According to a Decree of the government of Vietnam enacted on November 4th, individuals taxpayers with personal incomes below VND 5 000 000 (USD 240) per month will be exempt from paying taxes on incomes dividends gained from securities or stock purchases. Personal income taxes on profits derived from securities trading will also be halved. Both changes are applicable for the period between August 1st 2011 and December 31st 2011. Additionally, households which provide accommodation to students and low income shift workers will see their personal income tax obligations and value added tax liabilities halved for the period between July 1st 2011 and December 31st 2011.

Some enterprises operating in Vietnam will enjoy a significant reduction in their income tax obligations, with firms operating in the forestry, agricultural, textile, fisheries, leather, garment, footwear and electronic sector set to have their tax obligations reduced by 30 percent for the 2011 year. The tax reduction will also apply to companies which are deemed to be contributing to the socio-economic development of the country. Businesses operating in the lottery, real estate, finance, securities, banking, insurance, goods production and service trading sectors have already been listed as not being eligible for the tax break.

The new rules were passed with the explicit aim of helping businesses and individuals deal with the country’s current high levels of inflation, and to encourage economic prosperity and expansion.

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On July 13th the Standing Committee of the National Assembly of Vietnam held a scheduled session devoted to reviewing a government proposal to instate a series of temporary tax reforms and exemptions worth approximately VND 4.2 trillion (USD 205.8 million) in the 2011 year, and another VND 2.2 trillion (USD 107.8 million) in changes for the 2012 year. The overhaul was proposed by the Finance Ministry, and announced by the Finance Minister of Vietnam Vu Van Ninh, who said that the new measures were aimed at solving the economic difficulties faced by both national businesses and individuals.

On July 21st the Chairman of the Finance and Budget Committee of the National Assembly of Vietnam Phung Quoc Hien presented a report on the proposed cuts, claiming that the changes were poorly targeted and would not aid the low earning individuals or poorly performing businesses.

Under the initial government proposal, individuals earning less than VND 60 million per year, would be exempt from the current 5 percent tax rate. Small and medium enterprises would also be given extensions on their tax payment deadlines, as it is thought that the move would ease cash flow issues. The National Assembly is also considering the potential effectiveness of instating significant cuts in tax rates faced by small businesses. It was also proposed that tax exemptions should be applied to dividends, to stem the continued decline of the Vietnamese stock exchange.

However, according to the new report by Phung Quoc Hien, the lowest earning individuals in the country already face a relatively minor tax rate, and would not benefit significantly from a drop in their liabilities. Businesses would also only see small benefits from the tax cuts and payment extensions, as the primary difficulty faced by small enterprises in Vietnam is a lack of available capital, and Phung Quoc Hien suggested that the government should pursue means of easing the accessibility of credit to local entrepreneurs. The Chairman said that the government needs to reassess the fairness of the proposed tax exemptions on stock trades and dividends, as they could be perceived as unfair by other businesses.

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The tax authorities of two of Vietnam’s primary business centers are launching pilot programs of increased investigations into the transfer pricing behavior of local units of international businesses. According to Nguyen Van Mo, deputy head of the tax department in Hanoi, and Le Thi Thu Huong, deputy head of the Ho Chi Minh City tax authority, the two departments will begin more intense scrutiny of companies which potentially could be allocating their profits overseas to avoid tax liabilities in Vietnam.

According to previously released statements by tax authorities, nearly 40 percent of companies registered in Ho Chi Minh City have reported overall losses in their operations, despite showing continued levels of expansion. This ongoing behavior has been partially attributed to tax evasion through unsavory transfer pricing practices. In April 2010 tax regulations in Vietnam were altered, making it necessary for companies to list all of their related party transactions along with their annual tax returns, in the hopes of curbing tax evasion. However, tax authorities in Ho Chi Minh City and Hanoi will now begin closer scrutiny of these records, in an attempt to entirely eradicate negative exploitation of transfer pricing practices. As part of the clamp down, tax authority representatives will begin a series of meetings with local businesses to ensure that best practices are being followed and no tax evasion is being committed. New penalties will also be instated, which could see an offending company pay penalties of up to three times its underpaid tax liability, if transfer pricing based tax evasion is discovered.

Le Thi Thu Huong commented on the new efforts saying that they will lead to a welcome boost in tax revenues, adding that “China has enforced transfer pricing quite stringently and got a lot of tax money.” Explaining further Fredrick Burker, partner at the international law firm Baker & McKenzie Vietnam, said “…like a lot of other countries, they [the Government of Vietnam] need to keep their budget revenue to pay for their stimulus package from last year.”

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On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

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The Government of Vietnam recently released Circular 64, a new piece of legislation taking effect on June 7th and altering the tax treatment of the interest earned on bonds and CD held by overseas investors. Under the new regulations, interest earned will be subject to a 10 percent level of taxation. The new rate of interest will be calculated and paid after the sale or transfer of the bond. Previously, the tax liability was calculated as 0.1 percent of the cumulative total of interest earned and the instrument’s face value.

According to Do Thu Ha, a tax partner of KPMG Vietnam, the new changes were instated because of the ambiguity of previous legislation. Despite the added taxation certainty provided to foreign investors, finance industry experts have spoken out against the changes. Hoang Gia Hiep, deputy general director of Vinashin Finance Company, has decried the legislation as a “shock for the local bond market”. He explained that the finance industry has held large scale petitioning to the Government to take action and lure foreign indirect investment capital back into Vietnam, and the the current changes are counter-productive. Tom McClelland, Tax Partner at Deloitte Vietnam, also objected to the new tax rate, saying that the withholding rate on interest should be completely eliminated or at least thoroughly reduced, for the nation to draw the much needed capital required for economic growth. He added that funding costs are a major aspect of any infrastructure project, and the elimination of withholding rates on interest could be a great influence in whether projects are carried out or receive foreign investment.

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