Nov 21, 2012

Vietnam - Land tax does not bring in revenue

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VietNamNet Bridge - Poor tax administration prevents the expansion of the land tax. Typically, land tax can generate large revenues for local budgets, while in Vietnam, this number is very low.

A recent report by the Ministry of Finance shows that: "Vietnam currently has seven official duties, charges and contributions relating to land and buildings, not taking into account unofficial contributions such as: fees for land use rights certificates; agricultural land use tax; land lease tax; land transfer tax; charge for lease/sale of land and houses owned by the state; tax and land tax; and registration fees."

Of which, only the agricultural land tax, land tax and housing tax bring about budget revenue but it is insignificant. In 2005, these two sources brought about 2.8 percent of the total tax and cost of land and construction, 0.19% of the total State budget revenue, 0.35% of the total local revenues and 0.07% of GDP.

The above figures are lower than the international standard. In the past two decades, the average level of contribution to GDP from housing and land tax in the industrialized countries (OECD) was two percent. Other developing countries also reached 0.5 percent and the transition countries reached 0.6 percent.

Typically, land tax can generate large revenues for local budgets. In industrialized countries (OECD) this figure is 13%, the developing countries reached 16% and 8.5% in the transition countries. Meanwhile in Vietnam, this number is very low. Thus, in accordance with international standards, land in Vietnam is not taxed. There are several reasons for this problem.

Poor tax administration prevents the expansion of the land tax. In fact, currently there are reforms in the taxation sector and be able to finish in 2010 to consolidate the operation of the tax administration system.

The third cause of low tax collection is the strategic problem. Access to land is a huge form of asset accumulation for those who have good relationships and their partners. The fourth cause is due to the revenues from the sale of oil and gas, import and export taxes and from state-owned enterprises are available, so the Government does not have much need for taxation of land (and other assets).

The above reasons explain why revenue from the land tax is low. However, there is no reasonable cause to maintain this status.

Working poor tax administration to prevent the expansion of the land tax. Artwork

Taxes on the property dated back to the ancient Greece and it has become familiar to economic, political and social organizations. The Constitution has entrusted the State the responsibility to manage land. Efficient, reasonable and fair management will force the user to pay for the privileges they enjoy.

Weaknesses in tax administration can be explained by the limited land tax after the Doi Moi (Renovation). Many transition countries face difficulty in dealing with institutional bottlenecks and beyond the thinking of the centrally planned economy. Weak tax administration is the fault of the management of the State, especially when taking into account both the revenue and expenditure of the state budget.

In 2005-2009, the Government used about 32% of GDP for thousands of expenditures. Hence, in that period, the government could not find any corresponding revenues to cover these expenses. This created the macro-economic imbalances.

Land tax losses has exacerbated the inequality in Vietnam. Those who have access to land (and property) are increasing accumulation of wealth without any capital contributions to the development of the country, while other revenue sources are not sustainable. The state corporations are in the process of equitization while gas and oil are non-renewable resources.

The tax reform now faces the reallocation of the tax burden, leaving the taxes that are difficult to collect (because tax revenues are less than management costs), removing the fess that distort the economy, and adding more taxes to ensure sustainable revenue stream for both central and local budgets. Land tax will be part of the solution.

Land taxation (and adjustments associated with it) has many advantages. Land tax focuses on the object rather than the subject (for example human-related taxes). Land use can be defined clearly and relatively easy to collect taxes. The land may be seized, sold, or if there are difficulties related to politics, the restriction of land transfer may be applied until all taxes are paid. Whether land is use for any purpose in fact, land tax is inevitable and therefore there is virtually no impact on the attitude and behavior of users. Those who have to pay tax that is relatively high compared to their income are usually determined to use the land more effectively, or will sell / lease to others.

Land tax brings about revenues for governments of all levels to pay for the construction and maintenance of infrastructure and helps improve the production capacity of the land. When the quality of infrastructure services tends to be capitalized in the value of land, land taxation would make the land users share part of their benefits to the Government. Without taxes, the land users naturally enjoy welfares of other taxpayers, or from the Vietnamese people in general who are subject to the costs of inflation and currency devaluation due to the budget deficit.

The final advantage of the land tax is when local authorities have annual revenue from land tax, they will be less depend on the allocation of the central government. This also motivates them to encourage the more efficient form of land use.

However, there are many restrictions related to land tax. The application of or expand land tax will have difficulty (at least at the beginning) politically because it is a direct tax and it is difficult to get around the law. Valuation of land and improving regulations on land valuation also face difficulties. Currently there are many procedures to handle this problem in countries. The biggest difficulty is to make the process of land valuation transparency and the value of the land is constantly updated.
Land tax is completely unrelated to the user's ability to pay. The deeper problem is that the tax depends on the activities of the local economy. Poor areas will have lower tax revenue from land. For the goals of equity and development, the central government still has to redistribute funds from the rich areas to the poor areas. As being mentioned previously, this is completely consistent with the development pattern in which resources will be created in areas with high economic density to improve conditions for areas with low economic density.

Ho Dang Hoa, Le Thi Quynh Tram, Pham Duy Nghia and Malcolm F. McPherson

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