Vietnam: Proposal to amend and reduce the personal income tax calculation grade for employees’ income from 7 grades to 5 grades?

Main Content

• What are the regulations on the current progressive tariff applicable to taxed incomes from salaries, wages, and business?
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• What is the general assessment of the tax rate in the current partially progressive tariff in Vietnam?
• Proposing to adjust the personal income tax rate for employees from 7 grades to 5 grades?

What are the regulations on the current progressive tariff applicable to taxed incomes from salaries, wages, and business?

According to the provisions of Article 22 of the 2007 Law on Personal Income Tax in Vietnam, the partially progressive tariff applicable to taxed incomes from salaries, wages and business is as follows:

Vietnam: Proposal to amend and reduce the personal income tax calculation grade for employees’ income from 7 grades to 5 grades?

What is the general assessment of the tax rate in the current partially progressive tariff in Vietnam?

As for the tax rates in the partially progressive tariff, the Ministry of Justice gives an assessment in Item 2.1, Subsection 2, Section II, Appendix 2, Draft Government's Proposal on the Law and Ordinance Development Program in 2024; adjust the Program for making laws and ordinances in 2023, as follows:

Through the actual implementation process, there is a view that the current partially progressive tariff in Vietnam is unreasonable, too many grades, too narrow gap between tiers, which easily leads to tax grade jump when aggregating income at the end of the year increases the amount of tax payable, the amount to be finalized increases unnecessarily while the additional tax payable is not much.

Through a review of international experience, the application of personal income tax collection at progressive tax rates is a policy widely applied in many countries around the world with progressive tax rates with different grades to apply tax collection at different rates to groups of taxpayers with different income levels, ensuring vertical fairness of tax policy (tax payable increases with income growth).

Although the way and method of designing tax tables varies from country to country, depending on the point of view of designing individual income tax policies of each country, most countries apply a progressive tax rate when calculating personal income tax for income from wages and salaries for the purpose of income regulation.

Individuals with higher income levels are taxed at a higher rate than individuals with lower income levels.

Some countries that used to have fixed tax rates have now gradually switched to progressive taxation, mainly Eastern European countries such as Russia (2021), Czech Republic (2021), Latvia (2018), Lithuania (2019).

Proposing to adjust the personal income tax rate for employees from 7 grades to 5 grades?

This content is stated in Item 2.1, Subsection 2, Section II, Appendix 2, Draft Government's Proposal on Law and Ordinance Development Program in 2024; to adjust the Program for making laws and ordinances in 2023, as follows:

According to Clause 2, Article 22 of the 2007 Law on Personal Income Tax in Vietnam, the partially progressive tax schedule consists of 7 grades with tax rates from 5% to 35%.

By reviewing the current tax structure and studying the trend of improvement in living standards in the coming time as well as international experience, Vietnam can study to reduce the number of tax grades from 7 to 5; together with the consideration of widening the income gap in the tax tiers, ensuring a higher level of regulation on those with high incomes at the high tax tier. Implementing this direction will contribute to simplifying and reducing the number of tax levels in order to facilitate tax declaration and payment.

Along with gradually narrowing the number of tax rates, it is possible to consider adjusting the gap between tax tiers to match recent changes in people's living standards, while encouraging labor effort, improving competitiveness of the economy in attracting foreign experts and skilled workers to work in Vietnam, in the context of increasingly fierce competition for human resources in the world, especially between developing countries.

In a recent study, the World Bank said that reducing the number of grades from 7 to 5 is in line with the world trend to improve tax management and compliance. However, the adjustment of the tax structure may have an impact on the budget revenue.

The amendment of the Personal Income Tax Schedule will be studied and considered carefully and should be consistent with the orientation set out in the Strategy for Tax System Reform to 2030, ensuring it is appropriate to the socio-economic context, income and living standards of people and with international practices, especially with countries with similar conditions, while ensuring the rights of workers and encouraging the development of the labor market in the context of international integration, while ensuring revenue for the state budget.

At the same time, the Ministry of Justice also believes that the amendment of the personal income tax schedule must be consistent with the socio-economic context, income and living standards of the people and with international practices, especially with countries with similar conditions and close investment and trade relations with Vietnam, while ensuring the rights of workers.

Thereby, encouraging labor efforts, improving the competitiveness of the economy in attracting foreign experts and skilled workers to work in Vietnam, in the context of competition for human resources in the world are increasingly fierce.

The narrowing of the number of tax tiers will contribute to simplifying tax administration and collection, facilitating tax declaration and calculation, and in line with the trend of personal income tax reform in the world.

See details of the draft report here.