Vietnamlawmagazine

Nguyen Van Phung,[1] MA

Deputy General Director, Tax Policy Department

Ministry of Finance

After nearly 20 years of renewal, Vietnam has achieved encouraging results in economic growth, political stability, security and social order and in eradicating poverty. Environmentally, however, the country is facing the undesirable effects of economic growth, industrialization and urbanization. And it has been forecast that, in a not far distant future, Vietnam will be among those countries most badly affected by global climate change.

Aware of the role of the environment in sustainable development, the Vietnamese Government has made great efforts to apply environmental protection mechanisms and policies, including tax, charge and fee policies. In implementing the 2001-2010 tax reform strategy, the Government submitted this month a draft Law on Environmental Protection Tax to the National Assembly for debate. Following are some of the major contents of the draft.

Though Vietnam has no separate tax law dealing with polluting activities or products the use of which will cause pollution, it has been indirectly using tax tools to promote environmentally friendly actions and reduce environmental pollution, adopting various fiscal measures to encourage investors to participate in treating pollution and economically and effectively utilizing natural resources.

Vietnam has levied various taxes on the use of environmental elements, such as tax on the use of agricultural land and taxes on housing and land and royalties. Tax incentives have been introduced to restrict polluting acts and encourage investment in environmental protection. The law on special consumption tax law offers lower tax rates for less polluting products such as electric or solar-powered cars, which are just 50% or 70% of those applicable to petrol-powered cars of the same kinds. The law on corporate income tax grants the highest preferences to environmental protection activities, including a special tax rate of 10% for the whole lifetime of projects carried out by enterprises operating in the field of environment and tax exemption or 50% reduction for enterprises newly established in this field. The law on import and export duties grants breaks for machinery, equipment, equipment, tools and materials used in the collection, storage, transport, recycling and treatment of wastes, environmental observation and analysis and production of clean and renewable energies.

Vietnam has also imposed charges on polluters (those discharging pollutants into the water, soil or air) with a view to compelling them to reduce quantities of pollutants and pay for environmental treatment. Since 2003, environmental protection charges have been levied on wastewater at varying levels depending on quantities of hazardous substances in the wastewater (already technically treated). This charge aims to mobilize financial contributions for environmental rehabilitation, curb the discharge of pollutants into the environment and encourage the economical and efficient use of clean water sources. Ordinary and hazardous solid wastes discharged from the process of production have been liable to this charge since 2007. Environmental protection charges have also been imposed on the exploitation of metal and non-metal minerals since 2006. The collection of this charge aims to partially offset environmental damage caused by mining activities to society and communities.[2]

The proposed Law on Environmental Protection Tax was drafted on the following grounds:

First, the imposition of an environ-mental protection tax is to institutionalize the Party line and State policy. Politburo Resolution No. 41-NQ/TW, dated November 15, 2004, reaffirmed the viewpoint on environmental protection in the period of accelerated national industrialization and modernization: “Environmental protection is a vital issue of mankind; a factor to assure the health and quality of life for people, making an important contribution to socio-economic development, political stability and national security, and promoting international economic integration.”

Second, the promulgation of the Law on Environmental Protection Tax is a specific step in realizing the country’s 2001-2010 tax reform strategy, assuring a complete legal corridor for mobilizing financial resources in accordance with the law.

Third, sustainable economic development in association with environmental protection is the development trend in the world today. Minimizing dependence on natural resources and fossil fuels will help reduce negative impacts on the eco-environment. The global economic crisis, energy security challenges and climate change threaten to develop into social and environment crises. Many countries have been promoting technology renewal and economic restructuring towards incrementally reducing industries and technologies that consume lots of energy and natural resources in order to increase their competitiveness and gain advantageous positions in the post-crisis economy. Sustainable and less polluting economic development has drawn greater attention and become a priority in many countries. For this reason, the study and introduction of environmental protection taxes for the objective of increasing public awareness of environmental protection are necessary and suited to the present socio-economic context of Vietnam and the trend of global economic development.

Fourth, an environmental protection tax is a new instrument to create revenues for the state budget at a time when Vietnam has been deeply integrating into the global economy and has had to considerably cut taxes on international trade (import and export duties). Scientific research and practice have pointed out that the imposition of environmental taxes is a wise solution as it brings about double dividends of generating revenues and changing negative environmental behaviors. Along with maintaining current charges and fees, the enactment of the Law would create more resources for the Government to invest in environmental protection.

The draft Law

There are two economic instruments that help protect the environment, including environmental protection charges directly imposed on those discharging polluting wastes and environmental protection taxes levied on a number of products the use of which will pollute the environment in order to curb their production and consumption.

The Environmental Protection Law stipulates that organizations, households and individuals producing and trading in products that cause long-term negative effects on the environment and human health must pay environmental tax (Article 112) and those that discharge wastes into the environment or conduct activities harmful to the environment must pay environmental protection charges (Article 113).

Environmental protection taxes reflect the State’s regulation of the consumption of a number of polluting products, aiming to curb their use. This new tax is imposed on products the use of which will cause environmental damage. Consumers are liable to this tax but producers pay this tax on their behalf.

The identification of products liable to environmental protection taxes is based on the following principles:

(i) They must be home-made or imported products the use of which will negatively affect the environment;

(ii) Their identification complies with Vietnam’s international commitments and international practices; and,

(iii) Products must be clearly identified to ensure effective tax collection administration, taking into account harmony with economic development and avoiding adverse bad impacts on the competitiveness of Vietnamese goods, especially exports.

In reality, there are many products the use of which will exert negative impacts on the environment in varying degrees and which can therefore be taxed. However, in light of the present socio-economic situation, all polluting goods should not be subjected to environmental protection tax but only those that satisfy the above-said principles.

For these reasons, the draft Law proposes to levy environmental protection taxes on only five major groups of products the use of which may cause widespread pollution. They include:

(i) Petrol and kerosene (including petrol of all kinds, aircraft fuel, diesel oil, kerosene, mazut oil and lubricating oil and grease).

These products contain such chemicals as lead and sulfur which can seep into and affect the environment even when the products are not used. Levying the tax on petrol and kerosene aims to encourage the economical and efficient use of energies and the use of renewable energies.

(ii) Coal

When burnt, coal will emit CO2 and SO2 into the environment. Coal has been used throughout Vietnam with an annual quantity of nearly 30 million tons. The imposition of the tax on coal also aims to encourage the thrifty and efficient use of energies, reduce dependence on fossil fuels and stimulate the use of renewable energies.

(iii) Freezing solvents containing hydro-cloro-fluoro-carbons (HCFC)

HCFC is used in refrigeration and air conditioning. The emission of HCFC into the atmosphere pollutes the air and is the main cause of the depletion of the ozone layer and greenhouse effect. Vietnam has acceded to the Montreal Protocol on the restriction of the use of ozone-depleting substances, which requires developing countries (including Vietnam) to completely eliminate their use by 2030. The inclusion of HCFC in the environmental protection tax-liable list will contribute to realizing the Montreal Protocol commitments in Vietnam and encouraging enterprises to incrementally reduce the use of HCFC through changing their technologies.

(iv) Plastic bags

Plastic bags take a very long time (possibly hundreds of years) to disintegrate. Used plastic bags will accumulate in the soil, causing environmental degradation. Once disintegrated, they will produce substances that make the soil inert and unable to keep moisture and nutrients for crops. The taxation of plastic bags aims to raise public awareness about environmental protection, change consumer behavior in using plastic bags and encourage the production of substitute products which are more environmentally friendly.

(v) Plant protection drugs subject to restricted use

These are noxious compounds of natural origin or synthesized from chemicals to be used for eliminating crop epidemics and preserving farm produce. At present, the proper use of these drugs in appropriate amounts has not received due attention because their prices are fairly cheap compared to agricultural product prices. Their residues may be suspended in the air or exist in food, water or land. The taxation of these plant protection drugs aims to raise user awareness and encourage the change of the behavior of abusing these drugs, mitigating their impacts on the environment.

In the process of drafting the Law, there were opinions that many other kinds of products the use of which also causes environmental pollution should be liable to this tax, such as computers, telephones, accumulators, tires, detergents, paper production, food processing and chemical fertilizers. The list of environmental protection tax-liable products proposed in the draft Law can be adjusted before it is submitted to the National Assembly for passage by the end of this year.

Environmental protection taxes are an indirect tax. Therefore, taking into account this factor and the enforceability of the law, the draft Law stipulates that organizations, households and individuals producing and importing products on the above list are liable to pay this tax.

The tax will be levied based on taxable quantities and specific tax levels. The taxable quantity is prescribed for each type of goods (home-made and imported) to suit the characteristics of their production, facilitating tax administration and saving tax administration costs. Specifically, for home-made products, the taxable quantity is the quantity of products sold, exchanged, internally consumed or given as presents. For imported products, the taxable quantity is that indicated on import declarations.

The draft Law stipulates specific tax levels per unit of product. However, as this tax is introduced for the first time, it needs some time to accord with the practical situation and the economy. To facilitate the administration and implementation of the new tax policy, the draft Law prescribes a frame environmental protection tax within the minimum and maximum specific tax levels.

These minimum and maximum specific tax levels have been worked out on the principle of the degree of environmental pollution, perpetuating the current charge policy (petrol and kerosene charges and environmental protection charges) so as to avoid considerable impacts on production and consumption and ease tax administration. At the same time, the frame tax also takes into consideration the tax reform roadmap during 2011-2020 and through 2050, under which some taxes would be adjusted and revenue sources changed. Environmental protection taxes are a flexible substitute.

Based on this, the National Assembly Standing Committee will issue a detailed list of products and corresponding specific tax levels in line with the State’s socio-economic development policy in each period and based on the degree of environmental pollution.

Since the current tax administration law does not adequately deal with environmental protection taxes, the draft Law contains some provisions concerning tax calculation, declaration and payment.

The objective of the draft Law is to generate revenues to fund environmental protection efforts. While the division of these revenues has not yet been mentioned in the State Budget Law, the draft Law should provide for this division in accordance with the laws on budget division and environmental protection.

The draft Law is expected to be passed by the National Assembly at its year-end session and take effect on January 1, 2012, allowing adequate time for the Government, ministries, branches and localities to issue specific guidelines and measures for its enforcement.-