FDI: Why are revenues to the budget low despite high investment capital?

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Budget revenues from FDI enterprises in the first four months accounted for 31.7% of the estimates. Photo: H.Anh.

Not be a concern

According to statistics from the Foreign Investment Agency and the Ministry of Planning and Investment, in the first four months of 2017, the total capital of new registration, addition, contribution and share purchases reached US $ 10.95 billion, increasing 40.5% compared to the same period in 2016. Noteworthy, 345 times of projects registered to increase their investment capital worth US $ 4.36 billion, increasing US $ 4.36 billion, equivalent to 241.8% compared to same period in 2016.

According to Phan Huu Thang, former Director of the Foreign Investment Agency, the increase of additional registered capital of 241% was a good sign because FDI enterprises increased their investment capital meaning that they were performing better and trust in investment environment in Vietnam more.

However, the analysis of some related data showed that, although investment capital in general, including the sharp increase of additional registered capital of the FDI sector, in the first four months of the year, the payment to the budget of this sector was behind the schedule. According to the General Statistics Office (GSO), the revenues from FDI (excluding crude oil) in the first four months reached 47.3 trillion VND, equivalent to 23.5% of the estimate. Compared to the other two remaining sectors, the private enterprise sector and the SOE sector, the revenue from the FDI sector was also lower when tax revenues from the private enterprise sector reached 52.1 trillion VND and from SOE sector reached 49.4 trillion VND. The data from the General Department of Taxation pointed that by the end of April, some revenues still did not ensure the budget estimate schedule, including revenues from the FDI sector, reached 31.7% of the estimate.

Regarding this, Mr. Phan Huu Thang said that in general, the budget revenues from the FDI sector in the next year was also higher than those in the previous year. But due to the bit difference between Vietnam’s accounting system and other countries’, when FDI enterprises often account and close books in March of next year, so this is the time that enterprises summarize their performance, affecting to system updates. In addition, revenues from trade and payment in the first quarter are always slower than the rest quarters and normally the revenues from the rest quarters will increase and compensate for the shortage of the first quarter, so that the overall revenues of next year will be higher than the previous year. Therefore, the slow budget collection in the first quarter is not a concern.

In addition, according to objective statements from competent authorities, in the first quarter of 2017, the economy in general had many difficulties when GDP growth reached only 5.1%, much lower than target set for 2017, the industrial production index rose by 5.1%, much lower than the 7.4% of the first four months in 2016. Some sectors which have a large contribution to the state budget grew slowly, even declined significantly compared to the same period in 2016 such as the processing sector, which was one of the sectors accounting for 70% of FDI capital. This makes the contribution of the FDI sector to the budget fail to the estimate

Talking with a Customs Newspaper, a representative of an FDI enterprise investing in the Central Highlands said his company was facing many difficulties due to the acquisition of this project from the Vietnamese side. Because the assessment of the project was not good, when starting operation, his company knew that the infrastructure of the project has degraded much more than its information provided by the seller. "So far in the second year, but my company has not completed the reconstruction because the project’s infrastructure has damaged more seriously than the initial assessment, we lost the opportunity to soon get revenues, while the reconstruction was planned to take only 3 months”. According to the representative, the bad assessment made revenues and profits not reach as expected, affecting the budget payment because the time of CIT exemption was over.

Good evaluation as a part of improving investment efficiency

According to experts, in 2016 as well as in the beginning of 2017, the FDI enterprises had certain difficulties affecting the efficiency of their business and production, thereby affecting to the tax payment. Each sector had different difficulties, but in general, the political instability and the world economy in the recent time also partly affected the enterprises. For example, Mr. Donal Trump was elected president of the United States with changes in trade policy and the Brexit event in Europe. Accordingly, countries began to turn to protectionism, affecting the world trade, exports in general including exports of countries that were investing in Vietnam. In addition, internal changes of the Samsung Group in Korea also affected the production and business of Samsung in Vietnam, because this enterprise accounted for a large proportion of foreign investment in Vietnam.

Regarding the low budget revenues from FDI enterprise, Mr. Nguyen Van Toan, an expert on foreign investment, said that we gained many other benefits not only money from the foreign investment. Budget revenues were just one of the benefits from FDI, but of course, the large budget revenues were much better.

Talking about the reason of late payment of the FDI sector, Nguyen Van Toan said, besides revealed transfer pricing such as the selling price was not as same as the original price, one of the reasons for late payment or low revenues to the state budget of the FDI enterprises was ineffective management. Thereby the real profits of FDI enterprise were not revealed 100%.

Mr. Toan also said that in all revenues from FDI, the revenues from land use fee was not significant, but the revenue from CIT was not higher than other fields, meanwhile, frankly, "if there is no profit, FDI companies do not invest in anything." In addition, many FDI enterprises established more subsidiaries, so it might be suffer from the loss in first few years, and took more time to balance their capital and then could get profits to pay taxes.

Mr. Nguyen Van Toan also emphasised that the low budget revenues from FDI sector were due to a calculation of depreciation at the maximum permitted by law. For example, FDI enterprises will calculate the depreciation for a longer period and increase the depreciation to reduce profits. In many cases, we did not capture the price of input materials such as the value of materials, machinery and equipment, regardless the value of technology. These made product’s price high and profit reduced and if they implemented the transfer pricing and prepared documents in accordance with the law, we could not do anything as well as control. He also noted that our management was not qualified to collect full taxes, but if we implemented the tax collection tightly, it would affect the investment.

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Relating to transfer pricing, tax evasion, Assoc Prof. Dr.. Dinh Trong Trinh, Head of International Financial Management Subject, International Finance Department (Financial Academy) have ever commented that all FDI enterprises transfer their prices, only in which form (simply or complicated), much or little. In addition, he noted, we must pay attention to the investment efficiency upon attracting FDI, Many experts and managers thought that the efficiency was the profit of investors rather than calculating whether the project brings actual financial efficiency or not and what benefits to the investment recipient. If we evaluate the project strictly, the project will not be priced up and ensure the profits of foreign investors and tax payment and bring economic benefits to Vietnam. "The efficiency for recipients must be proportionate, but the amount of collected tax and gained economic benefits do not meet the desire of the Vietnamese side when the expense for attracting FDI do not match with the inflow of FDI investments into Vietnam as well as revenues of FDI enterprises. We must further improve this great financial weakness in the coming time to cut down the obstacles in the economy and select good and true investors”, Mr. Trinh stressed.