Giáo trình Taxation - Chapter 1: Introduction of Tax System in Vietnam

TAXATION Chapter 1: Introduction of Tax System in Vietnam Learning Objectives • LO 1-1: Explain concept, nature and characteristics of taxation. • LO 1-2: Analyze functions and roles of taxation in the market economy. • LO 1-3: Distinguish and recognize direct taxes and indirect taxes. • LO 1-4: Describe components and construction principles of a tax law. • LO 1-5: Understand Vietnamese tax system. Concept of Taxation • Taxation is an very important financial tool attached to the existence and development of any state. • All countries in the world use tax instruments to participate in the implementation of their functions and duties. • Taxation affects all activities of organizations and individuals in society. ✓ “Things as certain as death and taxes, can be more firmly believed” (Daniel Defoe, 1726, The Political History of the Devil). ✓ “In this world nothing can be said to be certain, except death and taxes” (Benjamin Franklin, The Works of Benjamin Franklin, 1817). LO 1-1: Explain concept, nature and characteristics of taxation. Concept of Taxation (cont.) • Generally, tax is an amount paid by organizations and individuals for governments to cover their expenditures therefore taxation is associated with the existence and development of the state. • Theoretically, citizens can get a certain number of benefits from the government for taxes they have paid. However, the value of certain benefits from the government that a citizen can receive does not correspond to the amount of tax they have to pay. • “Taxes are the enforced proportional contribution from persons and property levied by the State by virtue of its sovereignty for the support of government and for all public needs” (Thomas. M. Cooley, A Treatise on the Law of Taxation). Nature of Taxation • Tax expresses economic relations between states and organizations and individuals in society. • States, with their power, engage redistribution of total gross domestic product (GDP) in order to create the state budget funds to meet states’ needs of expenditure. • The state authority is the political and social basis leading to the birth of taxation. • Economic basis having meaning in decisions on tax revenues is the growth of the economy. This requires the state to develop tax policies in relation to the growth of the economy. Characteristics of Taxation 1)Mandatory: • Taxation represents the relationship between states and organizations and individuals. • States are political institutions having the supreme power in issuance of tax laws and enforcement of organizations and individuals to have to implement their tax duties. • States can not rely on the willingness of taxpayers. Human being has known tax evasion since appearance of taxation in order to pay the minimum tax. • To ensure tax revenue for states’ budget, taxes are defined by the legislation to increase the mandatory (coerciveness) of tax. Characteristics of Taxation (cont.) 2)Taxes are not directly refundable: • Through taxes, income from organizations and individuals to be transferred to the state. • States reserve the right to use tax revenue for the common benefits of society. • Theoretically, the slogan "Taxation is the obligations and rights of citizens" should not be interpreted in view of exchange of equal value. ➢ Interests taxpayers receive will not correspond to the amount they pay. The public services aimed at the common benefits of society, especially the interests of low-income people. Characteristics of Taxation (cont.) 3)Taxes used for public expenditures: • The explanation of U.S. Supreme Court “A tax is not an assessment of benefits. It is, as we have said, a means of distributing the burden of the cost of government. The only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes” (Available at https://supreme.justia.com/cases/federal/us/301/495/case.html) • Clearly public expenditure is very meaningful to society. Meanwhile, the majority of these expenditures are funded primarily from tax revenues. Role of Taxation 1)A tool to mobilize financial resources to meet governments’ needs of expenditures: • The fundamental purpose of taxation is to finance government expenditure. This is the most important role, associated with the history of taxation. ➢paying salaries for civil servants; ➢ funding long term projects such as construction of schools, hospitals, roads, etc. LO 1-2: Analyze the role of taxation in the market economy. Role of Taxation (cont.) 2)A tool to regulate the macro social economics: Tax policies: ➢ contribute to orient domestic investment, attracting foreign investment, in line with the social economic development strategy of a state. ➢ encourage or restrict business activities, contributing to establishment of the balance relationship between supply and demand of goods or services and the impact on the market balance. ➢ contribute to implement states’ foreign economic policies in each period, aiming at the economic development when to join the regional economy and globalization. Role of Taxation (cont.) 3)A tool to regulate income and implement social equality: Tax policies: ➢ intervene the process of distributing income and social wealth, limiting the big gap of living standards and income among people classes in the society. ➢distribute income among people classes via direct tax types. ➢orient consumption via indirect tax types such as excise tax. Classification of Taxes • Direct Taxes ➢ are levied on the income or profits of a person or an organization who pays them, rather than on goods or services. ➢ create a clear sense and common reaction of taxpayers. They are the final tax burden and all that taxpayers have to suffer. For direct taxes, taxpayers are those who incur taxes. ➢ depend on society’s income→ less stable than indirect taxes. ➢ tend to be progressive tax and fair vertically. People with higher incomes will have to pay more income taxes. This progressive highlights fairness of direct taxes than indirect taxes. LO 1-3: Distinguish and recognize direct taxes and indirect taxes. Classification of Taxes (cont.) • Indirect Taxes ➢ are levied on goods or services. ➢ considered as a sum of the value added to the selling price of goods and services that consumers must pay. Though consumers are people who incur taxes, sellers are those who are statutory to pay taxes. ➢ cause little reaction to taxpayers than direct taxes since they do not incur taxes. Indirect taxes incur when consumer activities should take place. ➢ more stable than direct taxes. Even in depressed economic conditions, essential needs must still be met. ➢ tend to be regressive→ the biggest disadvantage of indirect taxes. Components of A Tax Law 1)Name of tax law: • should be short and pointed out the object and scope of such taxes as these are the two issues that concern taxpayers first. 2)Taxable objects: • include goods, services, income or assets. The name of the taxes are often derived from taxable objects such as personal income tax, corporate income tax, VAT, etc. LO 1-4: Describe components and construction principles of a tax law. Components of A Tax Law (cont.) 3)Non-taxable objects: • are goods, services, income or property which are listed in the list of non-taxable objects specified by a tax law. 4)Taxpayers: • are organizations (including organizations authorized to collect taxes) and individuals who have responsibility to pay taxes according to law. • Depending on the nature of direct or indirect taxes, taxpayers may be taxed or just people who have a legal responsibility to pay the taxes received by the taxable person. Components of A Tax Law (cont.) 5)Tax determination bases: • Each tax has tax calculation base. • Tax bases include the quantity of goods / services, unit price, unit, taxable income, etc. • When constructing a tax law, governments need to define tax bases so that taxpayers cannot easily evade or conceal. Components of A Tax Law (cont.) 6)Tax rates: rates or amounts, which is calculated on the basis of tax revenue. ▪ 4 types of tax rates: Absolute tax rate Proportional tax rate Progressive tax rate Regressive tax rate ▪ defined by an absolute figure; ▪ stable over a long time, simple, easy to calculate; ▪ vulnerable to be backward, not really fair in regulating income of taxpayers. ▪ also referred to as a flat tax; ▪ assesses the same tax rate to taxpayers regardless of tax calculation bases; ▪ stable, simple, easy to calculate, popularly used, not affected by market prices. ▪ taxable incomes are not regulated really fair. ▪ is a tax rate specified as a percentage and increases with the increase of tax bases; → tax rate schedule will be more levels; ▪ regulate income of tax objects fairly; ▪ complex and not easy to calculate, often cause confusion of high taxes; ▪ 2 kinds: partly progressive tax rates and fully progressive tax rates. ▪ is a decreasing ladder tax rate while increasing tax bases.; ▪ unfair because individuals with lower tax bases will pay higher tax. Components of A Tax Law (cont.) 7)Tax exemption, tax reduction: • substantially are taxes payable but left to taxpayers. • totally different from non-taxable cases stipulated in a tax law. • assist to create fairness in regulating income between organizations and individuals, assisting for taxpayers who have difficulty in doing business. • allow states use tax instruments flexibly, helping tax policies to access to specific cases. • also have negative effects such as complicating tax laws, increasing powers for tax authorities, being used to seek illegal interests and undermining the rigor of a tax law. Principles of Taxation 1) Fairness/Justice: Tax should be levied fairly so that: ✓ The same amount is paid by persons or entities that are equal in earnings or wealth (horizontal equity). ✓ The contribution in tax should increase as the taxable income increases (vertical equity). 2) Convenience: ✓ Under normal circumstances, a taxpayer should not undergo undue difficulty to pay tax. ✓ Therefore, the place, medium, mode, manner and time of payment should not be an extra burden to the taxpayer. Principles of Taxation (cont.) 3) Certainty: ✓ A good tax system is one where the taxes are well understood by the payers and collectors. ✓ The time and reason of payment as well as the amount to be paid by an individual should be well documented and certain or known. 4) Economical: ✓ The administrative cost of collecting taxes should be kept as low as possible to both the collecting agent and the taxpayer. ✓ Likewise, the cost of compliance to the taxpayer should be as low as possible. Principles of Taxation (cont.) 5) Simplicity: ✓ The type of tax and the method of assessment and collection must be simple enough to be understood by both the taxpayers and the collectors. ✓ Complicated taxes lead to disputes, delays, corruption, avoidance and high costs of collection in terms of time and resources. 6) Ability to Pay: ✓ The tax should not take away so much of the income being taxed as to discourage the performance or participating in the tax base. Tax System in Vietnam ▪ Current tax policies of Vietnam: LO 1-5: Understand Vietnamese tax system. ✓ Law on Valued Added Tax ✓ Law on Agricultural Land Use Right ✓ Law on Excise Tax ✓ Law on Non-Agricultural Land Use right ✓ Law on Export and Import Duties ✓ Law on Royalties ✓ Law on Corporate Income Tax ✓ Law on Environmental Protection Tax ✓ Law on Personal Income Tax ✓ Business License Tax (converted to License Fees from 2017) Tax System in Vietnam (cont.) ▪ Structure of Vietnamese Tax System: Constitution National Assembly (NA) Laws, Ordinances, Resolutions of NA’s Standing Committee National Assembly, Standing Committee of National Assembly Decrees, Decisions Government, Prime Minister Circulars, Decisions, Official Letters Ministries Tax System in Vietnam (cont.) ▪ Structure of Vietnamese Tax System: Ministry of Finance General of Customs General Department of Taxation Customs Departments Border Customs Offices Tax Offices Tax Departments • State companies • Foreign capital companies • Ltd, Sole proprietorships • Small companies • Individuals, business households