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Taxes eat up 40% of business profits in Vietnam: World Bank
Businesses in Vietnam have to earmark nearly 40 percent of their profits for taxes, a significantly high rate compared to other countries in the region, a new World Bank report finds.
Despite a lower corporate income tax, 22 percent compared to the previous rate of 25 percent, the total tax rate on profits in Vietnam remains high at 39.4 percent, according to the Doing Business 2016 report released on Thursday.
By comparison, the average rate for the East Asia-Pacific region is 33.5 percent.
Profit tax accounts for 14.5 percent of Vietnam’s total taxes, whereas 24.8 percent comes from labor tax and contributions, and other tax makes up 0.1 percent, according to the report.
The report also revealed that businesses in Vietnam pay taxes 30 times per year, consuming a total of 770 hours. The averages for the East Asia-Pacific region are 25.3 times and 201.4 hours.
“The total tax rate could have been higher if the World Bank also counted value-added tax in their calculations,” said Nguyen Minh Thao, deputy head of business environment and competiveness at the Central Institute for Economic Management.
Thao added that the total tax rate in Vietnam is rather high compared to other countries in the region such as Singapore and Thailand, whose tax rates are 18.4 percent and 27.5 percent, respectively.
“Even a developed country like South Korea, whose tax system is very complicated, still has a lower rate, at 33 percent,” she underscored.
Thao said businesses in Vietnam are suffering much more than the tax rate suggests as companies often have to pay many fees which are not taken into consideration by the Doing Business report.
“This is why very few businesses are interested in expanding production or investment,” she said.
“While we cannot cut tax rates, which are regulated by laws, it is possible to reduce the number of fees.”
Economic expert Pham Chi Lan said a 40 percent total tax rate is beyond the limit of most businesses, which is why tens of thousands of firms dissolve or declare bankruptcy on an annual basis.
“How can they have money to expand production or invest in technology and personnel development when 40 percent of their profits go to taxes?” Lan wondered.
In the meantime, many analysts point their fingers at employer-paid social security contributions, which have a statutory tax rate of 18 percent.
Social security insurance can account for as much as 20.3 percent of the 39.4 percent total tax rate on business profits, according to the report.
A new law on employer-paid social insurance that took effect this year only exacerbated the burden on businesses.
Social insurance payments are now based on employees' gross salaries rather than on basic wages as they used to be.
“This results in VND6.7 billion [US$300,000] of added monthly costs for my company of 4,300 employees,” Le Quang Hung, chairman of Garmex Saigon, a Ho Chi Minh City-based garment firm, lamented.
“With most of our profits going to taxes, we are left with no money to re-invest in machinery upgrades.”
The director of a paper making firm also voiced concern over the situation, saying that the social insurance payment for his nearly 1,100 laborers has increased nearly 70 percent to VND1.46 billion ($65,179) under the new law.
“While businesses have to count pennies, the number of taxes and fees just keeps rising, destroying our motivation for growth,” he said.
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