There are numerous things to do to reform the land tax, and in-depth research is required to map out a practical roadmap
A picture of the land tax
It is generally accepted that the ratio of property tax revenue to GDP reflects a country’s development level. In the Group of Seven advanced economies, it is around 2.5%, while in OECD countries, the average is 1.9%, and in developing Southeast Asian nations, it is just 0.3%.
In Vietnam, the ratio is a mere 0.034%, just one-tenth of that in Indonesia, Thailand, and the Philippines, and one-fiftieth of that in OECD. This shows the land tax and tax on landed properties in Vietnam are extremely low.
On the other hand, the income of Vietnamese workers is relatively low compared to the regional average, so any tentative scheme to raise taxes will jeopardize society. But reality also shows that people are becoming super-rich owing to real estate, especially speculators. Realty speculation impedes economic development and widens the gap between super-rich people, who make up a small fraction, and the poor.
Many major businesses and rich individuals care little about the real estate tax, if any. For example, a plot of land of some 100 square meters in the heart of Hanoi is valued at VND150 million a square meter as per the State-issued land price frame and is subject to an annual tax of only VND4.5 million, which is trivial compared to the rent of the land plot. If the market price applies, the land price will be some VND600 million a square meter, and the land tax will be VND18 million a year for the plot. This tax amount is still inconsiderable for the rich but a headache for households with below-average income.
Land tax for land users
Resolution 18-NQ/TW dated June 16, 2022, of the fifth Party Central Committee Plenum, highlights the need to reform the land tax. Accordingly, higher land tax rates will be imposed on land speculators while tax reduction or exemption will be considered for poor people, ethnic minority people, and those using land for social purposes like forest protection or food security.
Land tax is closely related to a financial obligation on the part of the land title holder. In Vietnam, land management is rather complicated. The land use term is indefinite, and the land tax is low, stimulating the rich to speculate on land, while low-income people find it hard to secure a plot of residential land. Housing supply mainly ends up in speculation, prompting prices to undergo a vicious circle of frequent overheating and freezing. Speculation is also widely seen in the lump-sum payment method of land rent, though to a lesser extent.
The price of long-term land use rights is often calculated as the lump sum payment of land rent for 50 to 70 years, depending on the type of land. Therefore, the annual land tax should be based on the price of long-term land use rights and the lump sum payment of land rent. The land use tax will be the financial obligation for land use rights, and its calculation will be much easier than the administrative imposition. Land users can choose a payment option suitable to their conditions.
Industrialized countries attend more to the regular land tax and the value-added tax on landed properties, instead of the lump sum payment when the State hands over or leases land. Such a policy helps attract investment to utilize land as access to land is easy and at a low cost.
Two types of tax
There are two different objects when formulating the tax policy: land itself and landed properties. The goals and ways of taxation applicable to these two objects are also different. For land use, the tax is the financial obligation payable by those benefiting from land to those without land, more or less similar to contributing to the community as the land resource is limited. For landed properties, which land users develop after paying the land use tax, they, in principle, are not subject to tax. However, it is argued in industrialized countries that houses or other properties indicate a certain area is populated, and residents there have an obligation to pay for public infrastructure and service facilities. Such payments are a form of housing tax.
Properties meant for business are generally not subject to tax to encourage economic development. Countries will only impose a tax if such properties are not utilized or left idle or if their business efficiency is lower than the norms. Some countries integrate this tax into the land tax.
Conditions for taxation
One of the conditions needed is the availability of a cadastral papers system and the connection between the cadastral papers system controlled by the Ministry of Natural Resources and Environment and the taxation papers governed by the Ministry of Finance. As Vietnam has not achieved widespread digital transformation, grassroots civil servants are assigned to canvass every house to collect the land tax. The minimum requirement, therefore, is to digitally transform the entire cadastral papers system and connect this system with the digital taxation system on a national scale.
The above requirement is meant for unanimous taxation only, not the selective imposition of higher tax on speculators, which requires a high degree of transparency on properties as assets.
A roadmap of tax reform
Therefore, by conducting in-depth research on Vietnam’s socio-economic situation and considering good international practices, we can recommend a suitable taxation roadmap to bring about more economic value. Some solutions have been included in the draft amendments to the Land Law. In addition, it is necessary to build the Land Use Tax Law, taking into account both farmland and non-agricultural land, alongside the Land Law.
Numerous things must be done to reform the land tax, and in-depth studies must be conducted for a suitable roadmap.
First, the amended Land Law must include provisions defining the market value of land use rights and ways to build the land price frame aligned to the market value.
Second, there must be a system governing land use payment when the State hands over land or leases land with a lump-sum payment for long-term rent or annual rent payment, based on equal financial obligations for both leasing forms and allowing land users to choose whichever form of payment suiting their conditions.
Third, the draft Law on Land Use Tax must take into account both farmland and non-agricultural land, with a base tax rate being raised incrementally in 25 years when the people’s capacity to pay tax and their income is comparable to Thailand’s. Higher tax rates on speculators and other landed properties will be considered after this period.
Fourth, a progressive tax rate regime is unnecessary as the management system has not met conditions. Only three basic tax levels should exist, one on efficient land use, one on land left idle, and one on cases of reduction or exemption.
Fifth, it is imperative to step up digital transformation to modernize land management and taxation management and to connect the two operations.
To date, discussions have largely centered on the amended Land Law. Resolution 18-NQ/TW requires that other relevant laws be amended and supplemented to make them compatible with the Land Law. Since the 2003 Land Law was built, there have been many suggestions on making amendments to other land-related laws, but to no avail. It seems many people in the legislative sphere are still at odds when it comes to land tax issues.