What are the taxed objects and planned tax rates? Viet Nam seeks to implement tax on the following commodities: Refined fuels (gasoline, diesel, mazut, paraffin, kerosene) Coal Hdrochlorofluorocarbon (HCFC) substances Soft plastic bags Subset of harmful chemical substances used in agriculture and forestry Taxable object Unit Tax rate (VND/Unit) Refined fuels All kinds of gasoline liter 1.000-4.000 Jet fuel liter 1.000-3.000 Diesel liter 500-2.000 Paraffin liter 300-2.000 Mazut kg 300-2.000 Lubricating oil liter 300-2.000 Grease kg 300-2.000 Coal ton 6000-30.000 HCFC Substances kg 1.000-5.000 Soft Plastic Bags kg 20.000-30.000 Restricted-used plant protection chemical substances Agriculture chemical substances kg 500-2.000 Anti-termite chemicals kg 1.000-3.000 Preservatives for forest products kg 1.000-3.000 Disinfect chemical used for warehouses kg 1.000-3.000 Note: Taxes are levied on the consumed physical units rather than on percentages of prices. This corresponds to international best practice as the actual amounts of used units harm the environment, independent of its price.
Impact Assessment on the draft environmental tax law in Viet Nam Why? A quantitative evaluation of the impacts of the proposed draft law of Viet Nam on producer and user prices, sectoral output and employment, the commodity structure of demand, government tax revenue, CO 2 emissions and household welfare. How? A simulation analysis based on a Computable General Equilibrium (CGE) model of the Vietnamese economy is used to model the impact of the environmental tax. The CGE model is calibrated to a new Social Accounting Matrix for Vietnam. A SAM is an extension of the national accounting system reflecting the interactions among all actors in the economy, including the production sector, the household sector, the government sector, and the rest of the world. It is a consistent integrated snapshot of the whole economy in a given year (here 2007). Strengths: The model allows for a switch to less energy-intensive modes of production in response to an increase in energy prices. In detail, the sectoral production functions allow for imperfect substitutability between coal and a refined oil/gas composite, and between refined oil and natural gas. The general equilibrium approach allows quantifying the CO 2 emission reductions associated with the imposition of the environmental tax.
FAQ - Environmental Pollution Tax Law in Viet Nam Simulated environmental tax scenarios: Assumptions The CGE analysis focuses on the taxes on coal and on refined fuels, as they account for around 99.5% of the estimated environmental taxes. The other taxable objects (HCFC substances, Soft plastic bags and subset of harmful chemical substances used in agriculture and forestry) account only for a tiny share of domestic production and consumption and will therefore have negligible impacts on macroeconomic variables and on tax revenue. Nevertheless, imposing taxes on these products with negative environmental externalities will encourage users to shift to more environment-friendly substitutes that are available. The draft environmental tax law specifies a lower and an upper limit for the specific tax rates that apply to each taxable object. Therefore, the simulation results presented consider a Low and a High tax rate scenario.
Simulation Results: Macroeconomic Impact: Assumptions: The government spreads the additional tax revenue from environmental taxes among public investment spending, government consumption and additional transfers to the private sector. Main results: Estimated increase of environmental tax revenues by up to 37,844 1 billion VND in 2012 (fully exploiting the potential of the law) Significant shift in the purchasing power from the households to the government sector: => real government expenditure => demand for domestic non-tradable goods => prices for non-tradable goods => discourage exports => real exchange rate appreciation Income effect: Income Real PP => Reduces demand for all consumer goods. Household effect User price Production side price for taxed commodities Substitution effect => Shifts demand from coal and refined fuels to other goods. => It is the household sector that bears the burden of the tax - reflected in a noticeable drop in household consumption! Increase in production costs = supply prices of domestically produced commodities Substitution effect Between energy inputs 1 Equals approximately 1.5 billion Euro
FAQ - Environmental Pollution Tax Law in Viet Nam - Simulation Results: Impact on CO2 emissions: Assumptions: The government spreads the additional tax revenue from environmental taxes among public investment spending, government consumption and additional transfers to the private sector. Main results: The environmental tax law has the potential to reduce Viet Nam s annual CO2 emissions by up to 7.5 %. For the year 2012, this amounts to an absolute emission reduction of up to 9.3 million tons of CO2 (high taxation scenario).
Shortcomings of the current draft law & resulting recommendations The current draft of the environmental tax law includes already all relevant taxable objects with the only exception of a road tax 2. To overcome this shortcoming, the Vietnamese government already plans to charge exhaust fumes soon So far, the nominal tax rates are not indexed to inflation. But given the persisting high inflation rates in Viet Nam, nominal specific tax rates must exceed the rate of inflation to guarantee a positive environmental effect (otherwise the real tax rates even decrease!) 7 Erosion of effective real tax rates in the presence of inflation The actual nominal tax rate needs to be indexed (at least) to inflation! In Viet Nam, the price of coal only equals 75% of the world and the proposed tax rate on coal is significantly lower than the environmental tax rate on refined fuels. The implication is that the relative user price of coal in relation to the price of refined oils drops. To the extent that refined fuels and coal are substitutes, this may induce undesirable substitution effects from relatively clean refined fuels to relatively dirty coal. Ad valorem tax rate in % 6 5 4 3 2 1 0 2010 2015 2020 2025 2030 Year 10 % Inflation 20% Inflation The effective ad valorem tax rate of coal should exceed the tax rate on refined fuel substitutes to avoid undesired substitution effects.. 2 Please note, that road tax does not mean taxing the use of a road (toll) but rather the taxation of vehicles.
The current draft law suggest a relatively wide range of taxes (e.g. 1000-4000 VND/litre gasoline) without explicitly clarifying if it is planned to increase the tax rates gradually to the upper boundary or if this is just the inflation scope. If it is intended to increase real taxes gradually (nominal tax rates > inflation rates), they should be phased in according to a transparent pre-announced time schedule to allow firms to plan investments in fuel-efficient technologies. Develop a mid and long term roadmap for the gradual increase of environmental taxes to ensure investment certainty and to facilitate a smooth low-carbon technology transition. Currently, the draft law does not take energy efficiency adequately into account. The aim should be to set incentives to reduce the input of natural resources and to stimulate the shift towards low carbon technologies by a) increasing taxes on fossil energies while b) reducing taxes on renewable and efficient technology applications a tax differentiation is often very successfully internationally applied Stimulate investments in energy efficiency and renewables So far, the additional revenues stemming from the environmental tax law are not earmarked for environmental purposes (which corresponds to the nonaffectation principle). Nevertheless, international best practice (OCED) suggests partially earmarking of the environmental revenues to monitoring and enforcement activities. But even without explicitly earmarking the additional tax revenues, the Vietnamese government could use the additional money to stimulate investments into low carbon technologies and to promote environmental protection activities. Use the additional revenues for monitoring and enforcement activities as well environmental purposes.
The impact assessment results at a glance: The refined liquid fuels taxes will be the dominant source of tax revenue The results suggest that CO 2 emissions drop by around 2.3% under the Low and by 7.5% under the High tax rate scenario. For the year 2012, this amounts to an absolute emission reduction of up to 9.3 million tons of CO2 (high taxation scenario) At the higher end of the proposed tax rate band, the environmental tax on fuels will have noticeable economy-wide repercussions. The tax-induced fuel price increases raises the production costs and the output prices of other fuel-intensive sectors most notably for the fishing and the transport sector. The tax-induced rise in the cost of transport services spreads the impact of the fuel tax widely across the economy through its effect on transport margins for all non-service commodities. At high levels of the tax rate, the environmental tax shifts a significant amount of purchasing power from households to the government (37.844 billion VND 3 additional tax revenues) As the additional tax revenue is spent on environmental protection measures (or other nontraded goods and services), the real exchange rate appreciates to some extent and real exports decline slightly relative to the no-eco-tax growth path Household welfare narrowly defined as utility derived from the consumption of private goods declines significantly across all households groups. However, this result does not take account of future welfare gains due to beneficial environmental impacts. There is a need for supportive measures to facilitate a smooth low-carbon technology transition. 3 This equals approximately 1.5 billion EURO
Policy recommendations at a glance Include the explanations in the accompanying texts or a separate FAQ-document. Develop a mid- and long term roadmap for environmental tax and fiscal reform including slow and gradual increase of the environmental taxes Announce the gradual increase of the taxes in advance. Stimulate investments in energy efficiency and renewables. Increase taxes on coal. Increase public awareness for EFR. Include an Annual Road Tax in the future Adjust the environmental taxes at least to inflation. Use the additional revenues for environmental purposes.