Tax incentives must be provided with care to prevent "side-effects" such as a loss to the budget revenue, the report said.— Illustrative Image/ Photo thanhnien

HA NOI (Biz Hub) — Viet Nam should be more cautious while providing tax incentives to attract foreign direct investment (FDI), as these would affect the Government's coffers and consequently affect public services, experts said.

Experts at a conference held by ActionAid Viet Nam on Wednesday said the country, at the same time, needed to improve its tax legal system and management to prevent tax evasion and avoidance, especially from FDI firms.

This was critical for the Government to ensure tax collection to improve public services, while tax cuts and tariff liberations following free trade agreements were anticipated to cause a drop in the national coffers, according to ActionAid, which initiated the tax justice campaign in July 2013.

A report by ActionAid Viet Nam and the Viet Nam Tax Consultants Association launched at the conference said that generous tax incentives for foreign direct investment (FDI) companies, including tax exemptions and reductions, as well as rampant avoidance of taxes, has caused losses of millions of dollars to the State budget, which could better be spent on public services, social security and fairness.

The report cited statistics from the General Department of Taxation that the loss to the State budget caused by FDI firms which avoided paying taxes - mostly through transfer pricing - amounted to US$20 million in 2012, the most recent year the figure was available. The sum was five times higher than the budget for education and three times higher than the budget for healthcare services in the same year.

Further, it was stated that tax incentives could not create competitiveness for the national economy. Instead the report urged the Government to focus on improving the investment environment through building the legal framework, developing infrastructure, investing in quality human resources and the industry for parts suppliers, rather than using tax incentive policies to attract investments.

Tax incentives must be provided with care to prevent "side-effects" such as a loss to the budget revenue, the report said.

Nguyen Van Phung, Director of the Large Taxpayers Office, did not offer comments about the figures in ActionAid's report, except to say that this could be an opportunity cost.

"There is no discrimination in policy incentives between domestic and FDI firms," Phung stressed.

It was now time Viet Nam became more selective in attracting FDI, Phung said, adding that incentives should aim to direct investments in industries and sectors where the country aimed to promote development.

He added that it was critical to improve the legal tax framework, enhance the management capacity of tax authorities, strengthen enforcement, including inspections against transfer pricing, and apply advance pricing agreement (APA) mechanisms to prevent tax evasion and avoidance.

Regarding the massive and shocking leak of the Panama Papers which revealed an intricate web of money laundering and tax evasion from the world's political elite, Phung said this had rung alarm bells for the Government of Viet Nam to be more cautious with investors coming from tax havens as they might take advantage of incentives in Viet Nam and then transfer profits to tax havens where the rates were very low or even at zero.

Additionally, Vu Dinh Anh, economic expert from the Academy of Finance, said Viet Nam's tax authorities should improve their management capacity towards financial situations of foreign investors in Viet Nam.

This would essentially require international co-ordination to prevent tax evasion and avoidance, he said. — VNS