Nature of personal income tax In general, personal income tax has four characteristics: Trang 22 Because income tax is taxed on arising income, one of the important contents in income
OVERVIEW OF PERSONAL INCOME TAX
The basis of personal income tax: The definition and necessity of personal
Personal income tax refers to the taxes imposed on individuals' net income, which is calculated by subtracting allowable tax reliefs from gross income, as well as on capital gains (OECD, 2022) This tax is relevant to all levels of government and is expressed as a percentage of both GDP and total taxation Essentially, personal income tax targets individual earnings, and the filing of this tax is determined by applicable laws and is based on the actual taxable income over a specified period.
In tax systems of many countries, personal income tax is considered as one of the most important taxes, which stem from four reasons:
Personal income tax plays a crucial role in income redistribution, promoting social justice in a market economy where resources are allocated based on labor capability and production materials This system inherently creates a wealth gap, with the rich accumulating more resources while the poor struggle to improve their circumstances To address this disparity, governments implement personal income tax policies that require the wealthy to contribute to societal welfare, enabling the less fortunate to access public services and resources essential for sustainable development.
Personal income tax plays a crucial role in funding state finances, enabling governments to cover essential expenditures such as development investments, national reserves, recurring expenses, interest payments, and aid This revenue is vital for fostering social and economic growth, as it allows the state to mobilize significant financial resources for various public initiatives.
The state utilizes taxation as a vital tool for managing and regulating socio-economic activities, significantly enhancing social welfare by redistributing income from high-income individuals to lower-income groups A well-structured tax collection system allows the state to assess the population's income and the overall economic situation Additionally, taxation influences individual behaviors regarding investment and savings, as the state can impose or exempt taxes on income derived from these activities Furthermore, the government can implement market-aligned economic policies, including employment, insurance, and social allowance programs, to foster a balanced economic environment.
Personal income tax is crucial for identifying illegal income sources, including bribery, embezzlement, and tax evasion By monitoring financial activities, it helps uncover fraudulent practices and the trade of banned goods, thus playing a significant role in promoting legal compliance and accountability.
Nature of personal income tax
In general, personal income tax has four characteristics:
Personal income tax is a direct tax levied on an individual's actual income over a specific period, unlike consumption tax, which is an indirect tax applied when purchasing goods and services In the case of consumption tax, the consumer bears the tax burden while the distributor is responsible for submitting it to the government However, with personal income tax, the taxpayer and the individual who bears the tax are the same, highlighting its direct nature.
Because income tax is taxed on arising income, one of the important contents in income tax policy is to determine the term “taxable income” The concept of
"income" is not officially defined at present and there are many different interpretations
In a market economy, individual incomes vary significantly and can be categorized into several sources: labor income, asset and capital income, inheritance and donations, royalties, technology transfer and improvements, compensation, lottery winnings, promotions, and societal support such as scholarships, unemployment benefits, and social incentives.
Income can be categorized based on various criteria, including regular and irregular income, legal and illegal income, actual and potential income, as well as domestic income generated within a nation's borders and income earned abroad.
The above-mentioned types of income are not all taxable incomes, but only some incomes that meet certain conditions are taxable incomes
Income tax laws worldwide define taxable income as the foundation for taxation, requiring that it be legal, generated, and regulated by the State The new income tax legislation aims to enhance feasibility, promote fairness among taxpayers, and provide a stable revenue stream for the government budget.
Secondly, income tax has a wide tax base including individuals with taxable income Taxable objects include individuals earning income within the territory of Vietnam
Thirdly, individual taxation applies the principle of partial progressiveness The richer you are, the more high-level tax you get
The legal framework governing income tax encompasses both national and international legal documents As a direct tax, income tax is also influenced by double taxation treaties.
Overview of personal income tax in the world
Personal income tax was first implemented in England in 1841, followed by Japan in 1887, Germany in 1889, and the United States in 1913, becoming a vital source of government revenue Today, personal income tax constitutes approximately 53% of federal revenue in the United States, highlighting its significance in the nation's fiscal framework (fiscaldata.treasury.gov, 2022).
Figure 1.1 - Source of revenue in US federal government in 2022
Personal income tax is primarily calculated using two methods globally One approach involves assessing taxes on a household basis, as seen in countries like the Netherlands and France This method promotes greater social equity but introduces complexities in the calculation process.
The reason is that each family needs to have a book to record the personal income of each member
An alternative method for calculating national income involves assessing on an individual basis, a practice adopted by several countries including the UK, Japan, and Hungary While this approach simplifies the process for governments, it falls short of effectively redistributing national income to individuals.
In the United States, personal income tax is calculated using two primary methods, with varying tax rates applied based on taxable income and filing status, including single, married (jointly or separately), and head of household For example, the tax rates for single filers illustrate how income levels determine the applicable tax obligations.
Taxable income Tax rate Taxed paid
$10,276 - $41,775 12% $1,027.50 + 12% of the amount excess over $10,276
$41,776 - $89,075 22% $4,807.50 + 22% of the amount excess over $41,776
$89,076 - $170,050 24% $15,213.50 + 24% of the amount excess over $89,076
$170,051 - $215,950 32% $34,647.50 + 32% of the amount excess over $170,051
$215,951 - $539,900 35% $49,335.50 + 35% of the amount excess over $215,951
≥ $539,901 37% $162,718 + 37% of the amount excess over
$539,901 Table 1.1 Examples of US PIT for Single filers
Overview of personal income tax in Vietnam
In 2019, Vietnam's government primarily relied on value-added tax (VAT) for revenue, accounting for approximately 26.3% of total income In contrast, personal income tax (PIT) contributed only around 8% on average, indicating that PIT remains a minor component of the country's overall budget.
Figure 1.2 Source of revenue in Vietnam government in 2019
(Source: Report on government budget, 2019)
Currently, Vietnam applies the method of taxing individuals based on taxable income (specified in chapter 2)
The 2007 Law on Personal Income Tax (PIT), amended in 2012, significantly enhanced its role in the economy and increased state budget resources Since its implementation, PIT revenue has consistently outpaced the growth rate of total state budget revenue, with a remarkable 18.7-fold increase in 2011 compared to 2001, while total state budget revenue grew 6.8 times during the same period In 2011, PIT contributed approximately 5.46% of total state budget revenue, up from 1.98% in 2001, and represented about 1.38% of GDP, compared to 0.43% in 2001 However, following the amendments effective July 1, 2013, PIT's share of total state budget revenue and GDP declined in 2013 and 2014 before experiencing an upward trend again.
Since 2015, Vietnam's personal income tax (PIT) revenue has significantly contributed to the state budget, accounting for approximately 5.92% of total revenue in 2016, which is equivalent to 1.45% of the country's GDP The effective implementation of PIT policy has enhanced the government's ability to gather comprehensive data on individual incomes, thereby improving its capacity to regulate income distribution within society (National Institute for Finance, 2021).
Figure 1.3 Proportion of government budget revenue from personal income tax of
Viet Nam (Source: National institute for finance, 2021)
Despite the increasing number of Personal Income Tax (PIT) filings over the years, tax evasion and fraud have become more sophisticated and complex (Luatsaosang, 2021) For instance, individuals may transfer the rights to use real estate instead of selling it and paying PIT Additionally, some artists establish companies to convert personal income into corporate income, allowing them to declare inflated business expenses that result in lower profits and, consequently, reduced corporate income tax These intricate tactics make tax management more challenging for the state.
Overview of personal income tax in 4.0 era
The rapid advancements and extensive implementation of technologies from the Industrial Revolution 4.0, coupled with the effects of the COVID-19 pandemic, have significantly accelerated the growth of the e-commerce sector globally.
PROPORTION OF GOVERNMENT BUDGET REVENUE
FROM PERSONAL INCOME TAX OF VIETNAM
Proportion of PIT in State budget Proportion of PIT to GPD
Vietnam in particular The rapid development of e-commerce requires flexible and timely changes in management to prevent tax loss new position
In recent years, Vietnam has successfully implemented various reforms and modernized its tax administration by incorporating information technology into tax declaration, payment, electronic tax refunds, and electronic invoicing These initiatives have yielded significant positive outcomes, positioning Vietnam as one of the top four countries in the ASEAN region for collecting taxes from foreign suppliers via an online portal.
In the future, governments will leverage big data for tax administration, emphasizing the importance of data management, fostering a data-driven culture, and enhancing risk management to gain insights from data (OECD, 2016) As digital technology continues to evolve alongside increasingly sophisticated tax evasion tactics, the Ministry of Finance is working on an amended Tax Administration Bill aimed at controlling transactions and managing substantial income The tax industry's attention is particularly focused on individuals earning through various e-commerce platforms, especially those benefiting from major tech companies like Facebook and Google.
ANALYSIS OF VIETNAM LAW ON PERSONAL INCOME TAX
General provision of Vietnam Personal Income Tax (PIT)
In Vietnam, the salary income tax, introduced in 1962, was replaced by the Personal Income Tax (PIT) in 1972 The Income Tax Ordinance for High-Wage Earners was issued on December 27, 1990, and the Personal Income Tax Law was officially promulgated by the National Assembly on November 21, 2007, coming into effect in January 2009 Despite its implementation, the PIT has faced challenges, including issues of inequity and efficiency, which have hindered its effectiveness and role in the tax system.
Beginning on July 1, 2013, Law No 26/2012/QH13 dated November 22, 2012
The article titled "Amending and Supplementing A Number Of Articles Of The Law On Personal Income Tax" outlines key changes to taxation regulations It specifies that incomes from salaries and wages, as well as gains from the transfer of real estate in any form, are classified as taxable income (Clause 2 and Clause 5 of Article 3) Additionally, it establishes that the tax period applies to each transfer or on an annual basis for incomes derived from the transfer of securities (Point c Clause 1 Article 7).
Retirement pensions from the Social Insurance Fund and monthly pensions from the Voluntary Retirement Fund are classified as non-taxable income (Clause 10, Article 4) Income-paying organizations and individuals, as well as resident taxpayers, are required to handle tax declarations, withholdings, payments, and finalizations as stipulated in Article 24.
Another remarkable change is in the reduction stated on Clause 1 Article 19, which based on family circumstance, where reduction for the taxpayer, which is VND
The monthly income threshold for taxpayers is set at 9 million VND, equating to 108 million VND annually Additionally, taxpayers receive a deduction of 3.6 million VND per month for each dependent Adjustments to these deductions may be made based on individual family circumstances and will reflect changes in pricing for the upcoming tax term.
Beginning on January 1, 2015, Law No 71/2014/QH13, dated November 26,
In 2014, the law titled "Amending and Supplementing A Number Of Articles Of The Law On Personal Income Tax" was enacted, establishing that individuals earning personal income below VND 100 million annually are exempt from taxation.
Beginning on July 1, 2020, Resolution No 953/2020/UBTVQH14 dated June
02, 2020, "Amending Tax Deduction Base on Family Circumstances Of The Law of d
On Personal Income Tax", was in effect In this latest resolution, reduction on family circumstance has some adjustments as reduction for the taxpayer, which is now VND
11 million/month (VND 132 million/year); and also, for every dependent of the individual conduct tax, the new reduction amount is VND 4.4 million/month
Dependents include children under 18 and individuals over 18 with a monthly income not exceeding VND 1 million Additionally, parents or spouses of taxpayers who are unable to work or have low income qualify as dependents It's important to note that only one taxpayer can claim a deduction for each dependent.
The Ministry of Finance has issued eight guiding circulars, three laws (Law No 04/2007/QH12, Law No 26/2012/QH13, and Law No 71/2014/QH13), three guiding decrees, and two consolidated papers regarding Personal Income Tax (PIT) policy Following two amendments, these PIT policies have become more comprehensive, aligning with the needs of economic and social development as well as international economic integration.
According to Decree 126/2020/ND-CP, individuals are exempt from tax payments if their total tax due is VND 50,000 or less This decree, effective from December 5, 2020, outlines the implementation of Tax Administration Law 38/2019/QH14 Additionally, the General Department of Taxation (GDT) issued Official Letter 4110/TCT-DNNCN on October 27, 2021, providing guidance on non-taxable COVID-19 related expenses These include costs for mandatory quarantine during international business trips, expenses for COVID-19 test kits and protective tools for employees, and food and lodging for workers engaged in the "3 on-site" production model.
As of 2020, Vietnam has established double taxation avoidance agreements (DTAAs) with 80 countries and territories, which play a crucial role in preventing double taxation and curbing tax evasion and smuggling related to income and property taxes.
Detail provisions of Vietnam Personal Income Tax
The Law on PIT provides for taxpayers, taxable incomes, tax-exempt (non- taxable) incomes, tax reduction, tax period, tax administration and tax refund More specifically,
Taxpayers in Vietnam include both residents within the country's borders and non-residents present in Vietnam, as outlined in Article 2 of Law No 04/2007/QH12 These individuals are subject to taxation on the incomes specified in Article 3 of the same law.
To be considered as a resident, an individual must been in Vietnam for at least
To establish residency in Vietnam, individuals must either stay for 183 days within a calendar year or maintain a continuous presence for 12 consecutive months from their arrival date Additionally, having a habitual residence is essential, which can be a permanently registered abode or a rental property with a valid lease agreement in Vietnam.
A non-resident, on the other hand, defined as an individual who does not meet any of the above requirements
Incomes liable to PIT include 10 groups as following:
▪ Incomes from wages and salaries;
▪ Incomes from investment of capital;
▪ Incomes from transfer of capital;
▪ Incomes from winnings and other prizes;
▪ Income from inherited securities, investments in organizations or businesses real estate, and other assets that require ownership or usage registration and;
▪ Income from gifts of securities, investments in businesses or organizations, real estate, and other assets whose ownership or usage is subject to registration
In Vietnam, various incomes have been classified as exempt from personal income tax (PIT) by tax authorities, as outlined in the consolidated regulations of Law No 04/2007/QH12, Law No 26/2012/QH13, and Law No 71/2014/QH13.
▪ Incomes from real estate transfers between blood relatives and adopted relatives;
▪ Incomes from the sale of residential properties by people who only own one dwelling or land piece;
▪ Incomes derived from the value of the state-allocated land use rights;
▪ Incomes received from real estate received or inherited between family members, in-law relatives; or among blood siblings;
▪ Incomes of individual/household directly engaged from Agriculture, Forestry and fishery production;
▪ Incomes from the conversion of production land that has been allotted by the State to households and individuals;
▪ Incomes from oversea exchange remittances;
▪ Wages paid for night shift or overtime work, which are higher than those paid for day shifts or prescribed working hours in accordance with law;
▪ Pensions for retirement provided by the Social Insurance;
▪ Incomes from scholarships; charity funds; from governmental or non-governmental foreign aid for charity or humanitarian purposes;
▪ Incomes from indemnities paid under life insurance plans, non-life insurance policies, work accident compensation, state compensation, and other legal compensation;
▪ 1 Incomes from salaries and wages of Vietnamese marine fisheries working for foreign shipping lines or Vietnamese shipping lines for international transport; and
▪ 2 Incomes from ship owners or authorized owners, and individuals working on ships providing goods and services directly serving offshore fishing activities
(1), (2) supplemented according to the provisions of Clause 3, Article 2 of the Law No 71/2014/QH13 Amending and Supplementing A Number Of Articles Of The Law On Personal Income Tax
Under Article 5, Article 19, Article 20, and Article 21 of Law No 04/2007/QH12, as amended by Resolution No 953/2020/UBTVQH14, taxpayers facing challenges due to serious illnesses, fires, accidents, or natural disasters may qualify for a tax reduction This reduction corresponds to the extent of the damage incurred, but cannot exceed the total tax amounts owed.
Tax deductions are available for donations made to approved charities, as well as for employee contributions to Social Insurance, Health Insurance, and Unemployment Insurance Additionally, contributions to community voluntary pension schemes are eligible for deductions, subject to a specified limit, along with mandatory contributions to international social and health insurance programs.
Under Vietnam's Personal Income Tax Law No 04/2007/QH12, both residents and non-residents are required to pay personal income tax (PIT) Non-residents must declare only the income earned within Vietnam, regardless of where the funds are collected or paid In contrast, residents are obligated to declare their personal income earned both inside and outside of Vietnam.
Vietnamese residents are subject to a partially progressive tax rate ranging from 5% to 35%, or a flat income tax rate of 0.1% to 20% In contrast, non-residents are only liable for the flat income tax rate and do not qualify for compulsory insurance (approximately 10.5%) or family circumstance deductions.
Under Law No 04/2007/QH12, the taxable income is calculated by deducting premiums for social, health, and unemployment insurance, as well as professional liability insurance for certain jobs Additionally, it includes voluntary retirement fund contributions and reductions specified in Articles 19 and 20 of the law This results in the assessable income from business, salary, or wages.
No 26/2012/QH13 and Law No.71/2014/QH13
Pursuant to Circular No 111/2013/TT-BTC, PIT for residents is categorized into 3 groups : employment, non-employment and business income
Group 1: Residents sign three-month or longer labor contracts and earn money through salaries or wages
Payable amount of PIT = Assessable income of PIT * The PIT rate (%)
Assessable income is calculated by subtracting non-taxable income and tax deductions from taxable income For residents, the employment income tax calculation includes various tax reductions such as social insurance (8%), health insurance (1.5%), and unemployment insurance (1%) Additionally, there is a monthly deduction of VND 11 million for each taxpayer and VND 4.4 million for each dependent, along with any charitable donations made.
Group 2: Residents who do not sign a labor contract or sign a labor contract for less than 3 months and have a total income of VND 2 million/time or more
Payable amount of PIT = Total income before it is paid * 10 %
Table 2.2 Resident, non-employment incomes tax calculation
Group 3: Personal Tax Rates on Other Income
Payable amount of PIT = Assessable income of PIT * Whole income tax rate (%)
Table 2.3 Resident, other incomes tax calculation
Non-residents face a simplified Personal Income Tax (PIT) calculation process, as outlined in Circular No 111/2013/TT-BTC, which specifies a single method applicable to all cases.
Payable amount of PIT = Taxable income * Whole income tax rate (%) Table 2.4 Non-resident incomes tax calculation
Vietnam's tax regulations distinguish between residents and non-residents, particularly in the calculation of tax schedules Following amendments to Law No 04/2007/QH12, Law No 26/2012/QH13, and Law No 71/2014/QH13, tax residents are subject to a partially progressive tax rate ranging from 5% to 35% on employment income In contrast, non-residents and residents earning non-employment income face similar tax schedules, with rates starting at 0.1% and capping at 20% A comprehensive tax schedule for various income types and taxpayers is provided in the appendix of this article.
2.2.6 Tax administration and tax refund
2.2.6.1 Tax period and conversion of taxable incomes
The tax period for residents is defined as an annual timeframe for income derived from business, salaries, and wages, while it applies to each transfer for securities and at each instance of income generation for other taxable income types In contrast, non-residents have their tax period assessed at each instance of income generation, which applies to all their taxable incomes.
In Vietnam, the fiscal year aligns with the calendar year, making the annual tax period synonymous with it Individuals adhering to this annual tax period must register with the tax authorities at the beginning of the year.
Income earned in foreign currency, as well as income derived from products or services, must be converted into Vietnamese dong (VND) by the State Bank at the time it is generated.
Individuals with taxable income must acquire a tax code, and employers are obligated to submit tax registration forms to the local tax office for employees earning taxable income Additionally, if individuals have other sources of taxable income, they must file an individual tax registration with their local tax authority Compliance with legal requirements governs the handling of tax law violations, tax administration procedures, and all aspects of tax registration, declaration, withholding, payment, finalization, and reimbursement.
Common types of tax evasion on personal income
2.3.1 Change in taxable subject of the transaction
According to Article 3 of Circular 111/2013/TT-BTC, the Law on Personal Income Tax exempts income from real estate transfers between family members, including transactions between spouses, parents and their natural or adopted children, parents-in-law and their children-in-law, grandparents and grandchildren, as well as siblings.
Income from real estate transfers between brothers-in-law is subject to personal income tax; however, some individuals evade this tax by executing two separate transactions—first from husband to wife, and then from wife to brother Both transfers qualify for tax exemption, allowing them to bypass their tax obligations and resulting in a significant loss of revenue for the state budget.
Nguyen Kim offers a top salary of approximately 300 million dong per month, but only reports a taxable amount based on a basic salary of 30 million dong The remaining 270 million dong is classified as overtime pay, allowing for a tax exemption on the 240 million dong difference Additionally, Nguyen Kim converts quarterly and annual bonuses for thousands of employees into overtime wages to evade taxes on the excess amounts.
2.3.2 Understate real estate price to reduce taxable amount
The land use right transfer price in contracts often falls significantly below the official land prices established by authorities, leading to substantial discrepancies in transfer prices for similar real estate transactions within a short timeframe Furthermore, it is illogical that the taxable value of newly developed real estate is considerably higher than that of completed properties that have already received land use right certificates (Nong, 2021).
In the real estate market, land prices frequently exceed official valuations, leading buyers and sellers to mutually agree on a lower price in the transfer contract for their benefit.
To gain acceptance from state agencies, contracts are often written with prices that are equal to or slightly above the rates established by the authorities This practice results in a lower taxable amount, effectively serving as a tactic to evade personal income tax (PIT).
As a result, both parties buy and sell land for mutual benefits, only the State suffers from loss of tax revenue
A seller lists a land plot for 2 billion VND but agrees with the buyer to declare only 1 billion VND in the contract, the minimum amount required by authorities This practice results in a tax revenue loss of 20 million VND for the State, calculated as (2 - 1) x 2% Additionally, local zoning planning at a 1/2000 scale is conducted every seven to ten years.
Vietnam is experiencing rapid urbanization, but planning in many regions struggles to keep pace with this growth Legal regulations mandate that urban projects and commercial housing can only proceed once they are officially planned, creating obstacles for investors looking to develop land and projects Consequently, the prices set by authorities often fall significantly below the actual transaction values between investors.
2.3.3 Convert personal income to corporate revenue
A singer earning approximately 10 billion dong annually faces a personal income tax rate of up to 35% (Thai, 2019) However, as the singer transitions to running a business, their salary is classified as company revenue Before the corporate income tax of 20% is applied, the business can deduct various expenses, optimizing their taxable income.
In Vietnam, artists effectively minimize their personal income tax (PIT) by focusing on tax-free income sources and steering clear of taxable earnings as outlined in tax regulations.
The Law on Personal Income Tax 2007 allows businesses to deduct reasonable expenses from their taxable income, as outlined in Article 10 However, the challenge lies in accurately determining what constitutes reasonable expenses Managers in the arts sector often inflate costs such as salaries, service fees, depreciation, repair and maintenance of fixed assets, loan interest, and management expenses This manipulation can lead to significantly reduced taxable income, enabling them to evade substantial tax liabilities to the state.
Establishing a business allows artists to convert their show earnings, often reaching hundreds of millions, into company revenue This structure enables companies to retain the entire salary without the typical 10% tax deduction imposed by show companies Additionally, they document taxable income through wages, salaries, and bonuses, often reporting contract values at a significantly reduced level.
The implementation of legal provisions on registration and declaration of PIT for self-employed workers has not been fully managed by tax authorities
Self-employed workers often have significant outside earnings, with a large portion of their total income coming from non-recurring sources rather than traditional salaries This makes it challenging for tax authorities to effectively monitor these earnings.
Many companies are still mainly direct payment in cash, not via bank transfer
When employees are paid via bank accounts, it simplifies income verification for tax authorities, as they can easily access payment records This system also makes it more challenging for individuals to evade their tax obligations.
Tax evasion cases in the 4.0 era
2.4.1 Tax evasion by taking advantage of Payment Gateway
International payment gateways like PayPal and Payoneer currently lack the necessary licenses to offer intermediary payment services in Vietnam, resulting in unauthorized transactions This situation raises concerns as these gateways are often utilized for transferring funds of uncertain origin.
A successful YouTuber managing three channels with a monthly revenue of up to 150 million VND revealed that he does not receive payments directly from YouTube Instead, he collaborates with a reliable partner in Europe who facilitates the transfers through friends and family Mr H.V mentioned that this arrangement allows him to incur only a 3% commission fee for the European partner, significantly lower than the 5% value-added tax and 2% personal income tax applicable to individuals earning over 100 million VND annually (Tuan, 2021).
Many payment gateways offer personal money transfers that are both free and instant A popular YouTuber highlights that individuals earning money on platforms like Facebook and YouTube often receive significant revenues through PayPal and Payoneer wallets, which frequently go undeclared for tax purposes.
There are also cases where YouTube often pays youtubers through bank accounts Before Decree 126 took effect, Youtubers could evade taxes by not declaring taxes
A trick of tax evasion, tax evasion is dishonest declaration, not true to reality Transaction data may be modified or deleted after execution
Many YouTube channel owners, despite generating substantial income, often operate under pseudonyms and remain anonymous, complicating tax collection efforts for authorities due to their reluctance to voluntarily report earnings and pay taxes.
2.4.3 Transferring income to lower PIT rate
YouTubers generating significant revenue often seek strategies to reduce their tax liabilities A UK-based YouTuber is exploring the possibility of relocating his business to a country with lower corporate tax rates in an effort to alleviate his tax burden (Lao Dong, 2021).
2.4.4 What has Vietnam been doing to prevent tax evasion in the 4.0 era? According to the draft, because this transaction is mainly through an account, the proposal of the General Department of Taxation wants the bank to participate in the process of helping to 'trace' income and even deduct it as soon as there is a money transaction to the account However, the above proposal was "rejected" by the State Bank for the reason that, if you arbitrarily deduct money or "move" into your personal account, commercial banks will violate the law on credit institutions
To prevent tax loss, technology companies such as YouTube are now required to collect and remit taxes on behalf of individuals generating revenue on their platforms While some users voluntarily declare and pay their taxes, many others face scrutiny and are found to be in arrears by tax authorities, necessitating compliance with legal tax obligations.
In recent times, the tax authorities in Ho Chi Minh City have implemented robust measures to ensure tax compliance among individuals earning substantial income from platforms like YouTube and online businesses According to Decree 126, technology companies are now obligated to declare and remit taxes on behalf of these income-generating individuals Additionally, the decree outlines the responsibilities of banks in providing information regarding individuals with online revenue, enhancing the effectiveness of tax collection from those benefiting financially from digital platforms, as noted by Nguyen Nam Binh, deputy director of the Ho Chi Minh City Tax Department (Ngan, 2021).
Leaders of the Ho Chi Minh City Tax Department have clarified that the tax collection process for individual YouTubers aligns with that of online business revenue earners A key strategy under consideration is to collect taxes from the technology platforms that facilitate revenue generation for these individuals Both YouTubers and entities operating on digital platforms are required to voluntarily declare and pay taxes; failure to do so may result in fines ranging from one to three times the unpaid tax amount, and could lead to criminal prosecution.
In 2021, the Ho Chi Minh City Tax Department prioritized the collection of taxes from individuals earning online income, particularly targeting YouTubers This initiative is deemed a crucial task for the tax industry to successfully fulfill its assigned objectives.
Personal tax income from multiple viewpoints
2.5.1 Comparison of Law on Personal Tax Income between United States and Vietnam
The Personal Income Tax (PIT) laws vary significantly from country to country, reflecting the unique circumstances and characteristics of each nation In particular, the PIT regulations in Vietnam and the United States exhibit notable differences, especially in their calculation methods A key distinction lies in the preferential tax treatment afforded to investments, which influences the overall tax obligations for individuals in these countries.
US system of personal income taxation both fosters economic growth and assures an equitable income distribution Below are steps to calculate personal tax income in the United States
Step 1: Add up income from all of the following sources such as: Wages, profits, interest from loans, dividends, business profits, capital gains, unemployment benefits, etc Then, we subtract certain business expenses and we can get adjustable gross income
Step 2: Deduct appropriate personal exemptions (Kagan, 2022) Subtract appropriate partial deductions
Charitable contributions Certain medical expenses State income taxes
Or omit the standard deductions
Then, we have taxable income
Step 3: Apply the table of tax rates to calculate the tax Deducting the tax debt, we have the tax payable
In Vietnam, real income is calculated by subtracting taxes from total nominal income, and this income is primarily allocated for insurance, medical needs, basic necessities, and personal consumption Consequently, the process of calculating Personal Income Tax (PIT) in Vietnam follows a different sequence than in the United States, where the PIT system offers greater advantages The U.S approach ensures that insurance and medical services are accessible to all, thereby enhancing social welfare and public benefits.
2.5.2 Personal income tax from viewpoint of the State
Taxes serve as a mechanism for the government to manage the income levels across various social classes, influencing overall social demand and impacting economic growth Personal income tax plays a crucial role in generating substantial revenue for the state.
The reduction of import and export taxes driven by trade liberalization has made Personal Income Tax (PIT) a vital revenue source for the State budget As our country's economy continues to grow and individual per capita income rises, PIT is poised to significantly enhance state revenue contributions.
Personal Income Tax (PIT) is typically levied only on individuals whose earnings exceed the minimum taxable income threshold, excluding those who earn just enough to support themselves and their families Furthermore, as personal income rises, the applicable tax rate correspondingly increases.
In our country, income disparities exist among various social classes, with a significant portion of the population earning low incomes, while some individuals, particularly those employed in foreign-invested enterprises and export processing zones, enjoy considerably higher earnings Although personal income tax (PIT) currently contributes modestly to the State budget, it plays a crucial role in promoting social equality and serves as an essential tool for macroeconomic management This tax system aids the government in fostering social stability through welfare initiatives and addressing income inequality.
FINDINGS AND RECOMMENDATIONS
Evaluation of personal income tax in Vietnam
Vietnam's progressive income tax (PIT) system offers significant benefits for its citizens by effectively narrowing the wealth gap between the rich and the poor This approach aligns with socialist principles, as it aims to promote equitable wealth distribution by taxing the affluent to support those in need, thereby reinforcing the country’s commitment to social equity.
During the COVID-19 pandemic, official restrictions on personal income tax (PIT) rates were both humane and sensible, effectively targeting aid to those in need The General Department of Taxation opted not to recommend a reduction in PIT for salaries and wages in the latter half of 2021, as high-income earners contribute 87% of total PIT revenue To better support affected individuals and organizations, the government issued Resolution No 954/2020 on June 2, 2020, which adjusted support amounts based on specific circumstances This led to an increase in employee deductions from 9 million VND to 11 million VND and dependent deductions from 3.6 million VND to 4.4 million VND monthly Consequently, only 6 million employees remained with taxable income, resulting in a significant VND 10,800 billion decrease in state budget revenue (Hong and Thanh, 2021).
On the other hand, there is still room for improvement in the application of PIT in Vietnam
Many taxpayers, including instructors, physicians, and real estate dealers, face vague definitions and requirements under the current tax regime, leading to potential abuse With numerous occupations remaining unregulated by tax authorities, individuals must declare all sources of income, particularly those not derived from salaries, to accurately determine their taxable amount However, a lack of awareness regarding this responsibility often results in underreporting of income and subsequent losses in tax revenue The difficulty in regulating personal transactions, such as asset transfers and payments without labor contracts, further increases the risk of tax evasion Notably, current tax laws allow for cash payment transactions under VND 20 million to be tax-deductible, complicating enforcement efforts.
Taxpayers face significant challenges due to the extensive paperwork and materials required, which divert their time and resources from other important tasks This situation not only incurs high costs but also hampers the efficiency of Personal Income Tax (PIT) collection, particularly due to the reliance on cash transactions with the tax office Such practices create obstacles in monitoring and tracking tax collections and increase the risk of bribery during property transactions, ultimately resulting in inaccurate tax declarations.
The rising cost of consumer products is driven by various factors, including inflation, a post-pandemic labor shortage, and international conflicts Despite these challenges, the tax deduction for dependents remains unchanged, making it increasingly difficult for families to meet their needs Additionally, there is a lack of clarity regarding the definition of non-employment personal income tax (PIT) rates, leading to confusion in declaring taxable income, even though taxpayers are specifically defined under current law.
Freelancers are responsible for their operational expenses, including equipment depreciation and video production costs However, current laws have yet to clarify whether they will be taxed on profits or total revenues received, leaving a significant distinction unresolved.
Key learning points from the case and reflection in Vietnam
After its establishment, the Personal Income Tax (PIT) system in Vietnam has revealed both positive outcomes and significant drawbacks, including issues of inequity and inefficiency These challenges hinder the effectiveness of PIT in fulfilling its crucial role To enhance future improvements and management, Vietnam should focus on key lessons learned from existing cases.
To prevent tax loss, the government needs to improve the management of tax-exempt categories related to real estate transactions By clearly defining tax-exempt subjects for income derived from real estate transfers, taxpayers may exploit these exemptions to convert taxable income into non-taxable income, thereby evading payment of the Personal Income Tax (PIT).
The government needs to accurately assess real estate transaction prices to align with the actual market value When taxes are based solely on the contract value, taxpayers may underreport prices to minimize their tax liability, resulting in significant revenue losses for the government.
The government should monitor personal income and corporate revenue to effectively impose taxes By converting personal income into corporate revenue and calculating taxes based on turnover minus expenses, taxpayers can benefit from a reduced taxable amount.
The government needs to improve its tax transfer management methods, as cash transfers complicate the tracking of income for tax assessment.
To effectively address the evolving landscape of digital businesses, the government needs to modernize Personal Income Tax (PIT) regulations in the 4.0 era The rise of new income transfer methods necessitates adjustments to the PIT framework Implementing measures like the 126 Decree, which holds technology companies accountable for tax payments on earnings generated through their platforms, can be a significant step towards ensuring compliance and fairness in taxation.
Recommendations
To effectively manage tax exemptions and transfers in the 4.0 age, governments must establish a robust technological infrastructure The integration of technology in tax administration is crucial for preventing tax evasion and fraud, particularly in the wake of the COVID-19 pandemic According to the OECD (2021), nearly 60% of tax administrations have increased their technological use to enhance compliance and detect fraudulent activities, employing data analytics and data science methods Tax collection agencies can improve the management of personal income tax (PIT) for digital businesses by enabling tax officials to utilize mobile tax management apps and developing new electronic filing systems, virtual assistants, and online applications These systems should include the submission of financial statements and PIT declarations for employees and managers to mitigate tax evasion and fraud Additionally, government participation in the Banking-as-a-Service (BaaS) ecosystem can streamline PIT payment methods and collect transaction data to identify instances of tax evasion, such as real estate price manipulation.
The National Assembly and the Government of Vietnam must consider establishing a reasonable Personal Income Tax (PIT) rate, as an excessively high rate can lead to inefficient public investments and hinder socio-economic development, as noted by Nguyen and Nguyen (2020) The PIT law in Vietnam has faced continuous pressure for amendments due to these issues Researching an optimal PIT rate can streamline the complex legal framework surrounding taxation According to Hsing (1996), the Laffer curve theory indicates that tax rates between 32.67% and 35.21% yield maximum revenue in the USA, suggesting that Vietnam's current highest rate of 35% may also be effective However, given that the Consumer Price Index (CPI) data used in prior research is outdated and the economic contexts of Vietnam and the US differ significantly, it is essential for the Vietnamese government to reassess the tax rate based on current economic conditions.
To achieve equitable income distribution through taxation, the Government of Vietnam should regularly revise and refine tax rates in a progressive manner, minimizing drastic changes The National Assembly may consider adjusting tax rates favorably for income invested or donated to charity, similar to practices in the US, to enhance social income distribution The GINI coefficient, which ranges from 0 to 1, measures income equality, with lower values indicating more equal distribution As reported by the General Statistics Office of Vietnam, the GINI coefficient decreased from 0.431 in 2016 to 0.373 in 2020, indicating progress within a safe range However, income disparity persists, with the highest income group earning 9.8 times more than the lowest in 2016, increasing to 10.2 times in 2019, before dropping to 8 times in 2020 due to the impacts of the Covid-19 pandemic and effective social security measures.
As a result, it is crucial to reconsider the gap in the preferential tax schedule after the Covid-19 pandemi c.
This essay offers a comprehensive overview of Personal Income Tax (PIT) in Vietnam, examining relevant legal documents and highlighting key differences in personal income taxation between Vietnam and the United States It also identifies significant loopholes in PIT legislation, illustrated through specific cases, particularly in the context of the digital age.
Since the issuance of Vietnam's Personal Income Tax Law No 04/2007/QH12, PIT regulations have undergone numerous amendments due to unreasonable tax rates and exploitable legal loopholes Taxpayers often engage in complex practices such as changing taxable subjects, undervaluing real estate, shifting PIT to corporate income tax, and making false declarations, resulting in significant tax revenue losses and income inequality Despite Vietnam's GINI coefficient remaining within a safe range, the disparity between the rich and poor is concerning, highlighting ongoing wealth inequality issues.
To effectively address the backlog of Personal Income Tax (PIT) in Vietnam, the National Assembly and Government should prioritize investing in the technology infrastructure of the PIT management system, enhancing control over payments in the 4.0 era while simplifying the tax payment process Additionally, they must analyze and establish a reasonable tax rate that maximizes revenue without frequent regulatory adjustments Emphasizing the importance of a progressive tax rate, the government should explore successful models, particularly from the United States, to ensure a fair distribution of income.
APPENDIX 1 Differences between resident and non-resident tax calculation the group synthesized based on Law on Personal Income Tax No.04/2007/QH12
Compulsory insurance deduction Yes No
Family circumstances deduction Yes No
APPENDIX 2 Tax schedule for tax residents: Employment income
Taxed income per month (VND million)
2 Between over 60 and 120 Between over 5 and 10 10
APPENDIX 3 Tax schedule for tax residents: non-employment income
Type of taxable income Tax rate (%)
Business income encompasses various streams, including the distribution and supply of goods, the provision of services and construction without supplying raw materials, and the leasing of assets Additionally, it includes production, transportation, and services related to goods and construction that involve supplying raw materials, as well as other business operations.
1.0 Interest (but not bank interest)/dividends 5
Sale of shares 0.1 (of sales proceeds)
Capital assignment 20 (on net gain)
Sale of real estate 2 (of sales proceeds)
Income from inheritances/gifts/winning prizes (excluding income from casino winning prizes) 10
APPENDIX 4 Tax schedule for tax non-residents
Type of taxable income Tax rate (%)
Business income a) Goods trading; b) Services provisions;
5 c) Production, construction, transportation and other business activities 2
Interest (but not bank interest)/dividends 5
Sale of shares/capital assignment 0.1 (of sales proceeds)
Sale of real estate 2 (of sales proceeds)
Income from royalties/franchising/copy rights 5
Income from inheritances/gifts/winning prizes (excluding income from casino winning prizes) 10
APPENDIX 5 Tax schedule for Assessable income, Law No 71/2014/QH13
The tax rates for assessable income vary based on the source of income Income generated from capital investments and royalties or franchises is taxed at a rate of 5% In contrast, prize winnings and income from inheritances or gifts are subject to a higher tax rate of 10% Additionally, income from capital transfers as outlined in Clause 1 of the relevant law is also included in this tax framework.
Income from securities transfer prescribed in Clause 1 Article 13 of this Law
20 0.1 e) Income from real estate transfer 2
APPENDIX 6 Double taxation avoidance agreements Vietnam signed (By 2020)
No Nations Signing date Signing place Effective date
46 Egypt 06/03/2006 Cairo Not effective yet
71 Macedonia 15/10/2014 Skopje Not effective yet
73 USA 07/07/2015 Washington Not effective yet
Source: (General Department of Taxation, 20 ) 19
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5 HTCTTKQG – Hệ số bất Bình đẳng Trong Phân Phối Thu nhập (hệ số Gini)
The General Statistics Office of Vietnam published data on December 17, 2019, regarding income distribution and the Gini coefficient, which measures income inequality This information is crucial for understanding economic disparities within the country For more details, visit their official website at https://www.gso.gov.vn/du-lieu-dac-ta/2019/12/htcttkqg-he-bat-binh-dang-trong-phan-phoi-so-thu-nhap-he-so-gini/.
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When transferring real estate, it is crucial to understand the legal implications and processes involved Minh Khue Law Firm provides essential guidance on navigating these transactions effectively Engaging professional legal services can help ensure compliance with regulations and protect your interests For more insights, visit their website for valuable resources on real estate transfer and related legal matters.
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