ANALYSIS OF LAW ON PERSONAL INCOME TAX PRACTICES IN VIETNAM .... 25 Trang 6 CHAPTER I: INTRODUCTION Rationale of the research Uyển Nhi Scope of research Research methods Aim and objecti
INTRODUCTION
Rationale of the research
Personal income tax (PIT) has been around for a long time in tax history and is considered the most important tax to achieve the goal of social justice Up to now, Personal Income Tax has become a basic tax, playing a central role in the tax system of countries around the world, especially developed countries Because in addition to the purpose of redistribution, personal income tax is also a form of tax with a high proportion of contribution to the total state budget revenue (state budget)
In recent years, the personal income tax of the countries is stipulated in the Law on Personal Income Tax and the reform of the personal income tax has been carried out in many countries around the world in such aspects as regulations on family circumstances reduction; the personal income tax rate; taxable income and tax- exempt income; and regulations on tax administration reform
In Vietnam, the predecessor of Personal Income Tax was the salary income tax in 1962, then from 1972 it was changed to PIT On December 27, 1990, the State promulgated the Ordinance on Income Tax for high-wage earners Over a period of application of the Ordinance, besides the positive aspects, there are also certain shortcomings such as unfairness and efficiency, etc., thus limiting the important role of PIT
On November 21, 2007, the 12th National Assembly promulgated the Law on Personal Income Tax and officially took effect from January 2009 The system of Personal Income Tax policy documents includes 03 Laws (Law No 04/2007/QH12; Law No 26/2012/QH13; Law No 71/2014/QH13); 03 guiding decrees; 02 consolidated documents and 08 guiding circulars issued by the Ministry of Finance The promulgation of the Law on Personal Income Tax and guiding documents is a step forward in the efforts to reform PIT in Vietnam, creating a legal basis to contribute to income control However, how to enforce the law to both promote efficiency and ensure the fairness of PIT is a controversial issue among economists as well as society as a whole Besides the achieved results, the PIT policy system still has some limitations that need to be assessed and overcome to enhance equality and
Taxation None efficiency Some provisions of the current Law on Personal Income Tax are still complicated, arise administrative procedures, do not create favorable conditions for taxpayers and are difficult for tax administration; there is no appropriate tax policy to attract individuals who are high-tech human resources; Tax policy for individuals with income from winning is not appropriate Continuing to improve the personal income tax set out in the current conditions is an urgent issue, in order to meet the requirements of the renovation process national financial policy mechanism in general and practical service for tax reform with high results On November 18, 2016, the Politburo issued Resolution No 07-NQ/TW on policies and solutions to restructure the state budget and manage public debt to ensure a safe and sustainable national finance In Resolution No 07-NQ/TW, the goal of restructuring the state budget was set in the direction of ensuring a safe and sustainable national finance, contributing to macroeconomic stability At the same time, one of the solutions to achieve the above goal is to focus on restructuring revenue sources; perfecting the collection policy in association with the restructuring of the state budget in the direction of covering all revenue sources, expanding the revenue base, especially new revenue sources in line with international practices; increase the proportion of domestic revenue, ensure a reasonable ratio between indirect taxes and direct taxes, exploit taxes from property and natural resources well, protect the environment, minimize the integration of social policies in taxes and policies on tax exemption and reduction, ensuring tax neutrality, contributing to creating a favorable and fair investment and business environment, encouraging investment, and regulating reasonable income Therefore, in order to institutionalize the Party's and State's guidelines and views on tax policy in general and personal income tax in particular, it is necessary, contributing to building a synchronous tax policy system, in line with the best practices and practices tax reform trends in the world, ensuring fairness and encouraging people to work and get rich legally.
Aim and objectives
The thesis aims at the following two basic purposes:
Overall research objective: Systematize the theoretical basis of Law on personal income tax, analyze the reform trend of PIT policy of countries around the world, evaluate the current situation of Vietnam's personal income tax policy, from That set out a number of orientations and recommendations for amendments to improve the PIT policy in the coming time, contributing to the implementation of the Strategy for Tax System Reform for the 2011-2020 period issued by the Prime Minister in Decision No 732 /QD-TTg dated 17/5/2011
Specific objectives: Systematize the theoretical basis of PIT, especially clarify the content of the tax base, tax calculation method, tax rates and PIT management; study international experiences, assess trends; policy analysis, current situation of Vietnam's personal income tax policy; give specific recommendations on Vietnam's PIT policy
The research object of the thesis is the Law on Personal Income Tax based on subjective and objective dynamics that govern all aspects of economic, political, and social life; are solutions to promote and develop the Law on Personal Income Tax in the context of globalization.
Scope of research
Analysis of The Law on Personal Income Tax include a great deal of knowledge about the purpose of the law, the revisions, as well as the impact of the law on many different aspects, the methods of calculation and the difference between Law on Personal Income Tax in Vietnam compared to other countries in the era of globalization and integration In addition to studies on the role and status of the law, research topics include the practice of applying the law from the perspective of tax collectors and taxpayers
The research of the thesis is limited in the period when the personal income tax code is passed in 2007, used and revised up to now in 2022 The above-mentioned statistical, analyzing, or comparing documents are just controls and necessary to ensure the logic of the thesis.
Research methods
The thesis uses the method of dialectical materialism Besides, the essay also uses methods of analysis, synthesis, systematic statistics, comparison, classification, prediction
LAW ON PERSONAL INCOME OVERVIEW
Definition
The specific concept of personal income tax (PIT) has not appeared in the current legal documents of Vietnam However, based on the Law on Personal Income Tax 2007 (amended and supplemented in 2018) as well as a number of decrees and guiding circulars, it can be understood:
Personal Income Tax (PIT) is a direct tax imposed by governments on personal income including salaries and other taxable incomes after deductions have been made.
Historical development of PIT law in Vietnam
Personal income tax has a history of hundreds of years, first introduced in the Netherlands in 1797, then in England in 1799 Currently, there are 180 countries applying personal income tax and Vietnam is also one of them In Vietnam, personal income tax is one of the taxes that has been applied quite early, right from the early stage of Doi Moi
In 1990, the State Council approved the Ordinance on Income Tax for High Income earners, effective from April 1, 1991 During the implementation process, this Ordinance has been amended and supplemented 7 times, of which the most notable is
2 adjustments made in 2004 Next, the promulgation of the Law on Personal Income Tax in 2007 made this tax more modern and comprehensive, with the expansion of the adjustment scope, the reduction of tax rates, the elimination of discrimination between individuals in and abroad, and at the same time allow the application of family circumstance-based deduction for the taxpayer himself and the dependents that the taxpayer must support After that, it was amended by Law No 26/2012/QH13 dated
22 Nov 2012 (effective from 01 July 2013) and Law No 71/2014/QH13 dated 26 Nov
Characteristics of PIT law No.71/2014/QH13 in Vietnam
The Law on Personal Income Tax (PIT) which was promulgated in 2014 and took effect from 2009 has the following characteristics:
PIT is a domestic direct tax imposed on personal income which the taxpayer pays directly to the entity that imposed it Therefore, taxpayers cannot transfer their taxes to others
PIT has a large scope of tax application It is levied on specific target groups but all individuals inside and outside the Vietnamese territory who have taxable incomes
PIT is usually applied according to the principle of partial progressive tax rate, that is, applying gradually increasing tax rates to groups of taxable objects or all taxable objects This means that the higher the income, the higher the tax rate
PIT in Vietnam is not limited to domestic income but levied on worldwide employment income which is a sum amount of a taxpayer's domestic and foreign income
PIT policy is always associated with social policies The payment of taxes is to serve the state budget, contribute to social security policies as well as for public purposes Because of the liberalization of the commercial economy, import and export taxes gradually decrease over time Therefore, personal income tax becomes more and more important and is the main source of revenue for the State budget The economy is developing, the people's intellectual standard is improving, the sense of social self- discipline is also more popular, the per capita income of each individual is increasing day by day As a rational and inevitable result, everyone is responsible for fulfilling obligations to society, increasing revenue of the national budget
Normally, personal income tax is only applied to individuals with income higher than the starting level of taxable income, not taxed on individuals who have enough income to support themselves and their families at the necessary level Besides, when the personal income increases, the tax collection rate also increases In Vietnam, the incomes of all classes of people have quite clear differences, the majority of the population has low income, but there are also some individuals with quite high incomes, especially those working in foreign-invested enterprises, in export processing zones or who are foreigners working in Vietnam
Therefore, it is necessary to regulate personal income tax for those with high income, to ensure the implementation of social justice policy.
Components of PIT law No.71/2014/QH13 in Vietnam
2.4.1 Individuals liable to PIT and tax resident status
Individuals’ payment to Vietnamese PIT is based on their tax resident status, which means PIT on their worldwide incomes for tax residents or PIT on income sourced in Vietnam for tax non-residents
Any foreign individual shall be considered as a PIT resident if he/ she meets one of the following conditions: being present in Vietnam for at least 183 days throughout a calendar year in the west or for 12 consecutive months beginning with the date of arrival; having a permanent residence in Vietnam (including a registered residence that is included on the foreign resident's permanent/temporary residence card); possessing a leased house in Vietnam in 183 days or longer in a tax year and being unable to demonstrate tax residency in another nation
If the above conditions are not met, then an individual will be treated as Non- Tax Resident in Vietnam However, an individual may still be deemed a tax resident in Vietnam if he/she cannot prove his/her Tax Resident in another country
According to The National Assembly (2014), under Article 3 of this Law, taxable income generally comprises 10 main types of income:
A sole trader’s income of VND 100 million per year or less is not considered income from business prescribed in this Clause
2 Incomes from salaries and wages
5 Incomes from transfer of real estate
According to The National Assembly (2014), under Article 3 of this Law, Vietnam’s tax authorities have singled out a number of incomes that are exempt from PIT These include:
Incomes from transfer of residential houses between spouses; parents and their children; or between individuals who possess only one residential house or land plot;
Incomes from the value of land use rights of individuals;
Incomes from receipt of inheritances or gifts that are real estate between spouses, parents and their children;
Incomes from conversion of agricultural land
Incomes from interests on deposits at credit institutions or interests from life insurance policies
Wages paid for night shift or overtime work, which are higher than those paid for day shifts or prescribed working hours in accordance with the law
Overseas remittance, retirement pension, scholarship;
Income from compensation for insurance contracts or from charity funds;
Income received from governmental or non-governmental foreign aid for charity or humanitarian purposes approved by competent state agencies
Incomes from salaries, remunerations of Vietnamese crew members working for foreign shipping companies or companies that provide international transport services
Incomes from provision of goods/services serving offshore fishing
The incomes of residents are divided into main groups to which two different tariffs are applied
- The partially progressive tariff applies to:
+ Taxable incomes from salaries or wages
Payable amount of PIT = Assessable income of PIT x The PIT rate Assessable income = Taxable income - Non-taxable income - Tax deduction
Taxable income in this formula is a sum of taxable incomes from business taxable incomes from salaries or wages after subtracting compulsory insurances, deductions for taxpayers and dependents, and donation
The partially progressive tax rate is stated as table below:
Table 2-1 The partially progressive tax rate for residents
(Source: Vietnamese PIT law No.71/2014/QH13, 2014)
The whole income tariff applies to following taxable income with below formula and whole income tax rate:
+ Taxable incomes from capital investment
+ Taxable incomes from capital transfer
+ Taxable incomes from real estate transfer
+ Taxable incomes from won prizes
+ Taxable incomes from commercial franchising
+ Taxable incomes from inheritances or gifts
Payable amount of PIT = Taxable income x The PIT rate
The tax rate is stated in table below:
Table 2-2 The whole income tax rate for residents
(Source: Vietnamese PIT law No.71/2014/QH13, 2014)
PIT is levied on all taxable income of non-residents as the formula and PIT tax rate below:
Payable amount of PIT = Taxable income x The PIT rate
The PIT tax rate is stated as table below:
Business (based on the type of business activities) 1 to 5
Table 2-3 The PIT tax rate for non- residents
(Source: Vietnamese PIT law No.71/2014/QH13, 2014)
ANALYSIS OF LAW ON PERSONAL INCOME TAX
Current legal documents of PIT in Vietnam
The personal income tax is regulated by the Law on Personal Income Tax dated November 21, 2007 (effective from January 1, 2009), amended by:
Law on Amending And Supplementing A Number Of Articles Of The Law On Personal Income Tax dated November 22, 2012 (effective from July 01, 2013) Law on Amendments To Tax Laws dated November 26, 2014 (effective from January 01, 2015)
Below is a list of legal texts related to personal income tax that is currently effective in Vietnam:
Law LAW No 04/2007/QH12 January 1, 2009
Decree DECREE No 65/2013/NĐ-CP July 01, 2013
DECREE No 12/2015/NĐ-CP November 26, 2014
Decision DECISION No 102/2008/QD-BTC January 01, 2009
Circular CIRCULAR No 111/2013/TT-BTC October 01, 2013
CIRCULAR No 20/2010/TT-BTC March 22, 2010
CIRCULAR No 92/2015/TT-BTC July 30, 2015
CIRCULAR No 151/2014/TT-BTC November 15, 2014
CIRCULAR No 119/2014/TT-BTC September 01, 2014
CIRCULAR No 96/2016/TT-BTC August 15, 2016
CIRCULAR No 37/2010/TT-BTC May 2, 2010
CIRCULAR No 40/2021/TT-BTC August 01, 2021
CIRCULAR No 80/2021/TT-BTC January 01, 2022
Achievements of personal income tax in Vietnam
Personal income tax revenue in Vietnam generally has an upward trend as can be seen in the diagram below since 2007 when the law on personal income tax was passed
Table 3-1 Annual PIT revenue from 2007 to 2021
(Source: Trang, 2022) According to Trang (2022), 25% of the labor workforce who are salaried workers are subject to personal income tax This amount is going to subtract social insurance, health insurance, unemployment insurance and family circumstance deductions and so on The rest is taxable income as a basis for personal income tax calculation
Salaried employees are the main contributor to 70% of personal income tax revenue Personal income tax is one of the three taxes that make the largest contributions to annual state budget revenue, with VND 110,000 billion, accounting for 10% of the total budget balance of 2021 and only behind the two other taxes that are corporate income tax and value added tax (VAT).
Existing issues and limitations
Family circumstances deduction is a policy to facilitate the taxpayers to reduce the amount of individual income tax they are supposed to pay in case taxpayers have to support and raise independent people However, this support is considered inadequate and can witness several setbacks for particular reasons
With reference to Law No 26/2012/QH13, reduction for taxpayer had risen from 4 to 9 million, meanwhile for each dependant went up by 2 million , specified in Article 1, Clause 4:
< Reduction based on family circumstances consists of the following two parts: a) Reduction for the taxpayer, which is VND 9 million/month (VND 108 million/year); b) Reduction for each dependant of the taxpayer, which is VND 3.6 million/month.Taxpayer (VND million/month)
Each dependant (VND million/month)
(Family circumstances deduction through 2 times changing)
In 2020, the reduction amount increased again to VND 4.4 million/month for each dependent person and VND 11 million for the person paying his/her income tax The adjustment to raise the level of deduction for personal income tax has contributed to reducing the obligation for taxpayers, the amount of tax payable is reduced for all subjects who are paying PIT With the current deduction, in case the earned income from salary and wages is at VND 17 million/month to feed one more dependant or
VND 22 million/month to feed two dependants, after deducting social insurance, health insurance, unemployment insurance, this taxable income still lies in the range without paying any income tax
Regardless of this gain, it was reckoned that the reduction amount did not come up to the residents’ living expenses in the context of constant economic growth; increased prices of goods and services; taxpayers and dependants' high living expenses According to a one-week survey conducted by VnExpress, which has more than 23,900 subscribers with an average monthly salary of VND 22 million, taxpayers spend more than VND 10 million on themselves but at least VND 7 million to support a dependant, which accounts for 70% of their spending on themselves
It was also noted in Law Clause 4 Article 1 Law No 26/2012/QH13 that in case CPI’s change was higher than 20%, this reduction would be reconsidered by the Standing committee of the National Assembly The consumer price index, however, does not accurately reflect the rise in costs of necessities that consumers must pay for on a daily basis Inflation in Vietnam has only increased, and during the past 5-7 years, it has increased by roughly 3-4% annually As a result, it takes around 5 years to accrue to 20% CPI and hence, to modify the deduction for family needs Taxpayers' lives and income are already impacted by the CPI's yearly hike by then.
Examples of personal income tax law application
Another highlight is related to the voluntary retirement funds The model of voluntary pension funds was newly established and supported by the Vietnam legislation system in 2013 (Tran, 2019) The additional factor to taxed income matter was mentioned in Clause 2 and 5 Article 1 Spendings on this fund within an amount limited by the government would be exempt from taxable income Specifically, if the contribution to the voluntary pension fund was higher than VND 1 million/month, the excession would be taxed as normal, stated in Circular No 111/2013/TT-BTC, Article
9, Clause 2 This reduction was given as an incentive for the labor force to take part in the program directed by the Ministry of Finance Therefore, if a worker wants to contribute VND 1.5 million/month to the voluntary pension funds, it is a pity that only
1 million is tax-free and the rest will be added to the taxable income
Circular No 111/2013/TT-BTC, Article 2 defines taxable income: