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Vietnam Today

Balancing the books

Released at: 13:23, 22/02/2016

Balancing the books

Vietnam must work to improve collections and rein in overspending if it hopes to bridge its budget deficit.

by Quynh Nguyen

At the end of last year tax authorities were able to secure tax arrears of more than VND1.9 trillion ($85.5 million) following the sale of Metro Cash & Carry Vietnam to Berli Jucker Public Company Limited (BJC) from Thailand. This represents part of the government’s efforts to tackle the tax arrears of foreign-invested enterprises (FIEs). Budget revenue collections from FIEs over the last year were pleasing in many respects and contributed significantly to increasing the bottom line. Collections well and truly exceed estimates, helping Vietnam to cope with the budget problems at a time when difficulties abound. 

Solid domestic revenue 

Reports from the General Departments of Taxation in Thai Nguyen and Bac Ninh provinces, two key industrial provinces in the north, revealed that revenue from FIEs increased significantly over the course of last year. The Thai Nguyen report put tax payments by FIEs at an estimated VND1.35 trillion ($60.75 million), six times higher than annual estimates and 315 per cent higher than in 2014. Contributions exceeded estimates due to the rapid disbursement of capital by Samsung, which also led to higher payments from the South Korean giant’s contractors, which increased to VND950 billion ($42.75 million). 

FIEs in Bac Ninh, meanwhile, contributed VND4.5 trillion ($202.5 million) to the local budget in 2015 against estimates of VN3.9 trillion ($175.5 million). According to the provincial Department of Taxation, the higher contributions can be largely put down to enterprises paying higher income tax in January, of nearly VND1.4 trillion ($63 million). 

Overall, revenue from FIEs contributed significantly to the increase in State budget revenue last year. “Adjustments to policies and the reform of tax procedures were primarily responsible for revenues exceeding estimates,” according to economist Dr. Vu Dinh Anh from the Ministry of Finance (MoF). The structure of State budget revenue in 2015 shifted significantly, with less coming from crude oil and trade and more coming from domestic sources.

“Domestic revenues will be the main source of budget revenue in the years to come. It is important to develop the economy to increase domestic revenues and not rely on imports or exports or crude oil. Vietnam should take advantage of the falling oil price to cut input costs for materials and stimulate and restructure the economy towards greater quality.” Professor Nguyen Quang Thai, Economic Expert

An MoF report shows that revenue from crude oil accounted for only 6.6 per cent of total State budget revenue against estimates of 10.2 per cent, despite crude oil production rising 7.5 per cent compared with 2014, to 16.7 million tons. Budget revenue from exports fell slightly, from 19.2 per cent of estimates to nearly 18.9 per cent despite total export turnover coming in at $162.4 billion, up 8.1 per cent., while total import turnover reached $165.6 billion, a 12 per cent increase compared with 2014.

Despite the positive signs, budget revenue from the foreign direct investment (FDI) sector has fallen short of expectations and is not commensurate with the scale of FIEs, economist Professor Nguyen Quang Thai told VET. While budget revenue from State-owned enterprises (SOEs) was nearly 96.3 per cent of estimates and revenue from the FDI sector was only 86.1 per cent, revenue from the non-State sector exceeded estimates by 4.1 per cent and revenues from other areas were also higher than estimates, by more than 15.6 per cent. 

The non-State sector has contributed significantly to domestic revenue, increasing from 52.3 per cent of the total in 2014 to 55.2 per cent in 2015. The figure carries even greater weight given that 71,391 businesses were forced to suspend operations due to operational difficulties in 2015, up 22.4 per cent compared with 2014.

Moreover, while corporate income tax payments were only about 86 per cent of estimates due to the slow recovery of SOEs and FIEs, corporate income tax payments by the non-State sector exceeded estimates by 7 per cent. Surprisingly, revenue from SOEs was only VND212.6 trillion ($9.56 billion), 3 per cent down on estimates, while revenue from FIEs (excluding crude oil) was close to estimates, at VND141.7 trillion ($6.37 billion), which is totally disproportionate to the growth and role of the sector in the economy. Dr. Anh said that reasons may include slow improvements to tax administration and more transfer pricing activities. 

As Vietnam’s enterprises continue to struggle and the lives of most people have not improved to any great extent, raising revenue remains a burden. With rising incomes for some people along with economic recovery and stricter collection management, budget revenue from personal income tax reached VND55.6 trillion ($2.5 billion), exceeding estimates by 8.5 per cent and increasing 16 per cent against 2014.

Overspending persists

According to a report from the Ministry of Finance (MoF), total expenditure (excluding principal repayments) stood at VND1,093.7 trillion ($49.21 billion) in 2015, more than 1 per cent higher than estimates. The State budget deficit (including principal repayments) amounted to around 5.5 per cent of GDP against the 5 per cent permitted by the National Assembly. “While much effort has been exerted to meet State budget revenue estimates, State budget expenditure continues to rise and has resulted in a widening deficit that may cause macro-economic instability,” Dr. Anh said. 

Expenditure on investment and development reached VND162 trillion ($7.29 billion), expenditure on socioeconomic development, national defense and security, and administration tasks was VND745 trillion ($33.5 billion), and expenditure on debt and aid repayments was VND148.3 trillion ($6.67 billion). “State budget expenditure consistently exceeds estimates, proving that budget discipline is not being seriously observed,” Dr. Anh said. “Meanwhile, forecasting remains limited and negatively impacts annual State budget estimates, not to mention medium-term estimates.”

Expectations for 2016 

According to MoF, State budget revenue in 2016 is expected to reach VND1,014.5 trillion ($45.08 billion), of which budget collections from crude oil will top VND54.5 trillion ($2.4 billion) on output of 14.02 million tons. Total budget spending is forecast at VND1,273 trillion ($56.57 billion). Budget overspending is expected to reach an estimated VND254 trillion ($11.28 billion), or 4.95 per cent of GDP. 

Dr. Anh, however, believes that keeping budget overspending at 4.95 per cent of GDP will be no easy task. “Tightened fiscal discipline, especially in budget expenditure, is an urgent problem and the most important issue for Vietnam at present is to ease the pressure on balancing the State budget and reduce the debt burden in the future,” he said. 

Tariff revenues will fall significantly this year as free trade agreements come into effect and crude oil prices are expected to continue downwards for the foreseeable future. Domestic revenues will therefore be crucial in the years to come but the recovery in production remains weak. MoF said that important tasks for 2016 are the focus on State budget revenue, proactively handling the impact of crude oil price fluctuations and achieving or exceeding revenue estimates. Financial inspection, meanwhile, must be given greater consideration.  

Public debt  

The Ministry of Finance said that public debt in 2015 was 61.3 per cent of GDP, with government debt at about 48.9 per cent and foreign debt about 41.5 per cent. The structure of public debt includes government debt, which accounts for 80.3 per cent, government guaranteed debt 18.2 per cent, and local government debt 1.5 per cent. 

Of government debt, domestic debt accounted for 58 per cent and foreign debt 42 per cent. According to MoF, this structure is consistent with the strategic direction of Vietnam’s public debt and external debt. Regarding foreign debt, approximately 94 per cent is ODA loans and loans with long-term incentives and preferential interest rates. 

However, public debt will face a raft of difficulties in the future. With ODA loans and preferential foreign loans, since Vietnam became a middle income country in 2010 there have been significant changes in conditions and the cost of raising capital has doubled. 

The government continues to direct the strict control of public debt, government debt, and foreign debt. It has strengthened the inspection and supervision of loans, loan use and repayment, especially for new loans, and loans guaranteed by the government.

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