to be clarified. "When I first read it, I thought it's just like a bicycle without wheels and without handlebars."
The GDT's Mr Dau does not deny the law is incomplete, but says the remaining work will be done day by day. His department has been trying hard to fill in the gaps, and some vital adjustments came out in the very last week before the introduction of the tax.
Vietnam has been eager to listen to advice and learn from the experiences of other countries, but its international supporters would prefer it if things were less complex. "We would prefer to see essentially a simpler tax with fewer tax rates," says IMF resident representative Erik Offerdal. "But the government has decided on a different approach."
One foreign expert, who asked not to be named, was blunt. "Everything comes down to politics. A lot of compromises are involved."
Mr Dau acknowledges that in Vietnam, VAT has maintained a social focus. "The party leaders have said agricultural production is our foremost industry, and that medicines and books for children [which enjoy a preferential rate of 5%] should also be supported. The rich people can go to karaoke or restaurants and pay 20% [special sales tax], but the vast majority of the population do not have the money to go to such places."
In the future, he says, Vietnam will conform to the international trend of reducing the number of rates to one, plus the zero rate. "But it's still too early," he says. "We need to experience reality for a while before we can make systematic and well-founded revisions." Ms Dinh says the longer she has to wait, the more it will cost her: "It might all be too little, too late."
Why VAT replaced turnover tax
- Turnover tax is levied on gross turnover from sales of goods and services. Therefore it repeats at each stage of production trade and distribution. VAT is calculated only on the added value at each such stage.
- Turnover tax hurts international competitiveness as it applies on exporter's input, raising their cost. VAT gives refunds for tax paid on inputs.
- Turnover tax hurts competition because of different rates for competing goods and services. Most items are subject to a standard 10% rate under VAT.
- VAT should assist in improving bookkeeping and accounting standards by business.
First the good news ...
On January the first, 1999, the long-awaited VAT became a reality. However, even during the last days of 1998, significant changes were still being made. The new circulars clarified many issues, but the new rules raised as many questions as they answered. In keeping with the Christmas season, in many areas the new rules served to benefit taxpayers, with the apparent goal of rectifying problems arising from the previous Circular 89. Some companies woke up to find tax breaks under the "VAT tree"; others found unfavourable changes. Perhaps the best news was received by hotels, restaurants and tourism service providers, whose rate would be cut to 10% from 20%. Changes in the VAT treatment of goods subject to special sales tax, such as alcohol and tobacco, automobiles and air conditioners, was good news for some taxpayers, and there was still more in the treatment of foreign contractors. Helpful tax changes were also announced for a number of other industries.
Although the good outweighed the bad, there was some unwelcome news in these year-end Circulars as well. The Circular on banks provided additional information on the calculation of input credits for banks. Specifically, it now appears that in the formula to calculate their proportion of allowable credits, banks must include, as exempt revenue, their gross interest income, rather than their net interest income (less interest on deposits). This will significantly limit the ability of banks to claim input credits.
Producers of goods that are exempt when sold in the domestic market, such as beer, were disappointed to learn that the new Circular exempts rather than zero-rates their exports. This reduces their competitiveness in the export market, a policy result which certainly seems counter-productive.
By and large, the biggest disappointment was not anything contained in the documents; it was what was not included. Some of the most complex rules, such as the taxation of transfer of goods between branches of the same company, were not simplified. In the coming months, many practical problems will arise. Hopefully, ways will be found to address these problems which will simplify rather than further complicate VAT in Vietnam.
By Brian Wurts
Senior manager (VAT) for PricewaterhouseCoopers
Taxing business of promotion schemes
Business promotion schemes are an important feature of business in Vietnam and their VAT treatment gives rise to a number of contentious issues. Much of the difficulty arises from the variety of forms that these schemes can take.
The greatest concern was that VAT was to be paid on the market value of goods provided as gifts or free of charge. The tax authorities had given indications that this would not be the case and their position has been formalised in Circular 175/1998/TT-BTC.
Obtaining definitive guidance from the Circular is, however, rather like consulting an oracle that gives no straight answers, merely metaphors that must be pondered at length and which raise yet more questions. The path to enlightenment has many stages.
In fairness, the treatment of business promotion schemes continues to be a difficult issue in countries which have had VAT for years.
The Circular says VAT need not be accounted for on goods provided free of charge in the normal course of business. However if VAT is not accounted for by the provider of the goods the recovery of the input VAT it incurs is restricted.
While the example provided in the Circular of how the input deduction is limited can be compared to a simultaneous equation with only one half, the requirement is that the input tax deduction is only allowed for the VAT related to the value of goods which is permitted as a deduction for corporate income tax. One issue here is that this is an annual calculation, while VAT is returned monthly.
Business promotion schemes appear in a wide variety of guises.
The most straightforward situation is where promotional gifts are provided as prizes, or simple giveaways such as T-shirts or caps. In this case no VAT is payable but the input tax claim is restricted. The same treatment will apply to the provision of samples.
Buy one, get one free promotions are more complicated but very common. For example, Bakers Dozen Ltd offers as a Tet promotion: buy 12 banh chung and get one free. Sunshine Desserts Co responds by offering: buy 13 banh chung for the price of 12.
Both promotions are commercially identical and the "free" cake is merely a marketing ploy, but the VAT consequences are strangely different. If Sunshine Desserts does not wish to return VAT on the free item, the tax authorities say it must state on the invoice that 13 cakes are being sold for the price of 12. The invoice must not state that in cases where 13 goods are provided with one free, that 12 are sold for the regular price with one sold for nil consideration.
Combined goods promotions are treated the same way. It is therefore important, to avoid any VAT consequences, that the invoice does not show that the promotional item is sold for nil consideration; rather that the goods including the promotional item are provided for an all- inclusive price.
In cases where material provided to a retailer for display purposes remains the property of the manufacturer of the goods, then arguably as this is not a gift, the restricted input tax deduction provided for in the Circular should not apply.
These business promotion schemes are the most common but there are others, and there will be subtle variations which may have different VAT consequences.
It also remains to be seen whether the views expressed here will be universally shared by the authorities.
In conclusion, it appears that the treatment of promotion schemes is likely to continue to be contentious, and it is important that businesses review any new guidelines issued by the tax authorities in the future on particular promotion schemes.
Senior manager, Ernst & Young
Despite all the promises, some businesses see VAT as an excuse for raising prices, reports Tran Le Thuy
"Will you need an official invoice?" asks the sales girl in a computer shop on Hang Bong street in Hanoi. If so, VAT is included and the buyer has to pay $15 more than the $70 base price of the HP Laser Ink 6.0 cartridge. For an unofficial invoice the charge is $78. Similar stories were heard all over the country on January 1.
"Buy Now, Save 10%" banners all over the city had come down a day earlier, and prices duly went up. A VET market investigation found no shortage of merchants who had got into the New Year price-raising act. Most claimed to be covering up VAT-induced losses with higher selling prices.
This contradicted what the nation's leaders had been saying all along - that VAT would not result in an across-the-board increase in prices. The authorities did not take long to cry foul. "At first, many sellers just automatically added 10% to the price and blamed it on VAT," says Nguyen Ngoc Tuan, head of the Government Pricing Committee. "Even the ones who do not have to pay any tax at all, like translation centres, motorbike parking lots and notary offices, increased their charges."
Were most of them just out to make a quick buck? Not really, but those who did have been warned. Mr Tuan's committee has co-operated with other agencies in setting up a hotline and forming inspection teams to strictly enforce the government's directive not to increase prices for the first six months. The government has already made the Yen Vien Industrial Gas Company repay VND10m to customers, and persuaded many other companies, such as Morning Star cement and DHL, to revert to their former prices.
Haruo Takiguchi, general director of Honda Vietnam, the nation's main motorbike manufacturer, is not a happy man. He says the joint venture was able to limit its price increases to less than 5% even though his tax went up from 2% turnover tax to 10% VAT. But the government's directive not to increase prices for six months has caused "serious confusion and misunderstanding, and influenced the customer's willingness to buy. The damage it is causing our business is getting more serious day by day".
Mr Tuan says the complaint of one of Honda's accountants, that "the price before January 1, minus the turnover tax, was higher than the new price minus VAT", is plausible, but the government's intention is to keep the price the same as it was in late 1998. For the first four days of January, Honda postponed distribution of its Super Dream, as did Suzuki with its Viva, leading to a shortage of motorbikes on the market. However, as the price of locally produced motorbikes went up, that of imported ones came down. At $2030, the Viva is now $170 more expensive, while the same model imported from Thailand sells for $1860. Prices of imported motobikes have decreased by $60-80, says an industry source. "That's because supply is in excess of demand. Purchasing power is much reduced," says a Honda salesperson.
Reduced purchasing power has also affected the pharmaceutical industry, with a steep drop in imports and leading state-owned manufacturers saying even VAT of 5% cannot be absorbed by customers.
There are many other grievances about the new tax. "We lost all the profit that we were due," complains Nguyen Huu Thanh, branch manager of Vietnam Meat Industries and Seafood Export-Import Corporation in Hanoi. Unable to claim input credits on purchases made from farmers and small suppliers, the biggest state-owned meat processing company is trying to "help the farmers pay the tax" by asking them to slash their prices by 5%. "But it is actually very difficult to do so."
Saigon Commercial Corporation officials say they are very worried about VND300bn worth of goods still on the shelves despite their best efforts to clear stock before the new year. These goods will be taxed at 10% without any input credit and could end up costing the company a huge sum of money, they fear.
A senior railway official says the railways have increased their charges for both passengers and goods by 5%. He says that on expected turnover for 1999 of VND890bn, an extra 24.2bn would have to be paid compared to the old tax regime. "We know increasing prices is not right but we don't know what else to do."
Meanwhile, there is a lull at customs. "Businesses are waiting to see how VAT will be implemented," says Hoang Viet Cuong of the department in charge of collecting duties. Imports dropped drastically over the first 20 days of the new year.
Mr Cuong says the main problem is that the regulations are so confusing. Some goods which are exempt from import duties, such as petroleum exploration equipment, have not been included in the VAT exemptions. His office had to resort to a "flexible solution" to clear a jam caused by this confusion. Companies were allowed to delay their tax payments for 30 days.
Meanwhile, other companies are dropping their prices. La Vie bottled water slashed its retail price 15% on January 1. Nguyen Thi Tuyet Van of Long An mineral water joint venture praised VAT's input credit clause, which enabled the company to pay much less tax. "The government helped us a lot so we want to share our good fortune with our customers." And one advertisement agency has seen VAT as a golden opportunity to boost its profile. It ran ads saying it is reducing its prices by 5% because of VAT, capturing the attention of readers nationwide. "We can cut our prices even further," says Hoang Hai Duong, manager of the Goldsun agency. The firm has an annual turnover of VND10bn and its tax remains steady at 10%. But "our input credit is large, some 70-80% of total turnover," Mr Duong says. "Many other firms could reduce their prices, but they haven't."
|Cooking oil, wheat flour, cigarettes, shampoo, cosmetics||3-10%|
|Steel, sanitary ware||5-10%|
|Sweets, beer and liquor||5-10%|
|Telephone and Fax||0%|
|Electricity and Water||0%|
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