Doing Business in Vietnam Series: 1. Taxes

By on May 29, 2010 • Topics: Business,Current Affairs

Credit: Marchin Wichary on Flickr - http://www.flickr.com/photos/mwichary

Vietnam has been on a high real GDP growth rate (which is adjusted for inflation) since it started the economic renovation phase. In fact, its growth rate once ranked 2nd in the world with 8% annual GDP growth rate in the 90′s and 7.5% in the 2000′s up to right before the current global financial crisis. Even in this crisis, Vietnam real GDP’s growth rate is still on the rise and the nation did not face a recession like the US. Also, during the turn of 2007, Vietnam joined the World Trade Organization (WTO) – an important event that gives signals to investors that the country is putting more effort in stabilizing its economic environment.

With all these good news, many investors are looking into Vietnam as a high potential for their next investment projects. However, starting a business in any nation is not an overnight process. There are many considerations, and in this article, I will focus on several corporate tax issues:

1) the number of procedures and payments,

2) the time it takes to prepare tax documents per year

3) the total amount of tax on profit.

Before we examine the World Bank’s data, it is important to read about the assumption of this data here.

Also, it is very important to note that Vietnam has a strict policy that control the outflow of investment capital. For example, it might be very easy to bring $1M to Vietnam to start a business, but it is not easy to export $1M in profit outside of the country.  This fact has been very discouraging to many investors, and as a student of economic, I disapprove of such stringent control of investment capital.

Tax or mandatory contribution Payments (number) Notes on Payments Time (hours) Statutory tax rate Tax base Total tax rate (% profit)
Corporate income tax 5 350 28.0% taxable profits 19.2
Social Security contributions 12 400 15.0% gross salaries 16.9
Health insurance contributions 0 - 2.0% gross salaries 2.3
Income tax from transfer of land use rights 1 - 28% on the gains and progressive tax rates as surtax on the remaining gain capital gains 1.4
Business Licensing Tax 1 0 fixed fee (VND 1,000,000) 0.2
Fuel tax 1 - 5.0% fuel consumption 0.2
Value added tax (VAT) 12 300 10.0% value added
Totals: 32 1050 40.1

As we can see from the chart above, on average domestically owned businesses must go through 32 procedures and payments that take them at least 1050 hours to prepare. To put into perspective, it requires an accountant to work full time (8hr/day) for more than 6 months to complete the tax for one year, assuming perfectly available information. Also, the tax takes away 40.1% of the total profit that this domestic firm makes during that year.

Let us compare Vietnam with other country in the region and the OECD countries (high income and developed nations).

Indicator Vietnam East Asia & Pacific OECD Average
Payments (number per year) 32 24.6 12.8
Time (hours per year) 1,050 227.2 194.1
Profit tax (%) 20.6 18.3 16.8
Labor tax and contributions (%) 19.2 10.3 24.4
Other taxes (%) 0.3 7.5 3.3
Total tax rate (% profit) 40.1 36.1 44.5

As can be observed, Vietnam’s tax rate is relatively high mostly due to high profit tax and labor tax. In addition, the amount of procedures and payments of taxes and the time it take to complete them in Vietnam is exceptionally high in Vietnam, which is very discouraging to international investors. Many people might think that the amount of labor and profit tax will return to the citizens and workers somehow, but this might not be the case because the numerous procedures require many processing departments and personnel that just suck out the income. Also, a discouraging environment for the investors might be detrimental because it can reduce the total amount of employment and wages as the demand for labor decreases.

Vietnam has been growing at an impressive rate in the past 25 years, but its potential has not been reached due to many stringent and unnecessary procedures. There are much room for improvements and we have high hopes for Vietnam’s economic performance.

The Author: Neil Nguyen

Neil is a mechanical engineer who aspires to make his own robot so he no longer needs to do house chores. At UC Berkeley, Neil studied in South Korea and Japan where he did research on the post-war development processes of Japan and Vietnam.

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  • http://facebook.com/profile.php?id=100000805702568 Calvin Hue Quach

    I ask all venture capitals to invest in Vietnam, they all say it's bad investment might as well donate to entire country toward communist government officials!^^

  • http://facebook.com/profile.php?id=1225530023 Huan Tran

    I know absolutely nothing about business. This stuff is really interesting; can't wait for part 2!

  • http://facebook.com/profile.php?id=100000265569609 Jean Huynh

    doing business in VN all you nêeds is "phong bì" alot of "phong bì"

  • http://facebook.com/profile.php?id=685124542 Phuong Vu

    Death and Taxes

  • http://facebook.com/profile.php?id=643729960 Tom Thanh Van

    Every venture capitals who want to do business in Vietnam should take to account that they are operating a capitalist system in a communist country. Every transaction involves three main players the buyer, seller and the government. If one of these players are not cooperating than the transaction just fall apart. That is why doing business in Vietnam is so difficult and frustrate.

  • http://facebook.com/profile.php?id=100000805702568 Calvin Hue Quach

    I lost everything in mid 80's due to b.s communist of Vietnam taxation. Now I invest in Cambodia, Lao and Thailand country but hell no with VN!^^

    • Frances

      HI Calvin,

      What kind of trade you were involved when in Vietnam?
      Would you mind share your experience of doing business in Vietnam, just a summary?
      What is the business opportunity in Cambodia & Lao?

      best regards

  • k.bhasker

    dear friends , i want to do business in vietnam network business , so if any one intersted to do business with me in ur country plz call me 00919948405211, my business site is http://www.hci-india.in

  • http://vietnambusiness.asia Vietnam Business

    Hi all, Try this link to have more information about doing business in Vietnam
    http://vietnambusiness.asia/doing-business-in-vietnam-2010-world-bank-report/

  • ATran

    Hello all!
    I would like to know which is beneficial if I establish my business here and open the branch in Vietnam or let my cousin who lives in Vietnam to register the business. It’s a retail business. Anyone could give me some feedback of advise. Deeply appreciated.

    Sincerely,

    • BeenThere

      Hi ATran,

      Retail generates a lot of cash. If you have no way to account for it, I’m not going there. If you want to throw away your hard earned cash, please be my guess.

  • http://tmoble william

    your still comms. country and they don’t care about there own peolpe the older sell on the street’s make no money 10usd a day give me a real answer for that kind of money. i no it’s cheap to live there. but they don’t even help there own kind out like old and sick/hosp.very dirty i seen with my own eye’s people sitting on the floor thr.up and i seen a dog walking in hospital hall-way not good the people not very education is very poor sorry to say that but some thing is wrong in vn i like vietnam very preety country the air is bad every body cough a lot on the moto they ride in city