The side effects of FDI tax loss

Oxfam, a non-governmental organization group working worldwide to fight against poverty and injustice, recently released new research on the world’s 15 worst corporate tax havens.

These nations are facilitating ‘the most extreme form of tax dodging’ which gives way to the race to the bottom in the taxation of global corporations. As a result, countries are being deprived of billions of dollars needed to tackle poverty and inequality.

All nations worldwide were reported to have engaged in the race. “In an attempt to attract investors, countries are slashing corporate tax, doing harm to their economies and process,” Oxfam warned, assuming that ending the corporate tax race to the bottom is particularly important to developing countries, including Vietnam.

In its recommendation, Oxfam stressed that foreign direct investment (FDI) into Vietnam from tax havens has continued to increase, representing a 47% jump in the past year.

Some territories which were blacklisted such as the British Virgin Islands, Jersey, the Cayman Islands, and Bermuda are stepping up investment in Vietnam.

“Not having a suitable management mechanism in place will bring a risk that the profits of these investments might not be kept in Vietnam,” Oxfam commented.

The group claimed that in Vietnam, albeit tax incentives have been widely applied, there have been few evidences that show tax breaks help increase investment or boost economic growth.

In fact, this is not the first time an international organization raised such a warning. Earlier, experts of international non-governmental organization ActionAid and some local economists have more than once questioned Vietnam’s generous policies towards foreign invested businesses.

Senior FDI expert and prominent economist Nguyen Mai, however, repeatedly confirmed the importance of preferential policies to foreign invested projects.

“Other countries are offering huge incentives to attract foreign investors. If Vietnam provided fewer incentives, FDI could flow to other countries like Malaysia or Indonesia, rather than Vietnam,” Mai said.

Echoing Mai’s view, Christopher Jeffery, vice chairman of the British Business Group Vietnam, told VIR that “One of the key issues is that investment no matter where it comes from needs to support a country’s development. If tax havens’ investment in Vietnam creates jobs, value, and opportunities for the workforce to develop, and contribute to the country’s development and taxation, then I partly believe that it is the right thing for the country.”

“In addition, Vietnam is now competing globally for investment. Thus, it has to create an enabling environment, otherwise the country will miss out on investment opportunities,” he added.

The Provincial Competitiveness Index Report 2015 released by the Vietnam Chamber of Commerce and Industry (VCCI) early this year, showed that developing countries are offering the best incentives to FDI businesses to attract investment.

“Malaysia is an example. In 1996, policies attracting investment caused this country US$2.4 billion less in tax contribution from business tax and progressive income tax erosion. In exchange, Malaysia received a benefit equivalent to US$30,000 for each job an FDI firm created,” the report states.

From Mai’s perspective, one should not only look at the loss in tax contribution, but must be fair, and examine the benefits that FDI projects can bring to an economy-such as job creation, an increase in export value, and research and development activities stimulation.

However, Oxfam have reasons for their warnings because in fact, many foreign investors did profit from ‘tax incentives’, while countries lost out on funding to solve critical issues of poverty and social injustice. The organization, therefore, recommended the Vietnamese government to review preferential tax policies, and carefully make cost-benefit analyses for the long-term, before the enactment and after the implementation of related incentive policies. This will help Vietnam assess the impact tax incentives can have on both social and gender equality.

Besides, to improve tax transparency, Oxfam suggests the government to supplement a regulation that requires all multinational companies to publish financial reports for every country where they operate, and provide transparency on what taxes the companies are playing and where.