Need to abolish preferential treatment on tax and land to avoid pushing the race to bottom

Prof. Nguyen Duc Thanh made a speech at the conference.

Competition on preferential tariff

According to a report of the Vietnam Institute for Economic and Policy Research (VERP), the ASEAN region was facing major challenges during the Covid-19 pandemic. Besides the economic and health crisis, FDI that flowed to developing countries in Asia was forcasted to fall to 30-40% and tax revenues faced great trouble.

Therefore, ASEAN countries are competing in a race to reduce corporate income tax rates and offering huge tax incentives for multinational corporations without any real benefits.

According to VERP, instead of focusing on the key factor in deciding the FDI sector as buildling a business environment that has proven to be key element, governments in the region are adopting tax policies that are only beneficial for large foreign companies.

The VERP report showed the average corporate income tax rate of ASEAN has fallen from 25.1% in 2010 to 21.7% in 2020. Besides cutting corporate income tax rates, the application of other major incentives based on profits to attract FDI such as grace of tax was also very popular in ASEAN countries. The cost of excess tax incentives is likely to exceed benefits brought by FDI. The cutting corporate income tax excessively poses a threat to national revenues in the form of tax expenditure.

“Tax incentives could cause negative impact on economic efficiency. It was difficult for ASEAN countries to cope with those consequences, especially in the context of the economic and health crisis that all countries are facing. We need to choose between building sustainable societies with good land policies, or just benefiting companies that were working to minimise their tax bills. Whose interests would come first?” Ah Maftuchan, Director of PRAKARSA said.

Besides tax incentives, the use of non-tariff incentives was also widespread in ASEAN countries and exacerbated the race to the bottom in the region. Competition in the provision of non-tax incentives was illustrated clearly in preferential tariffs of land. Long-term land lease options were available in all ASEAN countries. For example, Thailand even allowed foreign investors to own land in some special cases. Or like Vietnam and Laos exempting or cutting land rent for investment projects in remote areas or promoting production.

Race is pushed down to bottom

Prof. Nguyen Duc Thanh, founder and chief advisor of Vietnam Institute for Economic and Policy Research, said while the competition of the business environment was a race to lead, the competition for the preferential treatment of tax and land was a race to the bottom. The provision of preferential treatment for land, especially extended land lease terms, lack of transparency could increase the risk of corruption.

“These unnecessary tax and non-tax incentives affect a nation's ability to mobilise domestic revenue, from that it would affect spending for essential public services in order to fight poverty and reduce inequality. It was absurd that those policies were not necessarily effective in attracting FDI inflows as policymakers often thought,” Prof. Thanh said.

According to VERP, many studies showed indicators of the new business environment were decisive factors in the selection of FDI investment locations, namely economic stability, political stability and domestic market, transparent legal framework, quality of labor, quality of infrastructure, quality of roads.

Therefore, VERP recommended ASEAN countries should take unified actions such as making a white and blacklist of tax incentives; prevent competition for making land incentives; agreeing on a minimum tax rate for the entire region; developing rules for well management of investment incentives; and unify the list of business environment factors for attracting FDI.

“ASEAN countries need to act together in the fight against poverty for the lives of millions of people in the region. It is the time to acknowledge that preferential tariff and non-preferential tariff are exacerbating economic and social inequality and not the key to sustainable foreign investment. Therefore, all ASEAN member countries need to unite and prioritise improving the business environment instead of offering ineffective incentives,” Mustafa Talpur, Regional Manager of narrowing the gap campaign, Oxfam in Asia, stressed.