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Issues with CIT incentive policies in Industry 4.0

Released at: 08:15, 25/11/2018

Issues with CIT incentive policies in Industry 4.0

Photo: Deloitte Vietnam

Mr. Bui Tuan Minh, Tax Partner at Deloitte Vietnam, shares his views with VET on the opportunities and challenges of corporate income tax incentives.

by Minh Do

Has Vietnam’s tax system caught up with the strong development of Industry 4.0?

Basically, I think that our CIT incentive policies from 2008 until now have covered the fields of digital technology and high technology application in the context of Industry 4.0 fairly well. These policies have been issued in a timely manner, at both the tax law and specialized law level and the decision level by the Prime Minister. The most prominent feature of Vietnam’s CIT incentive policies for key industries and sectors in Industry 4.0 is the highest level of CIT incentives (i.e. a 10 per cent tax rate for 15 years, tax exemptions for four years, and a 50 per cent reduction in tax payable for nine subsequent years from the first year of recording taxable income).

How will these CIT incentives provide opportunities for enterprises and the government to maximize the benefits of Industry 4.0?

Enterprises will be more active in increasing their investment or shifting their investment to sectors and industries in Industry 4.0 in order to create a competitive advantage and accumulate capital. Some large private corporations in Vietnam, such as Vingroup, have made strategic investments in high technology, with the establishment of the VinTech Technology Development Company, the Big Data Research Institute, and the Hi-Tech Research Institute, to focus on the research and development of cutting-edge technologies in the future, such as new-generation materials, artificial intelligence (AI), and smart cars, etc.

From the government’s perspective, the maintenance of the CIT incentive system and effective tax administration models in line with the trend of Industry 4.0 will help Vietnam attract domestic and foreign investment capital and expand its tax collection base to new sectors and industries in the digital economy.

What could be considered the challenges?

Vietnam has been facing significant challenges arising from its internal tax policies as well as in competing with other countries in the region and the world where tax incentives are considered one of the most important comparative advantages to attract investment. In my view, the government has experienced four major challenges.

The first comes from the emergence of new business models and business lines (for e.g., online advertising via Facebook and Google) that can create many differences compared to traditional models.

According to research conducted by Deloitte University Press in 2017, the development of the digital economy has posed many challenges in the implementation of tax policies: how to determine a virtual permanent establishment in the digital supply chain as the basis for CIT collection, or how to apply VAT policies for digital products in global transactions, due to the difficulty of clearly determining goods or services, etc.

Meanwhile, our tax policy and tax administration regimes have not kept up with such new business models and business lines and this has affected the interests of enterprises in applying for tax incentives.

The second challenge, from the viewpoint of many investors, is that our system of legal policy and administrative procedures, having been relatively well built, still do not have high practicality. Connections among ministries in the implementation of administrative procedures for enterprises to access incentives to adapt to Industry 4.0 have not been effective. According to the World Bank’s Doing Business 2019 Report, the “Paying Taxes” indicator for Vietnam has fallen 45 places compared to 2018 (down to 131/190 economies); lower than some countries in Southeast Asia.

The third challenge comes from tax incentive policies in general. Vietnam has not had any regulations to encourage and promote human resources in high technology sectors. The trend towards automation in manufacturing industries, replacing people with robots, will threaten Vietnam’s low-skilled workforce. According to forecasts from the International Labor Organization (ILO), 56 per cent of the workforce in Cambodia, Indonesia, the Philippines, Thailand and Vietnam are at high risk of being replaced by technology in the next one or two decades.

The fourth challenge comes from Vietnam’s tax incentive scheme (according to recent research by Oxfam), primarily the profit-based method (i.e. preferential tax rates and tax exemptions on taxable income for a certain period of time). There is a lack of widespread incentive application under cost-based methods (i.e. tax reductions corresponding to investment investors may fully or partly recover). This model has exhibited many inadequacies when it comes to high cost in terms of budget collection declines, unpredictability in the future, and a tendency to attract short-term investment instead of long-term investment.

Meanwhile, countries such as China, Thailand, Malaysia, and others are gradually reducing their dependence on incentives under the profit-based method, increasing the application of incentives under the cost-based method to encourage investment and technological innovation.

How can Vietnam improve its CIT incentive policies in Industry 4.0?

The government should promote cooperation with businesses and focus on the following solutions.

Firstly, it should continue to study to enhance or promulgate tax incentives. There is therefore a need to study and develop CIT incentive schemes under cost-based methods corresponding to a roadmap in line with the Vietnamese context, with the purpose of encouraging research and development activities, the application of information technology, and the use of high technology; improve incentive policies on personal income tax in order to attract and develop human resources to participate in technological fields; and develop tax incentives for enterprises operating in the field of education and development of high-quality human resources.

Secondly, the government should study and develop tax policies for specific sectors in Industry 4.0 but not present in Vietnam just yet, in order to orient and attract domestic and foreign investment flows and contribute to extending the tax base.

Thirdly, it should continue to aggressively reform and digitalize administrative procedures in granting and certifying incentives for enterprises investing in Industry 4.0 sectors, to assist them to quickly absorb and develop new production technologies. Such reforms would help the government improve management efficiency and budget collection, raise the ranking of Vietnam’s business environment, and initiate competitiveness with other countries in the region and in the world.

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