In their latest rankings of 175 economies evaluating ease-of-business, the World Bank and the International Finance Corporation put Viet Nam at 104, a drop of 6 ranks from last year’s rating. The research reveals that starting a business in Viet Nam is a time-consuming and cumbersome process.

Given the fact that Viet Nam is trying to improve its business environment and join the World Trade Organisation, the ratings drop might surprise some optimists as it signals that Viet Nam’s national regulations may constrain business more than they enhance it.

The recent international comparison should serve as a wake-up call to the nation: Viet Nam is not doing enough while other countries do better and improve faster.

The rankings argue that Viet Nam lags behind other economies in starting a business (a drop of 8 ranks from last year), registering property (-4), obtaining credit (-7), paying taxes (-4), trading across borders (-7), enforcing contracts (-4), closing a business (-11). One the other hand, the country’s biggest improvements have come in employing workers (+33) and dealing with licenses (+3).

The laborious and costly process of launching a business in Viet Nam is still daunting. According to the survey, entrepreneurs can expect to go through at least 11 steps to launch a business in a process that takes 50 days on average, costing as much as 44.5 per cent of the country’s per capita gross national income (GNI).

After that, average start-up entrepreneurs have to go through 14 steps and endure a 133-day licensing and permit period to ensure compliance with national regulations. In order to register property, an average independent business will have to go through 4 phases over 67 days. The cost to register property, according to the report, is 1.2 per cent of the overall property value.

The report calculated 37 steps and 295 days on average to enforce commercial contracts in Viet Nam while the average cost of enforcing contracts is 31.04 per cent of debts owed. The process to resolve bankruptcies takes 5 years and costs 14.50 per cent of the estate value. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is 17.95.

Although the nominal corporate tax rate in Viet Nam is 28 per cent, the report says that the average entrepreneur pays 41.58 per cent of gross profits on taxes through 32 payments and spends 1,050 hours a year completing a tax settlement. Some tax collectors do not accept many expenses declared by companies as tax-deductible, causing a difference in rates.

S&P credit ratings up

In another rating, Standard & Poor’s last week upgraded Viet Nam’s long-term foreign and local currency sovereign credit ratings to ‘BB’ and ‘BB+’, from ‘BB-’ and ‘BB’, respectively.

The ratings firm’s upgrading of Viet Nam’s foreign and local currency ratings reflects the increased economic growth potential of Viet Nam thanks to the ongoing efforts of the government to improve public infrastructure and the investment climate.

Measures to introduce foreign participation in the domestic banking system have also laid the foundation for greater financial stability in the future. The ratings firm observes that a resulting surge in future economic growth and financial stability would give the government greater flexibility in addressing structural weaknesses in the Vietnamese economy, particularly the undercapitalised banking system.

Despite the improvement in the ratings, Standard and Poor’s says Viet Nam is still in an early stage of transition toward a market economy and State-owned enterprises and banks are not yet sufficiently restructured.

"There is also a lack of information transparency regarding economic and financial development due to incompleteness and the absence of timeliness for data releases," said the firm.

The ratings firm concluded that while the economy should grow robustly in the next few years, its development remains immature and growth is below its achievable potential.

Income tax set to expand

Foreign earners in Viet Nam will have to pay higher income taxes if the current draft of the Personal Income Tax Law is adopted to become effective in 2009.

The draft, released by the Ministry of Finance last week, will be applicable to both local and foreign income earners as well as household businesses. Because the starting taxable income of VND4 or 5 million will be applied across the board, foreigners with an income of VND15-120 million a month will see their tax increase by VND400,000-2.4 million. The starting taxable income for foreigners now is VND8 million and income over VND80 million is subject to the highest rate of 40 per cent.

But unlike current income tax regulations, the draft law imposes income tax on other sources of income such as loans, deposits, dividends, capital transfer, and real estate sales. Income from savings deposits over VND5 million a month will be subject to a 5 per cent tax rate and income from real estate sales will be taxed at 25 per cent, excepting those owned 10 or more years.

The draft law provides deductibles for dependents, an improvement over previous drafts and current regulations.

One of the concerns raised after the draft was published is the effectiveness of verifying the status of dependents. In a family having many income earners, it is difficult to verify who will be responsible for their parents’ support in order to enjoy dependent tax-deductibles. For tax imposed on savings deposits, it would be difficult to protect privacy. Tax collectors would also have a hard time dealing with depositors split their savings in different banks to evade tax.

It seems tax officials are struggling with the desire to draft a tax law that is equitable to all amidst weak tax infrastructure where declaration and calculation are questionable.

In order to enforce a new tax law, it is vital that tax officials can prove to taxpayers that tax collection is equally applied, because if taxpayer know that high-income earners like singers, self-employed doctors and lawyers are not properly taxed, they will continue to find faults with new drafts.

Source: Vietnamnews