The proposal to levy 20 percent personal tax income (PIT) on profits from real estate transfers is not novel. While the goal of fairness and transparency in taxes is supported, the implementation of this proposal has sparked concerns among many homebuyers and homesellers.
Many loopholes visible
In its recent report on the implementation of the resolutions on questioning which has been sent to the National Assembly, the Ministry of Finance said that it is studying two methods of calculating PIT on real estate transfers including calculating on the profit (selling price minus related costs) and applying a fixed tax rate on the total transfer price.
If sufficient data is available to accurately ascertain the purchase price and associated costs, a tax rate of 20 percent will be imposed on the taxable income. Conversely, if there are inadequate conditions to establish the cost price and expenses, a rate of 2 percent will be applied to the total transfer value, as is currently the practice. It is worth noting that the proposed 20 percent tax rate is not a new concept as the 2007 Personal Income Tax Law previously suggested a 25 percent tax on profits or a 2 percent tax on real estate transfer prices when costs could not be determined. However, due to challenges in verifying these elements, the tax rate has been fixed at 2 percent of the total transfer value since 2015 and continues to be in effect.
However, the 2 percent tax on total transfer value has introduced numerous loopholes. Sellers can underreport transfer values to minimize taxes, resulting in budget deficits and market distortions. On the other hand, many experts say it would be unfair if sellers who suffer losses still have to pay taxes.
The Government has revived its tax collection plan to tax profits from real estate transfers with some changes. According to the Ministry of Finance, it is now possible to access transaction data dating back to 2018, including both the transaction history of land plots and taxpayer information. As a result, a return to profit-based tax calculation is viewed as more aligned with the principles of personal income tax, which is levied on actual income.
However, the Ministry noted that accurately determining profit remains a significant challenge. Declared transfer prices in contracts may not reflect the true market value, and various associated costs—such as brokerage fees, loan interest, compensation, or the original value of properties acquired long ago or through gifts—are often difficult to verify and quantify for the purpose of establishing the cost basis.
Difficult implementation
According to Chairman Le Hoang Chau of the Ho Chi Minh City Real Estate Association, it is necessary to remove the regulation on paying personal income tax of 2 percent on the real estate sale price, because personal income tax is based on the principle that only those with income pay tax. Meanwhile, the current regulation that makes sellers break even, or even lose money, still have to pay personal income tax is unreasonable.
To apply the method of calculating tax on transfer profits, it is necessary to have a sufficient basis to calculate taxable income, but there are still many shortcomings. For example, there is still a situation of under-declared prices when buying and selling, leading to tax avoidance and tax evasion.
On the other hand, the implementation of the new tax calculation method is now feasible due to the completion of the national personal identification system (VNeID) and the development of a real estate transfer price database by the tax authorities. According to Chairman Le Hoang Chau, when formulating a method to tax 20 percent of profit, it is essential to take into account other factors such as depreciation, inflation, and construction investment costs related to the property. To achieve this, the State must recognize the legal, reasonable, and valid expenses incurred by the landowner.
From a tax expert’s perspective, lecturer Danh Pham My Duyen at the Faculty of Commercial Law of Ho Chi Minh City University of Law affirmed that applying personal income tax on real estate transfers based on actual profit aligns fully with international standards and reflects the core principle of the tax—levying on income actually generated.
Implementation of a 20 percent tax rate on profits in Vietnam is currently quite challenging. The primary hurdle lies in accurately assessing the taxable profit. The tax authority can access transaction records dating back to 2018, but the figures in contracts may not reflect the true situation. This is due to 'two-price' agreements between buyers and sellers, who tend to evade tax obligations. Additionally, many properties were acquired years ago through gold transactions or asset exchanges, complicating the determination of their original cost.
Moreover, determining the original purchase price of many real estate properties is nearly impossible because these properties were often acquired long ago through complex transactions involving gold or asset exchanges. Additionally, calculating deductible costs is challenging due to the variety of expenses - including purchase, renovation, brokerage fees, paperwork, and interest on bank loans. Furthermore, documentation is lacking for many older real estate deals, with no invoices or other records to verify costs.
Veteran real estate investor Nguyen Van Hung, however, argues for the retention of the current 2 percent personal income tax on the total selling price. He contends that market fluctuations and the outcomes of speculative investments, whether gains or losses, are inherent risks that sellers must accept. Mr. Hung points out that many sellers hold properties for extended periods, sometimes 5 to 10 years or even longer, during which time significant price appreciation can occur. Applying the proposed 20 percent tax on the profit after such long holding periods would disproportionately burden these sellers.
