Shortcomings in Taxing Domestic Institutional Investors

Two different taxation ways
According to an analytical report from the Vietnam Association of Financial Investors (VAFI), at present, foreign institutional investors (legal entities established under foreign laws are levied a lump-sum tax (securities income tax = total selling value x 0.1 percent) - this is a form in conformity with international practices and meets simple procedures subjected to foreign entities that are not necessarily present in Vietnam. Individual investors (both domestic and foreign) are also subjected lump-sum tax (Personal Income Tax Law). This is the best way too.

For investors being domestic legal entities, taxable income is the revenue from securities sale minus securities purchase price minus the cost and tax payable, altogether multiplied by a tax rate of 25 percent (according to the Corporate Income Tax Law). This tax rate is too high in relation to that subjected to foreign institutions and individual investors and is also very high in comparison with international common practice.

Thus, according to VAFI, in fact, Vietnam is applying two different methods of tax calculation and collection for two different types of securities dealing. “When the tax calculation method is inconsistent for all subjects, it will create an unequal playground in exercising tax payment obligations," said Nguyen Hoang Hai, General Secretary of VAFI. He said many domestic legal entities with securities investments (normally companies without systematically organised apparatuses) will seek ways to dodge high tax obligations by giving the money to individuals to invest to be exempted tax duties or trading unlisted shares on OTC market where they can easily declare high buying price and lower selling prices to make their deals in the red or at low profit. In case of loss, they will deduct sufficiently for provision funds to enjoy tax cut. Thus, these enterprises apply two taxation methods but taxation authorities cannot detect. “Such cases partially result from irrational corporate income tax policy and mechanism,” Mr Hai added.

Systematically organised and transparently operated enterprises cannot manipulate such ways of accounting and they apparently suffer disadvantage because of the mechanism.

Applying regulations in accordance with international practice
According to the report from VAFI, securities dealings are very particular and risky in relative to investments in other industries; thus, Vietnam should have regulations in compliance with international practices while creating a fair playing field for entities. “Domestic institutional investors, foreign investors and individual investors have be subjected the same tax calculation method,” said Mr Hai.

According to Mr. Hai, at present, when the OTC market has not been organically operated, the lump-sum tax should be chosen to levy on all investors while the rate will be adjusted from time to time, depending on the development of the market.

The corporate income tax should not be imposed on bond investment activities (like not applying corporate income tax on deposits at banks).

“The exemption and reduction of corporate income tax on securities dealings for domestic institutional investors do not mean calling the government to apply preference policies on the aforementioned investors but building a consistent taxation policy in line with international common practices and in the orientation of building a sustainable stock market to spur economic development. We should consider the securities sector as a vehicle to increase the collection of taxes from service, production and trading enterprises, etc.” Hai concluded.