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Corruption risks in Vietnam’s household business sector

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Abstract

This study discusses the risks, forms and costs of corruption faced by registered household businesses in Vietnam. Based on a large-scale survey of 525 registered household businesses across 8 geographical regions, we explore corruption risks in administrative procedures, especially business registration/licensing and tax compliance, as well as access to information and capital. Based on survey responses, we find that corruption in licensing is more common than in registration (through the use of middlemen, contacts or informal payments). Likewise, these practices are also used to obtain access to credit, mainly from banks. Focusing on the interaction between household businesses and tax officials, we show that there are both collusion and extortion risks, although the former tends to be more frequent. That is, while respondents complain that tax officials use their prerogative and authority to interpret laws with a view to demanding more payments, businesses and officials often tend to settle on a deal. Finally, the article considers differences between how household businesses perceive and experience corruption, and finds that corruption is often perceived as the normal cost of doing things.

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Notes

  1. Decree 43/2010/NĐ-CP dated 15 April, 2010 on Business Registration

  2. Registration involves sending a form to the local district-level Business Registration Office. The form includes the following: name of the household business, address, business activities, business capital, full name and details of the owner(s), and a copy of the ID card.

  3. In such circumstances, a valid copy of the certificate must be enclosed with the registration form.

  4. That said, in terms of taxation and accounting practices, household businesses are subject to license tax (also called excise tax), personal income tax (PIT) and Value Added Tax (VAT). PIT and VAT are paid at a flat rate if the household businesses’ annual revenue exceeds VND 100 million (approximately 4,500 USD)

  5. To our knowledge, this is the first large-scale study dealing with corruption in the household business sector in Vietnam.

  6. See for example Nabamita Dutta, Saibal Kar, Sanjukta Roy, 2011, “Informal Sector and Corruption: An Empirical Investigation for India”, Bonn: Institute for the Study of Labor.

  7. See Cling et al., op cit [2]

  8. Findings from this survey date from 2007 and focus primarily on the informal sector in Hanoi and Ho Chi Minh City, although some references to FHBs are made. Thus, it would be difficult and misleading to apply conclusions and draw many implications from this study to evaluate FHBs. See [2], pp 32

  9. There is no accepted definition of SMEs. These tend to include up to 250 employees.

  10. See for example: Xun Wu, 2009, Determinants of Bribery in Asian Firms: Evidence from the World Business Environment Survey, Journal of Business Ethics, 87:75–88

  11. Typically, microenterprises are small business units, and often family run.

  12. Safavian, Sheldon, Graham, D, Gonzalez-Vega, C, 2001, The Differential Impact of Corruption on Microenterprises in Russia, World Development, 29(7), 1215–1224

  13. Fjeldstad O.H, Kolstad, I, Nygaard, K, 2006, Bribes, taxes and regulations: Business constraints for micro enterprises in Tanzania, Chr. Michelsen Institute Working Paper No. 2.

  14. See Purohit, M, “Corruption in Tax Administration” (Chapter 9), in Shah, A, (Ed.), 2007 Performance Accountability and Combating Corruption, Public Sector Governance and Accountability Series, Washington: The World Bank

  15. Galtung, Fredrik. 1995, “Current strategies for combating corruption: A study of corruption in the tax administration” Berlin: Transparency International, Occasional Working Paper No. 8

  16. Odd-Helge [4], “Tax evasion and corruption in local governments in Tanzania: Alternative economic approaches”, Institute for Development Studies and Human Rights Bergen Norway

  17. World Bank, 2012, “Corruption from the view of citizens, firms and public officials”, Hanoi,

  18. Vietnam Provincial Competitiveness Index, 2013, VCCI

  19. Rand, J, Tarp, F, 2010, Firm-Level Corruption in Vietnam, Economic development and cultural change, 60 (3), 571–595

  20. Transparency International, Global Corruption Barometer 2010/2011, 2012, Berlin

  21. This refers to instances where tax officials request informal payments, whereas collusion refers to instances where businesses and tax official settle on a mutually acceptable payment.

  22. The number of household businesses by province was based on GSO data (See [6])

  23. The number of household businesses differs substantially across provinces, ranging from 10,000 to 300,000 per province.

  24. The number of household businesses by district (except districts of An Giang province) is based on Provincial Statistical Yearbooks 2012 by the provincial Statistics Office. An Giang’s district numbers is taken from the official website of the An Giang Tax department, accessed on 20 Apr 2014 (Provincial Tax Department 2014).

  25. The bias towards the retail sub-sector in our sampling may have amplified the negative finding.

  26. Access to finance is regulated by the following: Decision 92/2009/QD-TTg on credit policy with regard to traders doing business in disadvantaged areas issued by Prime Minister on 8 July 2009. See also the list of disadvantaged areas issued with Decision 30/2007/QĐ-TTg by the Prime Minister on 5 March 2007.

  27. Because of this low ratio, we discard access to credit provided by banks for social policies and credit funds from our analysis and focus on the other ones instead.

  28. This does not preclude the fact that they do not prefer the option of giving a small bribe to get ‘things done’ and are therefore equally guilty by virtue of partaking in this exchange.

  29. This confirms our hypothesis that household businesses, due to their limited understanding of administrative procedures and for the sake of convenience, are willing to pay to receive help from government officials to fulfill their administrative obligations. In return, household businesses expect they will likely get better treatment from government officials to facilitate their operations, for example, by receiving preferential tax treatment and thus paying lower taxes.

  30. Gutmann, J. Padovano, F, Voigt, S, 2013, Perceptions vs. Experience: How to Explain Differences in Corruption Measures Using Microdata, EPCS Meeting in Cambridge

  31. CECODES, VFF-CRT & UNDP (2014). The Viet Nam Governance and Public Administration Performance Index (PAPI) 2013: Measuring Citizens’ Experiences. A Joint Policy Research Paper by Centre for Community Support and Development Studies (CECODES), Centre for Research and Training of the Viet Nam Fatherland Front (VFF-CRT), and United Nations Development Programme (UNDP). Ha Noi, Viet Nam.

  32. Razafindrakoto and Roubaud (2010) show that experts tend not to provide a good gauge of the real level of corruption and systematically overestimate the frequency of corruption in perception-based interviews. See Razafindrakoto, M. and F. Roubaud (2010). Are International Databases on Corruption Reliable? A Comparison of Expert Opinion Surveys and Household Surveys in Sub-Saharan Africa. World Development 38(8):1057–1069.

  33. [2], Op Cit

  34. See [2], pp 187/8

  35. Tran Tien Cuong, Rand J, Silva, P, Nguyen Thanh Tam, and F Tarp (2008), Characteristics of the Vietnamese Business Environment: Evidence from a SME Survey in 2007, Copenhagen and Hanoi: CIEM/University of Copenhagen

  36. Rand, J, Tarp, F, 2012, Firm-Level Corruption in Vietnam, Economic Development and Cultural Change, Vol 60, No 3, April, 571–595

  37. See: Bridi, A, 2010, Corruption in tax administration, Transparency International U4 Expert Answer

  38. See Van Rijckeghem, C, Weder, B, 1997, Corruption and the Rate of Temptation: Do Low Wages in the Civil Service Cause Corruption? International Monetary Fund (IMF) Working Paper 97/73; Rauch, J.E, Evans, P.B, 2000, Bureaucratic structure and bureaucratic performance in less developed countries, Journal of Public Economics, 75, 49–7; Svensson, Jakob. “Eight Questions about Corruption.” Journal of Economic Perspectives. 19, 3 (2005): 19–42.

References

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  2. Cling, J.P., Razafindrakoto, M., &, Roubaud, F. (2010). The informal economy in Vietnam, Study for the ILO.

  3. Economica Vietnam (2013). The non-farm household business sector in Vietnam.

  4. Fjeldstad, O.-H. (1996). Tax evasion and corruption in local governments in Tanzania: Alternative economic approaches. Institute for Development Studies and Human Rights Bergen Norway.

  5. Galtung, F. (1995). Current strategies for combating corruption: A study of corruption in the tax administration. Berlin: Transparency International, Occasional Working Paper No. 8.

  6. General Statistics Office (GSO) (2013). 2012 Economic, Administrative & Public Service Establishment Census.

  7. International Labour Organization (ILO) (2010). The informal economy in Vietnam.

  8. IRD-DIAL (2013). Survey on household businesses and informal sector to promote inclusive growth in Vietnam, Concept Note.

  9. Malesky, E. (2014). The Vietnam Provincial Competitiveness Index: Measuring Economic Governance for Private Sector Development. 2013 Final Report, PCI Report # 9, Vietnam Chamber of Commerce and Industry and United States Agency for International Development: Ha Noi, Vietnam.

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  13. Rand J., & Tarp F. (2010) Firm-Level Corruption in Vietnam, Working Paper No. 2010/16, United Nations University.

  14. The Economist (2014). A drop in the Ocean, What a spate of arrests say about Vietnam’s banking sector, November 15th, http://www.economist.com/news/finance-and-economics/21632650-what-spate-arrests-says-about-vietnams-banking-sector-drop-ocean. Accessed January 2015.

  15. Towards Transparency, CECODES (2011). Youth integrity survey, Hanoi: TT.

  16. World Bank (2012). Corruption from the view of citizens, firms and public officials. Hanoi, 2012.

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Acknowledgments

This article is based on research funded by the UK Department for International Development (DFID) in Vietnam on the costs of corruption. The authors would like to thank Nguyen Thi Bich, Bach Thang, Xavier Oudin and the guest editors for their feedback on earlier versions, and Nguyen Thu Phuong for her valuable editing skills.

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  1. CECODES, Hanoi, Vietnam

    Dang Hoang Giang, Phung Thanh Xuan & Ninh Quang Hai

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  1. Dang Hoang Giang
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Correspondence to Dang Hoang Giang.

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Giang, D.H., Xuan, P.T. & Hai, N.Q. Corruption risks in Vietnam’s household business sector. Crime Law Soc Change 65, 395–422 (2016). https://doi.org/10.1007/s10611-016-9604-z

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