Tax rate Taxable object Unit (VND/Unit) Refined...

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FAQ - Environmental Pollution Tax Law in Viet Nam - 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.

Transcript of Tax rate Taxable object Unit (VND/Unit) Refined...

FAQ - Environmental Pollution Tax Law in Viet Nam -

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.

FAQ - Environmental Pollution Tax Law in Viet Nam -

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, CO2 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 CO2 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.

FAQ - Environmental Pollution Tax Law in Viet Nam -

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 1billion 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

=> It is the household sector that bears the burden of the tax - reflected in a noticeable

drop in household consumption!

1 Equals approximately 1.5 billion Euro

Household effect

User price ↑

Income effect:

Income↓

Real PP↓

=> Reduces demand

for all consumer

goods.

Substitution effect

=> Shifts demand from

coal and refined fuels

to other goods.

Production side

price ↑ for taxed commodities

Substitution effect

Between energy

inputs

Increase in

production costs =

supply prices of

domestically

produced

commodities

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).

FAQ - Environmental Pollution Tax Law in Viet Nam -

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 tax2. 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!)

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.

.

2 Please note, that “road tax” does not mean taxing the use of a road (toll) but rather the taxation of vehicles.

The effective ad valorem tax rate of coal should exceed the tax rate on refined

fuel substitutes to avoid undesired substitution effects.

The actual nominal tax rate needs to be indexed (at least) to inflation!

Erosion of effective real tax rates in the presence of inflation

0

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2

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2010 2015 2020 2025 2030

Year

Ad

valo

rem

tax

rate

in %

10 % Inflation20% Inflation

FAQ - Environmental Pollution Tax Law in Viet Nam - 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.

So far, the additional revenues stemming from the

environmental tax law are not earmarked for

environmental purposes (which corresponds to the non-

affectation 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.

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

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.

Use the additional revenues for monitoring and

enforcement activities as well environmental purposes.

Stimulate investments in energy efficiency and renewables

FAQ - Environmental Pollution Tax Law in Viet Nam -

The impact assessment results at a glance:

• The refined liquid fuels taxes will be the dominant

source of tax revenue

• The results suggest that CO2 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 VND3 additional tax revenues)

• As the additional tax revenue is spent on

environmental protection measures (or other non-

traded 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

FAQ - Environmental Pollution Tax Law in Viet Nam -

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.

• Adjust the environmental taxes at least to inflation.

• Use the additional revenues for environmental

purposes.

• Stimulate investments in energy efficiency and

renewables.

• Increase taxes on coal.

• Increase public awareness for EFR.

• Include an Annual Road Tax in the future