Stabilizing state budget: Property tax reform in Vietnam

In law, similar to the regulation of non-agricultural land, the provincial People's Committee is basing on the local condition to classify into land categories, and by land [r]

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

LUU THI TAM

STABILIZING STATE BUDGET:

PROPERTY TAX REFORM IN VIETNAM

MASTER'S THESIS

………

PUBLIC POLICY

Hanoi, 2019

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

LUU THI TAM

STABILIZING STATE BUDGET:

PROPERTY TAX REFORM IN VIETNAM

MAJOR: PUBLIC POLICY CODE: ………

RESEARCH SUPERVISOR:

Dr NGUYEN CAM NHUNG

ABTRACT

In the context of declining revenues from oil, foreign trade and state-owned enterprises in Vietnam state budget, the Government of Vietnam has been reforming to find more stable revenues, property tax is a potential source despite property tax revenue accounts for a small propotion now

In theory, real property taxes can be stable revenues to local budgets and self-adjust due to increasing price of houses and land as the economy grows However, compared to internations, Vietnam does not taxes on land improvements, which means that the tax base is narrow Besides, the taxable land price is regulated and fixed over a five-year period without adjusting the update according to the market value These restrictions reduce the tax fairness as well as the unrealized collection

of budget objectives

Therefore, based on tax design theory and lessons learned from some other countries, this research suggess several solutions to increase revenues by collection process, then wider tax base and raise tax rate in long-term

In the first period, the government strengthened the efficiency of collection, in particular completing databases, using information technology and propaganda to increase voluntary morality; In urban area, tax price adjusted annual; In the long term, the government will gradually increase tax rates, expand tax bases with improvements on land as well as adjust land prices by GDP and ad-valorem to ensure the tax efficiency and feasibility; In addition, the government needs to consider, evaluate tax exempt policies, instead using these revenues to improve the quality of public goods

Table of Contents

ABTRACT - ii

LIST OF FIGURES - v

LIST OF TABLES - vi

INTRODUCTION - vii

Research motivation: - vii

The scope of research: - ix

The purpose of research: - ix

Research methodology: - ix

CHAPTER 1: LITERATURE REVIEW AND THEORETICAL FRAMEWORK - 1

1.1 Literature review - 1

1.2 Theoretical framework - 6

1.2.1 Definition and role of balanced-budget - 7

1.2.2 Condition for sound budget balance - 7

1.2.3 Determinants of stabilizing state budget in terms of tax - 9

1.2.3.1 Macroeconomics stability - 9

1.2.3.2 Tax regulations - 9

1.2.3.3 A good tax structure - 10

1.2.4 Property tax versus state budget – relation - 11

1.2.5 Conceptual framework for property tax reform - 12

CHAPTER 2: STATUS OF STATE BUDGET AND LEGAL FRAMEWORK OF PROPERTY TAX IN VIETNAM - 15

2.1 Status of state budget in Vietnam -15

2.1.1 Overview of state budget revenue sources - 15

2.1.2 Vietnam budget trend and budget deficits situation - 16

2.1.2 Structure of revenues in Vietnam state budget - 18

2.2 Legal framework of revenues of property tax in Vietnam -19

2.2.1 Agriculture land use tax law - 19

2.2.2 Non-agriculture land use tax - 21

2.3 Results of property tax implementation -23

2.3.1 Non-agriculture land use tax - 23

2.3.1.1 Non-agriculture land use tax: Results of tax revenues - 23

2.3.1.2 Non-agriculture land use tax: tax collection results - 25

2.3.2 Agriculture land use tax - 26

2.3.2.1 Agriculture land use tax: Result of tax revenues - 26

2.3.2.1 Agriculture land use tax: Tax collection result - 27

CHAPTER 3: EXPERIECES IN STABILIZING STATE BUDGET BY REFORMING PROPERTY TAX IN SOME COUNTRIES - 29

3.1 Taxation reforming objectives -30

3.2 Taxation design -32

3.2.1 Tax base - 32

3.2.2 Tax rate - 33

3.2.3 Price Assessment - 34

3.2.4 Collection process - 35

3.3 Taxation performance: effectiveness -35

3.4 The lesson learned from other countries -36

CHAPTER 4: POLICY IMPLICATIONS FOR PROPERTY TAX REFORM TOWARD STABILIZING STATE BUDGET - 38

4.1 To enhance collection efficiency -39

4.1.1 Factors to improve tax collection performance - 39

4.1.2 these steps to optimize property tax revenue by enhancing collection process effectiveness - 42

4.2 Expading tax base -43

4.2.1 Expading tax base of non-agriculture land use tax - 43

4.2.1.1 Adjusting prices of property taxpayable - 43

4.2.1.2 Expanding taxpayables - 48

4.2.2 Expanding tax base of agriculture land use tax - 51

4.2.2.1 Land categories and land price to calculate tax payables - 51

4.2.2.2 Expanding tax base by abolish tax exemption, protect cultivated land area, reduce abandoned land area - 51

4.3 Adjusting tax rate -54

CONCLUSION - 57

REFERENCES - 59

LIST OF FIGURES

Figure 2.1: The scale of budget revenues and expenditures balance with

GDP in Vietnam from 2007 to 2017 ……… 25

Figure 2.2: The budget deficit in Vietnam from 2007 to 2017 ……… 26

Figure 2.3: The structure of revenues in Vietnam state budget from 2012

LIST OF TABLES

Table 1.1: Concepual framework for property tax reform ……… 23

Table 2.1: Tax categories of agricultural land use tax ……… 25

Table 2.2: The tax rate of non-agricultural land use tax ……… 31

Table 2.3: Revenue of non-agricultural land use tax (2012-2017) …… 33

Table 2.4: Revenue of agricultural land use tax (2010-2017) ………… 35

Table 3.1: The comparison between Vietnam and other developing

Table 3.2: Reforming objectives in Vietnam and other developing

Table 3.3: Tax base in Vietnam and other countries ……… 42

Table 3.4: Tax rate in Vietnam and other developing countries ……… 43

Table 3.5: Price assessment in Vietnam and other developing countries 44

Table 3.6: Tax collection in Vietnam and other developing countries … 45

Table 4.1: Tax revenues in hypothesis ……… 63

INTRODUCTION

Research motivation:

The state budget of Vietnam depends on revenues of oil or natural resources, foreign trade and state-owned enterprises These have been recording decreasing trend and will be continuous in next time, because of oil or nature resource are non-renewable Another reason is the participation in trade agreements such as Free Trade Agreements (FTA), government commited to reduce import tariffs on various types of goods when participating in these agreements, so leading to reduction in foreign trade revenue In addition, the more and more state-owned enterprises privatize also reducing the contribution and role of this group in the economy The change of domestic and foreign contexts raises the need to reform and improve the policy of mobilizing budget resources

Therefore, government has designed policies stabilizing state revenues to decline budget deficit while maintain government‘s goals in the future as well as adapt to development goals In the theory, there are two sides to approach the goal of balancing the budget deficit including expenditure and revenue aspect This research focuses on revenue side - sustainable revenue creating by tax policies, which minimize the social losses and get the objectives of the state In revenues from central and local government, the government aims to decentralization to achieve the goal of reducing the burden on the central budget

According theory, a good tax system is a system with a wide tax base and a low tax rate, which means an increase in indirect tax revenues that helps balance the direct tax in the period of 2011-2020 Vietnam aims to "build and complete the tax policy system to ensure transparency, clarity, ease of understanding, easy implementation; expand tax base to develop revenue sources, cover newly generated revenue sources and restructure towards increasing domestic revenue sources (excluding crude oil

revenues) by 2015 to reach over 70% of total home budget revenues by 2020, it will

be over 80% of the total state budget revenue‖1

Another pursues of state management at the moment in Vietnam are decentralization.2 In perspective of taxation and the experience of some countries in the world, property taxes are effective to finance the local budget for supply public goods like education or health In Vietnam, revenues from land and natural resources (except for oil and gas) are sources of local government revenue Therefore, there are opinions from policymakers that if the property tax policy is appropriately designed, it will be able to generate stable revenues for the local budget, offset the cost of public services Then reducing the burden on the central budget

In Vietnam, policymakers suggest property taxes can be long-term solutions In

1992, with the goal of contributing to state management of land, encouraging organizations to use land economically and encouraging the contribution of land users to the state budget The government enacted the Ordinance on house and land tax Subjects liable to tax under this Ordinance are residential land, construction land and houses In addition to the Ordinance on housing and land tax, in 1992 also issued the Ordinance on agricultural land use tax At the present, Vietnam only collects taxes on land without collecting taxes on houses or improvements on land Proportion of property tax revenues have room to increase in the total state budget revenue, thus government has focused on property tax reforms, to the present actual revenue is still lower than potential, and the ability to increase in time helps stabilize state budget

The scope of research:

The time period in this research from 2012 to 2017 due to the non-agriculture land use tax – specific name of property tax applied from 2012, and data in 2017 is the published number that can be collected at the time of the study

Research content is on the side of state budget, including theoretical basis analysis step In detail, expressing number of revenue without analyzing social impacts such

as price fluctuations and fairness as well as estimate potential revenues

Any link to new property draft law in which expand the tax base, tax rate only for comparison purposes

The purpose of research:

This research focuses on a solution to improve collection efficiency in order to achieve higher property tax revenues in legal framework enacted, and suggest reform in short-time and long-term which to strengthen state budget stabilization in the future by property tax

Research methodology:

Research applied qualitative analysis and comparison method, combining theoretical framework analysis and practical experience in several countries in the world Along with analyzing the information and data in Vietnam to assess the situation of the current budget revenue, then propose solutions to increase revenues

to help balance the state budget

CHAPTER 1: LITERATURE REVIEW AND THEORETICAL

FRAMEWORK

1.1 Literature review

These are a number of research related to state budget involves solution to budget deficit, public debt These concentrate into allocation expenditure, budget deficit, public debt status as well as solutions Although there have had researches legal framework of land in Vietnam, evaluating revenues of the new land tax and old system and suggest property tax reform

Trinh, H.L (2012) researched property tax reform in Vietnam, specifically focused

on the changing progress given that land law in Vietnam has always been considered to belong to the State and the shifted to reforming the real property tax from the largely based on rice productivity to one base on ad valorem principles This paper reviews existing property-based taxes, highlighting their weaknesses and outlining the potential for a land tax to effectively replace the current property tax

In detail, this paper reviews land and land ownership in Vietnam to 2012, several different ministries are involved in the regulation and use of land The underlying concept off land ownership is the foremost determinant of the land policy system in Vietnam In the absence of private ownership, land is regarded as an asset of the population Individual members off society as natural or legal entities have only land-use-related rights In addition, it is understood that land use right in Vietnam are a private asset, protected by the civil code Even if full individual property rights do not exist, there is a legal market for land use rights Which has prompted the Vietnamese government to move towards a market economy and to reform its real property taxation system and align it with international standards In analysis of property tax reform in Vietnam, the market-based ad valorem property tax that includes within the tax base all land and buildings would prove a major challenge for Vietnam, for several reasons First, the property market has not reached a sufficient level of maturity to provide the necessary transactions upon which to

create a value-based property tax Second, the infrastructure, in terms of a valuation/appraisal profession and associated university programs delivering appropriate real estate course, has yet to be developed

McCluskey W.J & Trinh, H L (2013) analysed current land based revenue sources

and concludes that these sources are unsustainable, lack buoyancy and represent a downward revenue base Group author advocates payable property tax bases on land value empirical analysis, in other word, the value gain through effectiveness using At the same tine, they provide several evidence that the government's proposal for a land based tax has several structural problems that will directly affect revenue buoyancy However, by identify structure problems, which affect provincial and local government finance The proposed land tax is at least a positive and important step in developing a sustainable revenue source for city and local governments The research supports the government‘s proposal towards the development of a land tax

Besides, the paper simulates comparasion the revenues of the new land tax and old system Their results record an upward trend by 0.02 percent from 0.06 percent to 0.08 percent of GDP in 2008, assuming a 60percent revenue collection level In addition, given the fixed nature of the tax rates and land value tariffs, nominal revenue as a percentage of GDP declines in the following years The desirability of

an adjustment to the current tax reform comes from stabilizing revenues, which are currently still declining, by addressing several structural problems that will directly enhance revenue buoyancy The choice of a land tax is in many respects the optimal choice, and the revenue performance is modest but has room for future growth

In two researches in 2012 and 2013, the authors reviewed Constitutions from 1946

to 2012, in which first Constitution issued in 1946, the data tax revenue valid to analysis until 2008, the square of land and share of land catergories updated until

2010 Methodology used all is qualitative method that review law and logic analysis

Workshop on "Applicability and impact of property taxes in Vietnam"3, experts, policy critics shared the view and discussed that the improvement of Vietnam's budget should be rooted in cost savings – experience side, not the increase in revenue, criticism, and difficult collection, in detail:

From statistic of world experience, property tax contributed significantly to the national budget, especially in developed countries But the tax property is complex

as well as hard to implement efficiency and raising corruption ―The world has been debating this tax for hundreds of years and so far, countries that have actually applied taxes on assets show that this tax is very complicated, implementation is not easy and not effective ‖

Property taxes have a significant impact on household spending and consumption

By calculated and predicted according to Ministry of Finance‘s proposed options, the result is Gini coefficient (indicating the inequality of income distribution among economic individuals in an economy) decreased by 0.65%, but disposable income decreased by 0.9 %, actual spending decreased by 0.7%, and the poverty rate remained unchanged Although the inequality index (Gini) improved but mainly because the rich were poorer, it was not because the poor‘s living standard improved higher Therefore, if public spending does not promote social welfare and productivity, it is not a sustainable tax law

Worldbank (2011) analyzed the economics of property taxes, the research points

out reason for separate analyses of Taxes on Land and on Improvements A

property tax is a combination of two taxes, the same tax rate is generally applied to both components of the tax bases, but it is possible to have different tax rates on land and improvements, at the same time, some places record different rates

There are different between land tax and improvement tax in term of administration The proper taxation of improvements requires continual on-site evaluations that are somewhat subjective and open to corruption Land values in other sides, are much

3

December 12th 2018 at Hanoi Union hotel

more objective, transparent, and easy to assess, because they are generally smooth functions of location Therefore, it should be divided into two taxation analysis, first

is tax on natural opportunities and other is tax on humanly produced capital improvements

This research mentions to efficiency of land taxes: raising substantial government revenue without burden, as well as offset other circumstances that generate economic inefficiency When properly administered, a tax on land has not gotten

inefficiency, or ―excess burden‖ into an economy Thus, whenever a nation or a commune replaces a revenue source that has an excess burden with a tax on land, the overall efficiency of the economy improves In order to have no excess burden, the tax must be independent of how productivity the land is used and the tax must not be greater than the value of using the land If these two conditions are met, then all land can be used productively will continue to be used when the land is taxed, and the land owner will continue has motivation to use it as productively as they can Moreover, enforcement and compliance costs of land taxes are minimal These only involve maintenance system, frequent and transparent assessments, sending bills, treating with violence activities

The higher rate of land taxation, the less rewarding land speculation is In case of higher land tax, which reduces land speculation, tends to reduce premature conversion of agricultural land to development uses Speculation is reduced or eliminated because of a high land taxes, the most value sites are developed rapidly when land is taxed heavily, leaving little or no market for the development of those that are not rip for development

Other side is offsetting public service costs and maintaining reduced poverty

Because property tax on improvements can have a significant excess burden, it should be much lower tax rate on land compared with tax rate on improvements There are two reasons why a tax on improvements should be included in a package

of efficient sources of public revenue Firstly, government needs budget for public services such as police, courts, national defense and diplomacy to protect

improvements It is suitable when using property tax on improvement revenues in state budget to make payment for these public services Secondly, property tax on improvements wish to levy a tax on improvements is to erode the wealth of the wealthy If a tax on improvements simply compensates for the cost of protecting

additional improvement, then there is no excess tax burden

In reality, Vietnam Ministry of Finance (2018) published statement which give the

ideal the necessary of reforming property tax, namely to adjust the tax payable in land using term and add revenues from other property such as building, plane, yacht This statement used data from 2012 to October 2017 because the data update until October 2017 and 2012 is when begin apply non-agriculture land use tax – a mainly kind of property tax in Vietnam now It also pointed out several basic reasons First, International experience shows that property taxes are an early tax in the tax system of most countries around the world, especially in developed market economies There are currently 174/193 countries that collect property taxes (annual tax, during the use of assets) with many different name, Subjects subject to property tax in countries mainly are land and houses Second, property taxes in countries represent an important role in the total revenue of countries, accounting for an average of 3-4% of the total tax revenue in developed countries, some of which are

up to 8% like Japan In developing and transition countries, this rate is lower Considering the period 2005-2013, the rate of property tax collection (annual tax collection, asset use) compared to GDP in developed countries and some developing countries in Asia is about 2% of GDP In Vietnam, the assessment shows that the annual income tax, in the process of using assets (agricultural land use tax, agricultural land use tax) accounts for only 0.036% of GDP and only regulates land

General purpose was given is enhance state management in assets, corresponding international practices and the context of international economic integration

International experience shows that countries use property taxes as an effective financial tool to strengthen the management of organizations 'and individuals' asset

use, and have additional investment resources back to the land Besides, to regulate with property of houses and land, contributing to ensuring social justice

The draft property law order to strengthen the management of the use of assets by organizations and individuals, to well exploit the revenue from property, one of the requirements is to reform and improve institutions, in which tax policy reforms in order to timely adjust economic activities to ensure compliance with the socio-economic development orientation and the context of international economic integration, to facilitate and protect national interests in participating in integration international economy

Thus, statement above determined reforming tax policies on property and implement to restructure state budget revenues will contribute to state management

in property, suit with international regulations

Therefore, choice of a property tax is in many respects the optimal choice; it has room for future revenue growth The government also hope expanding tax base as property tax draff law in 2018 could reduce budget deficit, find regular revenue for local budget Researchs also pointed out if it has a good control and monitoring system, property tax is potential to takle state budget challenge However, in fact, this draft law is not appreciates by policy critics in Vietnam at the moment; the reason are leading to inequality, corruption, and tax base erosion in the long-term

In this context, this work focuses on the maximizing efficiency plan according to the current regulations in the law and short-term adjustments

1.2 Theoretical framework

The foundation theory of stabilizing state budget will introduce to show the role, relation tax policy in state budget Besides, this part review taxation theories have applied to analyse, implement , design legal framework of property tax in the word, namely optimal taxation and land tax By doing so determine factors affecting tax revenues, then guide solutions to optimize the revenues in current regulations and aim reforming in near future

1.2.1 Definition and role of balanced-budget

The balance budget in which receipts equal expenditure or a situation in financial planning or the budgeting process where total revenues are equal to or greater than total expenses A budget can be determined balanced after a financial year‘s worth

of revenues and expenses have been incurred and recorded But it is hard to get balance or complete balanced is impossible, the government attempts to optimal fiscal policy, namely call for budget deficit and budget surplus (Mankiw, N.G 2010) The term budget surplus occurs when revenues exceed expenses, and the surplus amount represents the difference By contrast, budget deficit is the result of expenses over revenue

There are three options for closing budget deficits, the state can raise taxes, reduce spending, or change ―budget execution‖ to close the apparent deficit (Jame M Poterba, 1995)

In optimal fiscal policy, a budget deficit or surplus can help stabilize the economy

In case an economy goes into a recession, taxes automatically fall, and transfers automatically rise Although these automatic responses help stabilize the economy, they push the budget into deficit A strict balance-budget rule would require that the government raise taxes or reduce spending in a recession, but these actions would further depress aggregate demand Besides, these can be used to reduce the distortion of incentives caused by the tax system

1.2.2 Condition for sound budget balance 4

State balanced-budget when revenues equal expenditures, but in fact, the absolute balance never happens, because absolute balance is not final goal, insteadly, government will adjust the use of state budget depending on the objective - optimal fiscal policy in other word However, they attempt to keep these gap is not

4 Author summarized from the dissustion with Professor Koji Fujimoto in December 2018 And documents prepared by Professor Fujimoto for Class 3: Macroeconomic policies in Developing countries Development Finance subject, Vietnam Japan University

dramatically, state budget deficit exceeds safety level and not affects to macroeconomics stability

There are two basic ways to help regulate the budget, which is to reduce expenditures and increase revenues In terms of spending, in order to decline expenditures, projects are required reasonable and effective from planning, implementation, control and evaluation

At revenue sides, in order to increase revenue, the government can borrow foreign debt, issue bonds and increase tax revenue here exclude the government directly involved in economic activities (Eshag, E 1983); government just keep roles what regulate and control the economy In other sides, in order to tax revenue records upward trend, government could increase tax payable by expanding taxe base, enacting new tax laws; However, government not only raise tax burdens, but also make efforts from the collection process, to real revenues close upto potential revenues at maximum

Optimal taxation system theory: When the policymaker formutates tax policy to

increase revenues of state budget, it is based on the theory of optimal taxation system and policy objectives

A optimal tax system is the set of taxes which maximizes social welfare, one of the objectives of optimal tax theory is to determine whether there are some general properties of all Pareto efficient tax systems that is properties which hold regardless

of the social welfare function (Stiglitz, J.E 1987) And a social welfare function bases on the utilities of individual in the society Generally, the optimal taxation theory points out that a stable tax base allowing to wide tax base, low tax rate, simply implementation

In theory, there is no complete perfect tax system While policymakers analyse, formulate any tax policies, they need considering four goals: The whole tax system where more efficiency or not? The taxation will remain social equity or not? Is it increase revenues in state budget? Is it impossible in implementation?

1.2.3 Determinants of stabilizing state budget in terms of tax

1.2.3.1 Macroeconomics stability

The concept of macroeconomic stability include not only price stability and sound fiscal policies, but also a well-functioning real economy, sustainable debt ratios and healthy public and private sector balance sheets The stability ralates to countercyclical macroeconimic policies including exchange rate, monetary, fiscal; and with capital management techniques together like capital account regulations and pridential rules incorporating macroeconomic dimentions; as well as the role of international financial institutions (Ocampo, J.A 2008)

Fiscal stabilization operates mainly through automatic stabilizers It can contribute

to macroeconomic stability through three main channels involves: (i) The automatic reduction in government saving during downturns and increase during upturns, cushioning shocks to national expenditure; (ii) Government can change public spending and tax instruments to offset business cycle flutuations; (iii) the structure

of the tax and transfer system can be designed to maximize economic efficiency and market flexibility, thereby enhancing the resilience of shocking in economy (Debrun, M X., & Kapoor, R 2010)

1.2.3.2 Tax regulations

Taxes are one of the sources of government and local revenue, used to pay and provide public services Based on the status of the macro-economy, the socio-economic situation, the payment balance, the government will adjust the fiscal policy in order to reach the goals Tax is neutral and should be reported, accountability ensures transparent and can be monitored

International intergration affects the number of tax revenue The government participates in free trade agreements, thereby gradually reducing tariffs to reduce tax revenues from customs On the other hand, partner countries that are mainly developed countries could regulate tariffs (anti-dumping tariffs) or quotas that will affect the exporting country, changing the balance of payments, affect to macroeconomics stability

Property tax is revenue of local government, although in OECD developed countries account for less than 3 percent of GDP (McCluskey W J & Franzsen

R C 2017) but plays an essential role to pay local public services, offset the central budget

1.2.3.3 A good tax structure

The requirements of a good tax structure are generally associated with a good tax applying to taxes in general and regard to property taxes, including (McCluskey, W J., & Franzsen, R C 2017):

i In Canon of Equity: the distribution of the tax should be equitable, in other words every taxpayer should be expected to pay a fair share of the tax

ii In Canon of Fairness: the tax structure should endeavor for fair and arbitrary administration It should also be understandable to the taxpayer iii In Canon of Economy: when compare to the revenue collected, the

non-administration and compliance cost of a tax should be as low as possible –

in other words it must be economical to collect

iv Tax obligations should be bases on benefit receivable from the enjoyment of

public services

v In Canon of Convenience, tax should be levied at the time, or in the manner that is most likely to be convenient for the taxpayer

vi And taxation should as much as possible avoid creating ―excess burdens‖

that would interfere with the efficient functioning of the host market

The most important issues impact to tax collection process involves information, data and collection implementation (Rosengard, 1998), in detail:

Information and data:

i To identify and describe the property

ii Property valuation; Determining the valuation value and accounting of tax

obligations

Implementation of collection:

i To prepare and issue tax invoices

ii Payment of tax collection

iii Enforcement those cases that do not voluntarily comply

It means that in order to tax collection process get highly effectiveness, the system

of information and data of land resources play a key role

1.2.4 Property tax versus state budget – relation

There is no fix definition of property tax in the world depending on tax scale but accoring the theory and regular in other countries, property tax is a real estate ad-valorem tax, in some case, it also included personal valued assessts, calculated and collected by a local government, which is paid by the owner of the property (Heller, 1974) The tax payable is calculated basing on the value of the owned property, including land The local government allocates this fund to water and sewer improvements provide law enforcement and fire service and other items deemed necessary

Property tax is one of taxation in state budget revenues, it is local revenue Almost local governments in the world rely, at least to some extent, on property taxation to pay for local services Economists have long argued that the property tax is a good tax for local government due to fairness in benefits received from local services, it also is not evade, promotes local autonomy and accountability The results recored from OECD give information that property tax revenues rarely exceed 3 percent of GDP in any countries and even less than (Slack, N E 2013) But property tax remains important revenue of local government to balance with central budget as well as improving quality of public services

Property tax involves a tax on residential property and a tax on non-residential property Almost countries taxes higher rate or levy on non-residential properties than on residential properties (Slack, N E 2013)

Property tax is a revenue stability There is some evidence that the property tax has

at least a proportion; and often a progressive effect on the distribution income In some circumstances actually improve the efficiency of resource use Because

property can be assessed by physical inspection, the tax is difficult to evade; indeed, local government officials are well situated to collect the tax The property tax can serve as a perfect tax to encourage more responsive, efficient, and accountable local governments; thus, it is a visible and politically sensitive revenue instrument (Alm,

J 2013)

1.2.5 Conceptual framework for property tax reform

The conceptual framework has been formulated by Jay K Rosengard (1998) including purposes, principles and process

The purpose is ensure the long-term generation of adequate local government discretionary resources This entails providing local government with more revenuw where the property tax yeils is insufficient and strengthening the future viability of property taxation by improving administrative cost-effectiveness, economic neutrality, and operational fairness whether or not revenue adequacy has already been achieved It is an inappropriate policy tool and poor administrative mechanism for guiding allocative decisions achiveing social goals recovering the cost of capital investments or pricing private goods

The principle of property tax reform in developing countries should be administrative and allocative efficiency, horizontal and vertical equity, as well as system sustainability These make the revenue will achive a financially viable, economically non-distortive, political fair, social just, and temporally enduring manner Reforming could helps minimize the costs and maximize the longevity of reform by: increasing coverage through establishment and maintenance of a broad tax base; emphasizing simplicity through promotion of transparent policies and administrative clarity; and enhancing buoyancy through routine indexing

The process to convert these structure in to practises in real should be an element stresses utilization of personal and institutional incentives, dissemination of public information an integrated perspective, and selective implementation This lead to changes in tax policies, administrative systems, and human behaviour The

reforming can minimize public, governmental, and political obstruction, misperception, risk, and thus maximize cooperation by: improving service, applying sanctions, promoting meritocracies, mounting multimedia campaigns, linking policies and practices as well as subsystems of field operations, phasing implementation activities, and upgrading existing systems

In the purpose part, this framework shows that the property tax is best suited to generating revenue to finance relatively modest public expenditures At the same time, the property tax in developing countries is a wealth tax on fixed assets to help finance local government provision of public facilities and services Traditionally It has been the revenue tools of local government for make payment to operation administration, public services But, the property tax has been a poor tools for guiding allocate decisions, achieve social objectives, cost recovery of capital investments, or pricing of private goods In detail of characteristics for property tax

in developing countries make a potentially effective mechanism for generating local government increase revenue In local revenue sides, these contributes typical a relatively insignificant portion of national tax revenue, but is commonly the major sorce of discretionary local government income This often causes policymakers to misjudge the strategic importance of property taxation to local jurisdictions Thus, the generic features of property taxation, together with adaptions to developing country environments, make it a potential effective mechanism for revenue of local government using to local public goods

Table 1.1: Conceptual framework for property tax reform 5

& Enhancing buoyancy

& Promoting meritocracies

&

Mounting multimedia campaigns

& Linking Phasing Upgrading

(Source: Jay K Rosengard (1998))

Incentives information Public Intergration selactivity Change

CHAPTER 2: STATUS OF STATE BUDGET AND LEGAL

FRAMEWORK OF PROPERTY TAX IN VIETNAM

2.1 Status of state budget in Vietnam

2.1.1 Overview of state budget revenue sources

According to law of state budget in Vietnam (2015), state budget revenues involves6:

i Taxes are paid by organizations and individuals according to tax laws

ii Fees paid by organizations and individuals according to law provisions iii Fees collected from service activities implemented by state agencies; In case

of contracting operating expenses, they are deducted

iv Charges collected from service activities performed by public non-business

units and State enterprises, after subtracting the deducted fertilizers to cover expenses according to law provisions

v State budget remittances from the State's economic activities

vi Mobilize contributions from agencies, organizations and individuals

according to the provisions of law

vii Revenues from the sale of state assets, including revenues from the transfer

of land use rights and land use purpose changes, managed by State agencies, units and organizations

viii Land use fees; land and water surface rent; money to use the sea area; rental

money and sale of state-owned houses

ix Revenues from property established by the State; collection of mineral

exploitation rights, collection of water exploitation rights

x Proceeds from the sanctioning of administrative violations, fines and other

confiscation according to the provisions of law

6

Vietnam Government (2016), Decree 163/2016/ND-CP, Decree detailed provisions for the implementation of a number of articles of the state budget law

xi Voluntary contributions of domestic and foreign organizations and

individuals

xii Non-refundable aids of the Governments of other countries, organizations

and individuals to the State, the Government of Vietnam and local state agencies

xiii Revenues from the financial reserve fund

2.1.2 Vietnam budget trend and budget deficits situation

Fiscal policy has an important role in stability and economic growth, however, there are always conflicts between spending needs and budget resources While the possibility of state budget collection is always constrained by various factors and difficult to go up, thus, securing the state budget balance has become a big challenge for the Government of Vietnam

Figure 2.1: The scale of budget revenues and expenditures balance with GDP in

(Source: Author calculated from GSO’s data)

In the recent period the pressure on expenditure led to pressure on revenue increase

to ensure the stability of the state budget Because the pressure to reduce budget

7

In 2017 is estimated data

revenue in the coming period will mainly come from the current budget-related policies that have not created sustainable revenues Although the tax revenue has continuously increased in the period of 2011-2016 (Figure 2.1), the proportion of tax mobilized from this period is only 76.1% of the total state budget revenue equivalent to the rate of the period 1996-2000

Revenues from non-renewable resources such as land and crude oil still account for 20% of the state budget balance in the period of 2009-2013 and about 18% in 2014 High oil prices can help the state budget exceed the estimate As in 2012 (reaching 166% of the estimate) it will also make the state meet difficulties today (in 2015 it

is estimated to reach only 65% of the estimate of crude oil revenues)

Figure 2.2: The budget deficit in 10-year period from 2007 to 2017

(Source: Vietnam GSO)

Figure 2.2 describes the structure of revenues in state budget, it recorded an upward trend; revenues from land, houses and accounted for significant propotion in general state budget revenue, namely 11.99% in estimate date 2017 During given period, the rate increased by 4.6% from 7.39% However, the reason of upward trend also is ubanization, land owners pay transfer using purposes In other

revenues parts, revenues maily collected from foreign enterprises, trading It is the result of attracting foreign investors have joined in Vietnam market and whole economic development, the total of these amounts is estimated at 2017 accounting for 19.53%

2.1.2 Structure of revenues in Vietnam state budget

In practice, figure 2.3 gives clearly information about the proportion of revenues in the state budget

Figure 2.3: The structure of revenues in Vietnam state budget from 2012-20178

(Sources: Vietnam GSO, 2017 is estimated data)

These source revenue from state owner enterprises, crude oil, customs recored downward trend compared to previous years, because of equitization of state-owned enterprises In the budget structure in Vietnam, state-owned enterprises contribute significantly to the budget, however, they have gradually limited their participation

in economic activities according to orientation reforming of government In addition, the revenue from natural resources is decreasing because this is a non-renewable energy source and has been exploited for a long time, the current reserves have been reduced, so the exploitation limit have been narrowing Revenue

non-Revenues from land, houses

Revenue from state owner enterprises

from foreign trade, customs fall because of international intergration Vietnam paticipates in trade agreements that commit reduce import tax on schedule, thus, this revenue will dramatically decrease in the following time

Revenues from land, houses accounted for 11.99% (estimated data) in 2017 At the same time, which involves both property tax and fees The property tax revenues accounted for average 0.15 percent in total revenue of state budget The number of collection result was not dramatically after 5-year implementation, but there is room

to increase in the next time In current regulations on property taxes, Vietnam has just started research since 2010 and has been implement for six years, from 2012 by have applied non-agricultural land use tax Both the tax base and the applied tax rate are still low for people to be familiar with the newly issued tax

2.2 Legal framework of revenues of property tax in Vietnam

In Vietnam, there are several revenues from assets in state budget, including three groups: The State has enacted the following property-related revenues that cover activities related to the establishment of ownership and use rights; in the use process and when transferring assets But only revenues in the use process is taxation, other

is fees due to land ownership rule At the moment, property tax in Vietnam involves (i) Agriculture land use tax; and (ii) Non-agriculture land use tax

2.2.1 Agriculture land use tax law

In Vietnam land law (2013), agricultural land includes:

i Annual crop land includes rice and other annual crop land;

ii Land for perennial crops;

iii Production forest land;

iv Protection forest land;

v Special-use forest land;

vi Aquaculture land;

vii Salt land;

viii Other agricultural land includes land used for the construction of greenhouses and other types of houses for cultivation purposes, including non-direct cultivation on land; build cages for cattle and poultry breeding and other animals permitted by law; land for cultivation, husbandry and aquaculture for study and research purposes; land for planting seedlings, breeds and land for planting flowers and ornamental plants;

Tax base:

The agricultural land use tax was first introduced in 1993, all organizations and individuals which use land for agricultural production are covered in this law In other words, that applies to the purpose forest, cultivation, aquaculture and agriculture land economy allocated

The tax base included three original components: land size, land categories, tax liability according to each category in the regulations In addition, the basis for calculating agricultural land use tax is area, land class and annual tax rate calculated

in kilograms of paddy per unit area of each land class

Tax exemption and reduction policies apply for reclaimed land in specified in the law In line reforming trends to reduce tax burden on agriculture economy propose

to abolish tax collection in the draft law

Taxable price: basing on productivity

Tax rate: The law classifies base on five physical characteristics following location,

climatic condition, irrigation, and fertility in order to formulate six categories for annual harvest and aquaculture; five categories for long tem production land

In the Article 8 of Decree 74/CP in October 25th 1993 declared: ― The annual harvest relates to short-term seasonal agricultural production Long-term production

is related to recurrent crops that do not require replanting annually such as palm oil There are three fundamental components of the tax base: the land size, the land categories, and tax liability applied to each category The law stipulates six categories for annual harvest and aquaculture land and five for long-term

production land The land classification is based on five physical characteristics, which include land fertility, location, climate conditions, and irrigation.‖

Table 2.3: Tax categories of agricultural Land Use tax

harvest for each crop in each region

2.2.2 Non-agriculture land use tax

This law puts a tax on non-agricultural land using excluding agricultural land and construction on land

Tax base: is determined by square and price tax calculated There are two land

categories in tax objects:

i Land in rural area, land in urban area;

ii Land for production and business which is non-agricultural purpose

including: industrial zone land; land for construction of production and business; Mineral exploitation and processing land; Land for production of construction materials and ceramics

Tax exemption: The following soil types are not tax payable, except for production

and business purposes

i Land uses for public purposes included: traffic and irrigation land; land for

construction of cultural, medical, educational and training and sport facilities for public purposes; land with historical-cultural relics, scenic spots; and other construction land according to government regulations

ii Land used by religious orgnization

iii Land for cemeteries and graveyards

iv Rivers, streams, canals, streams, and specialized water surfaces

v Land with buildings is communal houses, temples, shrines, pagodas, worship

houses and churches

vi Public land where construction of public agencies, public works, land used

for national defense and security purposes

vii Other non-agricultural land as prescribed by law

Moreover, to get the social objects, the regulations also exempt for disabled people, elderly people without support; priority family objects; people with meritorious services to the revolution

Another purpose is encouraging more investment, thus the law exempts tax for investment projects in geographical areas with difficult economic conditions; Welfare line such as health and education

Taxable price: Land prices for calculation of non-agricultural land use tax are land

price for use purposes promulgated by provincial-level People's Committees according to every five years

Tax rate:

Table 2.4: The tax rate of non-agricultural land use tax

Tax rate (%)

The excess area must not exceed 3 times the limit 0.07

The area of the area exceeds 3 times the limit 0.15

(Source: Vietnam Congress (2010) Law No.48/2010/QH12)

The limit is setted by the provincial People's Committee Tax rate of 0.03% for land

of apartments and underground ground construction; Non-agricultural production and business land; Land belongs to registered investor projects and approved by competent state agencies

The rate of 0.15% applies for land used improperly, unused land in accordance with regulations

Land encroachment and land use levy at the rate of 0.2% at the same time do not apply limits and tax payment is not a basis for recognizing land use rights with an area of encroachment or occupation

Collection: Annually, As a Vietnam regulation, the owner who has several land

parcels have to pay registering, declaring, calculating and paying taxes for each parcel of land with local ownership In addition, the taxpayer must also make a general declaration of all land in area in which taxpayers choose to determine the taxable land limit After subtracting the tax amount already paid in the localities where the land use right is located, the remaining difference will be paid in the locality where the taxpayer has chosen The regulation aims to limit the restrictions

on land speculation leading to abandonment and waste of land

2.3 Results of property tax implementation

2.3.1 Non-agriculture land use tax

2.3.1.1 Non-agriculture land use tax: Results of tax revenues

In government's report, the non-agricultural land use tax recorded an average revenue of about VND 1300 billion per year, an average increase of 1.3% From

2012 to 2016, revenue accounted for an average of 0.15% of total state budget revenue, equivalent to about 0.3% of local budget revenue

Although the amount of land use tax is not large amount, in recent years it is a stable and regular source of income, contributing to mobilizing land users' contributions to the state budget, creating revenue sources for local budgets to

perform the spending tasks of the local state budget.9 Besides, this also sever better managing requirements and monitoring macroeconomics To increase fair policies among classes in society, funding of land management, then, contributing to the local spending

Table 2.3: Revenue of non-agricultural land using tax (2012-2017)

Unit: Billion Dong

(Source: Ministry of Finance)

In the draft Law on agricultural land use tax in 2010 estimated that the agricultural land use tax revenue reached about VND 1,696 billion, including revenue, from residential land and from production and business land respectively 1,258 billion and 438 billion These estimates based on government land prices (2008) 11; and taxable land area according to the 2005 land inventory result12 After

1 Total state budget revenue 754,572 828,348 877,697 966,870 1,039,000 1,212,180

2 Total domestic revenue 477,106 567,403 593,560 740,932 829,000 990,280

3 Total local budget revenue 336,937 368,833 377,707 450,977 544,425 456,092

five years of implementation, the result achived lower than estimated, the average annual revenue is VND 1,310 billion, equivalent to 0.14% of the total state budget revenue - a very small and insignificant revenue figure Similarly when comparing the budget contribution of total assets and regular revenues from assets Moreover, the area of non-agricultural land wider and wider due to convert using purpose, therefore, the actual revenue obtained is lower than the potential

2.3.1.2 Non-agriculture land use tax: tax collection results

Information and data: Applying to apply information technology in tax

administration to create information data:

i Scope: nearly 700 districts

ii Number of taxpayers: More than 17 million people

iii Personal ownership (nearly 18 million plots ~ more than 46.2 billion m2);

Ownership of the organization (nearly 80,000 land plots ~ more than 1.2 billion m2)

iv To issues 14.1 million new tax codes and reconfirm 2.3 million for

non-agricultural land users

v However, the management system by technology when exporting data has

not met the demand for reporting, so it is necessary to improve the forms The data of taxpayers is still updating but not yet completely

vi The complex tax exemption regulations and required documents also lead to

the management process more difficult to monitor

Implementation of collection:

i Management office‘ government: Training to improve professional skills for

tax official‘s employee Procedures under the one-door mechanism (procedures are handled with a tax officer, making it more convenient for taxpayers)

ii Propagate and guide taxpayers

iii ―Tax books‖- for each tax payables are prepared and monitored annually to

manage change and control

iv The issuance of tax codes is carried out at the same time with the import data

process from tax declarations to ensure sufficient and timely data updates and avoid lacking information

v Registration tax and payment creates conditions for taxpayers to own many

land plots Taxpayers make a declaration with each local land plot, then make a general declaration in a main locality that they choosen, the difference will be paid in this locality

2.3.2 Agriculture land use tax

2.3.2.1 Agriculture land use tax: Result of tax revenues

According to current appling regulations (at June 2019), Resolution 55/2010 / QH12 is amended and supplemented by Resolution No 28/2016 / QH13 on exemption and reduction of agricultural land use tax applied from 01 On January 1,

2017, this agricultural land use tax exemption and reduction policy is applied until December 31, 2020

Table 2.4: Revenue of agricultural land using tax (2007-2017)

Unit: Billion Dong

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 13 201714

Revenue

(billion Dong) 113.0 97.0 67.0 56.0 72.0 69.0 69.0 61.0 58.0 60.0 39.0 Percentage of

The purpose of this tax exemption and reduction policy is to encourage investment

in agriculture and rural areas; restructuring agriculture in the direction of large-scale commodity production, helping to improve Vietnam's domestic and international agricultural product competitiveness; encourage concentration and accumulation of agricultural land

From the data of General Statictic Office, the agricultural land use tax revenue has decreased gradually from 2007 to 2017, the rate in the state budget accounted for 0.02% on average - not significant

2.3.2.1 Agriculture land use tax: Tax collection result

Collection process, information managenment

- Tax declaration: Agricultural land use taxpayers shall submit tax declarations to local tax office; In cases where there is an increase or decrease in the area subject to agricultural land use tax in the year, taxpayers must submit tax declaration within ten days after the increase or decrease of the land area; In case of exemption from agricultural land use tax, taxpayers must still submit agricultural land use tax declaration dossiers and papers related to tax exemption determination of the first year of the tax exemption period

By tax declaration, the public management office could record and control land using Moreover, tax office has recorded the amount of tax exemption

However, the tax exemption according to Degree No 28/2016/QH14 applied from 01/01/2017 has affected to management process of agriculture land Because, it reduces the frequence of monitoring by government office when tax is a tool to manage agriculture land

In short, comparing the revenue of both non-agricultural and agricultural tax with the property tax results of developing countries analyzed shows that:

The average annual growth rate of 1300 billion VND, equivalent to 1.3% per year despite not falling like Jamaica but much lower than the Philippines and Chile increases of 4.0% and 4.4% respectively, expecially in Indonesia with 10.2% The

proportion of revenue is insignificant in the total budget revenue (approximate 0.13% to 0.16%), compared with the three countries accounting for about 1% -3%

of the total state budget revenue

Because the tax base classifies into land class and tariff schedule progresses, the tax rate is less changed during the period of data collection In addition, the area of non-agricultural land increased as a result of the urbanization process, land users converted land use purposes from agricultural land to non-agricultural land Therefore, it can be speculated that the absolute increase in revenue will be lower, the increase in revenue is not due to the effect characteristic of the tax base but also due to the increase in taxable land area

Comparing to total state budget revenue, property tax revenues accounted for an average of 0.15% during the five-years-period from 2012 to 2017 Besides the rate

of domestic and local budget revenues are 0.2% and 0.31% respectively This result

is the lowest when compared to the developing countries above

Although revenue from assets accounted for 10.26% of the total average revenue in five years, the percentage of property tax accounts for only 0.15% In the total local budget revenue, revenue by property tax accounts for 0.31% of the total 22.81% of all property tax to the total local budget (Appendix 3) Despite revenues from land, houses accounted for 11.99%, the data indicates that the main source of revenue of the local budget comes mainly from the revenues when establishing ownership and use rights of assets (including land use fees, land rent, and sale of assets State-owned, registration fee), not from revenue during property use time, which is more stable and advailable

CHAPTER 3: EXPERIECES IN STABILIZING STATE BUDGET BY

REFORMING PROPERTY TAX IN SOME COUNTRIES

In fact, the formulate and implementation property tax in each countries are different, and there has not clear definition of this in the word However, several group of countries have similar in economic conditions, public administration, objectives, human, thus this research select and compare the property tax system in Vietnam with developing countries, including Indonesia, Philipines, Chile, Jamaica15, corresponding data of the first period of reform of countries – in 1989

Table 3.1: Comparison between Vietnam and other developing countries

GDP by PPP (USD)

GDP growth rate (%)

Population density (people / km2)

Urban population rate (%)

These countries also developing countries and has conducted the reforming before

So, learning from experiences in other countries is necessary in formulation and implementation in Vietnam The reason why this research take data of these countries by 1998 is the early period these countries conducting to reform property tax like this period in Vietnam at the moment