The World Bank Support Program
For the Implementation of Vietnam Domestic Resource Mobilization Plan 2016-2020
Scoping Mission -- November 9-20, 2015
1. A World Bank mission visited Vietnam from 9 to 20 November 2015 to identify the possibility for continued support to tax policy and administration reform in response to request of the Ministry of Finance. The mission was led by Mr. Robert Taliercio, Practice Manager (GGODR) and consisted of Rich Stern, Lead Public Sector Specialist (GGODR), Duc Minh Pham, Senior Economist (GGODR), Daniel Alvarez, Senior Public Sector Specialist (GGODR), Miki Matsuura, Public Sector Specialist (GGODR), Viet Anh Nguyen, Operations Officer (GTCDR), and Khanh-Linh Thi Le, Program Assistant (EACVF).
2. The mission met with the staff and the management of the Ministry of Finance (MOF) and the General Department of Taxation (GDT), comprising of the International Corporation Department and Tax Policy Department of the MOF, functional departments of the GDT, and Tax Departments of Hanoi, Ho Chi Minh City and Vung-Tau Province. The wrap-up meeting was held between Ms. Victoria Kwakwa, Country Director of the World Bank in Vietnam and Mr. Do Hoang Anh Tuan, Vice Minister of Finance. The mission would like to express our great appreciations to the counterparts for their excellent cooperation during the mission. The content of this Aide-Memoire was agreed between the mission and the Ministry of Finance and cleared by Mr. Robert Taliercio, Practice Manager (GGODR).
I. PROPOSED SUPPORT PROGRAM
3. The mission discussed with the MOF and GDT on a proposed program to support Vietnam implementating Domestic Resource Mobilization Implementation Plan 2016-2020 -- the second 5-year plan to achieve the objectives envisioned under the Tax Reform Strategy 2011-2020. The support program builds on the Tax Reform Strategy 2011-2020 issued by the Prime Minister Decision 723/QD-TTg dated May 17, 2011, and the report "Needs Assessment and Proposed Support of the Development Partnership" prepared by the World Bank in collaboration with the Ministry of Finance, and other development partners for the Public Finance Partner Group (PFPG) meeting dated July 23, 2015. It was agreed that the proposed support could cover comprehensive areas of tax policy and administration reforms, supporting operational improvement, institutional development, organizational restructuring, and human capital building for the entire revenue management system. Activities highlighted in this Aide-Memoire are those proposed by the MOF and GDT based on the above mentioned Needs Assessment.
4. The key development objectives of the proposed support program are to (i) enhance sustainable domestic resource mobilization to address sources of tax base errosion to support revenue growth and ensure the government’s increasing spending needs for social and economic development; (ii) facilitate further global integration and achieve sustainable development objectives though a more efficient and neutral tax system; (iii) improve business climate and private sector development through a service-oriented revenue administration and lower taxpayer compliance costs; and (iv) support a smooth transition to achieve middle-income status by leveraging reduced reliance on ODA source of financing for growth and enhanced country ownership over the development process.
B. Sectoral Context and Rationale for World Bank Group Engagement
5. The tax reform process in Vietnam was launched in the early 1990s and has gone through three phases since. The first phase (1990-1999) had introduced major changes in the tax policy regime, in particular in the replacement of the turnover tax by a modern value added tax (VAT) and the introduction of a corporate income tax (CIT) instead of the previous profit tax. The second phase (2000-2007) concentrated on administrative reforms with, in particular, a successful application of a self-assessment regime, piloted in 2004 and rolled-out countrywide until 2007. The recent third phase introduced a new legal basis for tax administration(the Tax Administration Law) in 2007 and further modernized major taxes, such as VAT, CIT, excise tax, export and import tax, natural resource tax etc.in line with the Tax Reform Strategy for the period 2011-2020.
6. The major tax reform achievement in recent years has been the implementation of the Government Resolutions 19/NQ-CP issued in 2014 and 2015. As mentioned in the PFPG Needs Assessment, the Government has made serious efforts to revise and simplify a number of tax administration regulations, leading to the issuance of Circular No. 119 amending seven circulars, Decree 91 amending and supplementing four decrees, and Law No. 71/2014/QH13 amending and supplementing five tax laws. All the amendments are expected to reduce considerably the time needed to pay taxes to the level of the ASEAN-4 avarage.
7. The MOF expressed their strong interest in partnering with the World Bank Group (WBG) to implement the Domestic Resource Mobilization Implementation Plan 2016-2020 in the context of Vietnam’s preparation of the new Social and Economic Development Plan, focusing on deepening international integration, sustainable development, and the country competitiveness enahancement.
8. The mission recognizes that domestic resource mobilization and revenue management is a strategic reform area of Vietnam and the WBG engagement is highly relevant. Despite the efforts made and progress achieved over the past two decades, Vietnam tax system would need to be further transformed to achieve a systematic business process redesign toward information-based operations and introduction of risk-based management approach. Further more, as agreed between the MOF and the development partners in the PFPG 2015, in the context that other donnors’ contributions are minor the WBG -- the most active development partner so far in this reform area -- is expected to continue this support. The proposed support program would contribute to Pillar one of the current CPS (2012-2016), namely improved economic management and business environment to enhance competitiveness. The proposed program fits well with the EAP’s Governance Practice Program, and WBG Domestic Resource Management (DRM) Strategy, which focuses on providing support to governments in building capacities of both tax policy and administration through eliminating sources of base erosion and expanding the tax base.
C. Benchmarking Revenue Management Performance and Strategic Planning
9. The first priority of the proposed World Bank’s support is to assist the MOF to apply the Tax Administration Diagnostic Assessment Tool (TADAT) in order to standardize performance assessment of Vietnam’s revenue management performance. The tool aims to identify administrative strengths and weaknesses of the revenue management system and facilitate shared views among key stakeholders. The TADAT is currently designed by the IMF, the World Bank and other development partners with nine performance outcome areas using 52 measured and scored dimensions and 26 high-level indicators. The TADAT is being developed as a comprehensive and yet practical and that would allow a tax authority to conduct their periodic self-assessment. With TADAT, the MOF will be able to benchmark the GDT’s performance against the international practice. From such repeated assessment, the GDT also would be well positioned to set informed objectives, priorities and sequencing for further reforms.
10. Of the same importance with TADAT is the development of Domestic Resource Mobilization Implementation Plan 2016-2020. The needs assessment prepared by the World Bank in collaboration with the MOF and other development partners for the PFPG 2015 identifies the key gaps to be addressed by this action plan. The TADAT is expected to provide additional diagnosis to strengthen the plan and set the baseline key performance indicative (KPI) measurements, for which the reform will be implemented. In addition, an analysis of comprehensive sources of base erosion would also help ensure factors affecting the reform roadmap of the next five-year DRM Plan. It is expected that the World Bank support program will be one of key drivers to implement and provide result framework and monitoring the Domestic Resource Mobilization Implementation Plan 2016-2020. The major directions and content of the proposed support to implement this DRM plan will be discussed the in subsequent sections.
D. Tax Policy Reform
11. The proposed support could include a technical assistance to strengthen the capacity of the MOF in tax policy formulation and implementation. The assistance is to address the main reasons leading to the recent declining trend of revenue-to-GDP ratio and determine sources of tax base erosion, in particular factors impacting possible revenue losses, including oil revenue decline, tariff reductions as the result of trade liberalization, and the impact of tax incentives and exemptions, among other things. The program will assist the MOF to review, analyze cost benefits, and rationalize the tax incentives and get tax expenditures documented and accounted in the state budget. Based on the above mentioned assessment, the technical assistance will support researches to amend the basic tax laws.
12. More than coping with fallen revenue-to-GDP ratio, the assistance is expected to identify tax gap and find a total solution to improve domestic resource mobilization to finance increasing needs of the national socio-economic development. Among other things, efforts to research new ways of collecting revenue such as property and environmental protection taxes are encouraged. The former is to promote fiscal decentralization while the latter to encourage the use of green and renewable form of energy and resources. The MOF also suggested a study to forecast the trend of social security collections versus the tax revenue collections so as to outline an appropriate policy framework for combining these two resources in the future within a consistent DRM strategy.
13. A set of tax database is essential for sound tax policy formulation mentioned above, which requires necessary legitimate guidelines by the MOF to collect, process, and use tax information for revenue forecasting and tax policy analyses. For the longer-term, this set of database should be part of the more comprehensive effort to develop tax database functions and system to present in further detail in the next section (Paragraph 15). For the immediate future, such an interim tax database should be established to ensure the success of the tax policy component of the proposed technical assistance. The mission agreed to work out with the MOF on a feasible template of and the plan to build this database.
E. Tax Administration Reform
14. Re-designing tax administration business processes towards simplification and modernization is considered by the MOF as the single most important priority under the proposed program. Despite achieving preliminary success, various challenges still confront the Tax Management System (TMS), which is based on the current business procedures. The business process re-engineering (BPR) will help set a roadmap for operational redesign for the entire tax administration functionalities. It will cover not only return-processing functions – the current focus of the TMS, but also post-return processing functions. In medium term, the BPR will allow predictable operational and institutional changes that are sustainable enough for upgrading TMS in phase and minimizing ad-hoc customization costs. The proposed activities include a review of the current business process and IT applications and a BPR undertaking for the entire tax functions. Implementing such comprehensive effort will require an adoption of quality assurance process to improve quality of BPR, and the design and implementation of a change management program to train staff and apply risk mitigations where necessary. The World Bank was also requested to provide financial support to upgrade the TMS based on the BPR undertaken if the BPR is completed satisfactorily.
15. The MOF also proposed the support to establish a specialized tax database management functions and system – the heart of a modern tax administration. The tax database is considered vital for all the functionalities and effective decision making across the tax administration. It has been an important task guided under the Tax Reform Strategy 2011-2020, but currently remains missing from the GDT. A centralized database could gather from different sources, including TMS, taxpayers, other tax departments, government related agencies such as land administrations, banks, customs, treasury etc. Clear legitimate guidelines are necessary to develop and institutionalize the database scope and functions for collecting, processing, storing and using of required information. For TMS and additional reforms to be effective, the World Bank’s financial support was requested to deploy an integrated data-warehouse system to facilitate data and information exchange, storage, and management, which remains missing from the TMS. The possible financial support if any should be based on the completion of a satisfactory design of the tax database management functions and system.
16. Furthermore, the establishment of risk-based management functions and system built on the above mentioned tax database system is neccesary to include as part of the proposed support program. The risk management functions are applied for all the tax functionalities from registration, return processing, audit, tax arrears management, to taxpayer services. This objective is clearly identified in the Tax Reform Strategy 2011-2020, but has not been factored into the design of the TMS. The proposed activities by the MOF include the introduction of a risk-based compliance management concept, the assessment of prevailing risk management capacity of the tax administration. Based on this assessment, a risk-based management system model should be built on international practice, as well as suitable for Vietnam in terms of scale and characteristics. The model is expected to be designed and institutionalized under the proposed support. Appropriate forms of technical and financial support was requested to supply and install the risk-based management system and train tax officers at all levels to be capable in operating and utilizing the risk management system. The possible financial support if any should be based on the completion of a satisfactory design of the risk management functions and system.
17. The development of full-pledged Large Taxpayer Office is considered as one of major organizational restructure initiatives to enhance tax administration efficiency and effectiveness. International experience shows that Large Taxpayer Offices (LTOs) in developed and developing economies help secure revenue collection, improve management of arrears, reduce level of non-compliance among large taxpayers, and provide better services to large taxpayers. The World Bank is expected to provide analytical inputs and practical advice for Vietnam to consider this full-pledged LTO model, in particular with a view to maximizing the benefits while containing the possible risks associated with the model deployment. Proposed activities include exchange of experts’ views and the sharing of international experience, through international workshop and analytical inputs for a feasibility study on the establishment of full-pledged LTOs in the GDT. The establishment of the full-pledged LTOs also allow to apply effective modernization measures such as building a database and the application of risk management. It is estimated that about 500 enterprises as large taxpayers in Vietnam (less than 1 percent of all taxpayers) contribute up to 60-70 percent of total tax revenue. Effective management of this group of taxpayers would help better secure revenue mobilization in the context of dealined government revenue to GDP in recent years.
18. The proposed support also includes an international taxation assessment aimed at protecting domestic tax bases from erosion and profit shifting through international transactions . Following the diagnostics of the international tax regime, proposed activities are to develop and implement a plan that includes legislative, procedural, and capacity building in the following BEPS and non-BEPS areas which could include transfer pricing (detection and audit functions), advanced pricing agreements, thin capitalization (interest deduction caps), safe harbor program, permanent establishment rules, tax treaty implementation, and harmful tax practice detection. Given that international taxpayers are often large ones, the technical assistance on international taxation should be interlinked closely with the support on the LTO development mentioned in the above Paragraph 17 in particular in terms of risk management.
F. Capacity Building
19. Training for staff of the MOF and the GDT and other capacity building activities in tax policy and administration are integral part of the proposed program. Both sides agreed to seek opportunities to organize international workshops and training courses in areas that Vietnam needs new knowledge and analytical skills. Training and capacity building activities should attach to designed components of the proposed program, such as revenue forecasting and tax policy analysis, BPR undertaking, tax database development, risk-based management, LTO development, and international taxation etc. Concerning tax policy capacity building, the mission suggested a consideration to form a long-term partnership between the MOF with an international reputable resource center for revenue forecasting and tax analysis program that link training and knowledge sharing activities with practical analytical inputs for revenue forecasting and tax laws amendments. The MOF sought possible opportunities for the staff and management of MOF and GDT to proactively participate in international and regional forums on revenue management.
II. PROGRAM MODALITY
20. A two-phase program with short-term interventions to build momentum and capacity among key stakeholders leading to a potential long-term Bank supported operation is proposed to help Vietnam to achieve objectives of the Domestic Resource Moblization Implementation Plan 2016-2020. This suggests a new service delivery model, which is mixing trust-funded technical assistance with Bank-supported operations to ensure a steady stream of implementation and results. It is expected that with this programmatic approach the World Bank engagement will be results-oriented. The establishing of a track record of delivery in technical assistance phase would be possibly followed by a Program for Results (PforR) financing instrument as a means to implement the Government Domestic Resource Mobilization Implementation Plan 2016-2020 and measured by the benchmarks and outcomes obtained from the TADAT assessment.
21. The first phase of technical assistance funded by trust funds (DFID-SECO, PHRD) include the diagnostics as well as selected implementable activities from the mentioned areas. The DFID-SECO trust fund is the World Bank-executed trust fund and available to use for a number of capacity building activities under the agreed program. The World Bank-managed PHRD grant of US$ 4.2 million is authorized by the Government of Japan for Vietnam to use for the tax reform purposes. The MOF emphasized their priority to use PHRD grant for the BPR undertaking, the development of tax database functions and system, and the establishment of the risk-base management, among other things.
22. The second-phase program for results will be based on successful completion of the actions designed under the technical assistance phase. The program of expenditures proposed by the MOF includes the TMS upgrade and the deployment of tax database management system and the risk-based management system, among other things. The MOF will discuss with the Ministry of Planning and Investment (MPI) to include the proposed operation into the Government’s formal list of IDA projects to be financed by the World Bank. It is preferred by the MOF that the PHRD will be stand-alone operation from the Program for Results.
III. NEXT STEPS
23. The next mission is scheduled to field during January 11-22, 2016 to sustain continued dialogue left in this mission. The next mission will jointly organize with the MOF an workshop covering a reform agenda under the next five-year DRMplan, an introduction of TADAT and Program for Results. The mission will also start other related TA initial activities in the mentioned areas. It is planned that the TADAT mission will be followed after the next mission in the second half of February 2016. In preparation for the TADAT mission and at the request of the MOF, the World Bank team will provide necessary materials for the MOF and GDT.