Asia Times: Vietnam: Trading on more investment


	September 9, 2000	atimes.com

Special Reports

Vietnam: Trading on more investment
CHAPTER 5: TRADE AND INVESTMENT

Trade
Vietnam's trade deficit is expected to rise to US$1 billion in 2000 from US$113 million in 1999 because of higher prices for imports of petroleum products. Vietnam paid about US$746 million for imported petroleum products in the first five months of 2000, up 129.5 percent from a year earlier, official statistics show. Major import products are petroleum products, tractors, tires, steel products, foodstuffs, cotton, textiles and sugar. Adding to the problem, exports by domestic enterprises rose just 0.7 percent in the period compared with the same period of 1999, the Trade Ministry reported. The export sector performed strongly in 1999, helping to shrink the trade deficit to US$113 million from US$2.03 billion in 1998. Vietnam's exports rose by 23.1 percent to US$11.523 billion for all of 1999 against US$9.356 billion in 1998. Major export products: are crude oil, rice, marine products, garments and textiles, coffee, coal, rubber, nuts

2000 export forecast: The export turnover for 2000 is expected to rise seven percent over the year target to an estimated US$10.7 billion. The main export items included footwear, garments, electronics, appliances for computers and crude oil.

Footwear: Footwear companies earned US$1.35 billion in exports in 1999, up 30 percent over 1998, making them one of the top hard foreign currency earners. The United States is the largest footwear export target following the signing of a trade pact is signed between Hanoi and Washington. In 2000 Vietnam's footwear industry is expected to expor US$1.45 billion to US$ 1.5 billion worth of its products. Currently, the EU remains the largest importer, accounting for 80 percent of the volume.

Rice: 1999's rice exports exceeded US$1 billion. In 2000, 4.3 million tons of rice will be exported, 2.9 million ton of which will be exported by HCMC and the Mekong Delta and 1.2 million tons by State owned companies, foreign invested enterprises; and the rest by large businesses in all economic sectors. Vietnam exported 4.5 million tons of rice last year, earning over US$I billion, in which the Asian market accounted for 54.5 percent; Africa 22.8 percent and the Middle East around 12 percent.

Garments: Garment export sales for 1999 were US$1.65 billion, according to the Ministry of Trade.

Coffee: Vietnam exported 378,872 tons of coffee beans in 1999, up 41 percent over the previous year. The US tops the list with imports of 78,546 tons, followed by Germany with 51,150 tons; Italy with 40,909 tons; Belgium with 33,329 tons; Spain with 30,642 tons.

In the nine months preceeding July 2000 Vietnam exported 508,970 tonnes of coffee, an increase of 54.43 percent. Export earnings during the same period dropped 4.73 percent to US$446.86 million. With an expected coffee robusta output of between 450,000 tons to 500,000 tons in the 2000 crop season, Vietnam will take over Indonesia as the biggest coffee producer in the world. Vietnam has 350,000 hectares of coffee, 95 percent of which is robusta.

Foreign investment
Foreign direct investment has fallen sharply, from US$8.3 billion in 1996 to about US$1.6 billion in 1999. Vietnamese authorities have slowed the implementation of structural reforms needed to revitalize the economy and produce more competitive, export-driven industries. Investment is not expected to increase until regulatory reforms make the Vietnamese business climate more hospitable to foreign sinesses.

The number of workers employed by foreign-invested businesses increased from 267,000 in 1997 to 296,000 in 1999, which indicated that the foreign-funded sector had undergone expansion in production. In addition, the foreign-funded sector's export value was still increasing, reaching nearly US$2.6 billion in 1999, 30 percent more than the 1998 figure. The sector now contributed 10.3 percent of the country's Gross Domestic Product (GDP).

Outward investment
In the fiscal year ended in April 2000 Vietnam carried out 11 projects abroad with a total investment capital of US$4.9 million, the highest such figure so far recorded by the country. Also in the past year, overseas projects expanded to include financial and banking joint-ventures, software industry, wooden products and handicrafts. In the first four months of this year alone, the Company for Financing and Promoting Technology (FPT) and the Ho Chi Minh City-based Long Van High Quality Wooden Products Company had two projects deployed abroad with a total investment of US$528,000. Previously, from August 1989 when Vietnam started to make investment abroad until early 1999, the country had only 18 projects licensed by other countries with a combined investment capital of nearly US$ 8 million. Of them, 12 projects with 70 percent of the total investment capital were involved in aquatic products processing and sea transports. The increase of investment abroad is due to the government Decision 22/1999/ND-CP on investment outside of Vietnam that took effect on April 29, 1999. The decision not only created a legal frame-work for investment abroad but also encourages Vietnamese businesses to integrate into the regional and world market.

Foreign Investment law
Basic laws and regulations governing foreign investment are governed by the Law on Foreign Investment in Vietnam and Decree 18 Providing Regulations on Foreign Investment in Vietnam, often referred to collectively as "FIL" for foreign investment legislation. FIL provisions detail the form and organization for four types of investment vehicles, investment guarantees, taxation, banking and foreign exchange, and other pertinent issues. The FIL, promulgated in 1987, has been amended several times, the most recent in May 2000. Foreign investors are allowed to invest in Vietnam in various areas of the economy. Vietnam encourages investment in economic sectors and localities as follows:
1. Sectors:
a. Production of exports;
b. Cultivating, growing, and processing agricultural, forestry, and aquatic products;
c. High technology, advanced know-how industries, with a view to protecting the ecological environment, investment in research and development;
d. Labor-intensive industries; processing materials and using efficiently natural resources available in Vietnam;
e.Construction of infrastructure and other important industrial production facilities;
2. Localities:
a. Mountainous and remote regions;
b. Areas of underdeveloped socio-economic level
c. Foreign investment licenses are not granted in sectors and areas where foreign investment may hamper national security and defense, cultural and historical heritage, custom, and ecological environment.

In accordance with planning and development orientation, the government specifies localities where foreign investment is encouraged, issues lists of priority and prime priority investment projects, lists of conditional investment sectors, and lists of prohibited investment sectors.

Private economic organizations are allowed to engage in investment cooperation with foreign investors in sectors and under conditions regulated by th government.

Perceived problems: Following a Ministry of Planning and Investment (MPI) survey of 64 foreign-invested enterprises, officials have identified the three most pressing problems: Dual pricing, discrimination against private firms in favor of state-owned enterprises and difficulties in accessing land. Other problems the MPI pollsters found were the business approval and labor recruitment processes. The complaint which was listed last, in terms of the worries generated, was difficulties in choosing which investment form to do business through.

Taxation
Vietnam imposes various taxes on foreign business activity, with the most relevant being income tax on corporate profits, withholding tax and value added tax.

* Enterprise Income Tax (EIT). Foreign-invested enterprises pay EIT at a standard rate of 25 percent on net income. Preferential rates of 20 percent, 15 percent and 10 percent are available for projects in encouraged fields or geographical areas. EIT refunds are available in respect of some re-invested profits. .

* Value Added Tax (VAT). On January 1, 1999, Vietnam introduced a VAT regime. The scheme has two calculation methods and a four-tiered rate structure that includes rates of 0 percent, 5 percent, 10 percent and 20 percent, with 10 percent being the standard rate. Twenty-six categories of goods and services are exempt from VAT.

* Income Remittance Tax (IRT). IRT is a withholding tax imposed on income remitted abroad. IRT is imposed at rates of 5 percent, 7 percent and 10 percent, with the lowest rate reserved for encouraged categories of investment.

* Special Sales Tax (SST). The SST is an excise tax imposed on goods and services that are considered to be luxurious. SST is imposed on automobiles, tobacco, alcohol and golf for example.

* Personal Income Tax (PIT). Vietnamese PIT ranks among the highest in the world, with maximum rates of 50 percent for foreigners, and 60 percent, plus 30 percent surtax, social insurance and health insurance payments for Vietnamese citizens.

Types of investment forms:
1. Business cooperation on the basis of business cooperation contracts (BCC): The BCC is a contractual arrangement between the foreign and Vietnamese party and no separate legal entity is created. It is considered the most flexible in some respects but has other limitations with respect to the other three investment types. A BCC receives a business license as opposed to an investment license and is not entitled to many tax holidays and other concessions given to foreign invested projects.

In practice, the duration granted rarely exceeds 15 years and is commonly five years. To secure Ministry of Planning and Investment (MPI) approval, the parties involved must show that a high degree of commercial involvement on both sides will occur, and that it is not merely a subcontracting arrangement (processing contracts are regulated by the Ministry of Trade). . BCCs are common in the petroleum and telecommunications sectors, where foreign investors are prohibited from having operational involvement or management control.

Joint venture company (JVC): The JVC is the most common form of establishment, accounting for about 70 percent of total foreign investment. A joint venture creates a private limited liability company through shared ownership by Vietnamese and foreign partners. The minimum legal capital requirement for the foreign party is 30 percent and there is no statutory ceiling limit. In practice, JVCs are usually structured as a 70 percent contribution by the foreign party and 30 percent by the Vietnamese party. Legal capital contribution by the foreign party may be in the form of cash, plant, equipment, technology and know-how.

The Vietnamese party's contribution is usually land-use rights. Under the FIL, valuation of all capital contributions is based on international market prices. Licenses are issued for a maximum duration of 50 years, although in special cases, they may be granted up to 70 years.

Some major obstacles include financing; differing agendas and commercial expectations; unexpected administrative delays in clearing current occupants from the land to be used by the project and procuring necessary permits such as construction permits, and shifting market conditions.

JVCs are required to form a board of directors, referred to as the Board of Management in Vietnam, of which the membership reflects the proportion of each party's capital contribution. However, the guiding principle for the management of foreign investment projects in Vietnam is equality between both parties. As such, at least two members on the board must be from the Vietnamese party, and certain major decisions affecting the JVC require unanimous vote of the board. Other decisions require a two-thirds majority.

100 percent foreign capital enterprises (FOE): The FOE is established as a limited liability company incorporated with 100 percent foreign capital. Like JVCs that can only be established for specific investment proposes, the FOE accounts for about 17 percent of foreign investmet.. However, increasingly more foreign investors are opting for the FOE as a way to control the various risks associated with investing. The FOE affords the advantage of independence, management control and no profit sharing. The disadvantages are difficult access to land (except in the case of industrial zones), a limited duration from 20 to 30 years, and the lack of assistance with the government by a Vietnamese partner. Initially, a FOE license was typically granted for investments in the area of high technology and export-oriented production.

Build-Operate-Transfer (BOT): The BOT investment form is designed to attract private foreign investment in public infrastructure projects. Under a BOT license, investors build the infrastructure, operate the project for a reasonable time period to recover their initial investment and earn a reasonable profit, and at the end of the contractual period, transfer the project without compensation to the Vietnamese government.

Investment licensing process
All foreign investment must have a license issued by the Ministry of Planning and Investment (MPI) in Hanoi, except branches of certain types of foreign companies, such as banks which require the approval of the relevant ministries. The MPI is designed as a "one-stop" licensing body responsible for coordinating with various other government authorities the evaluation and approval of an investment license application.

Once a license has been approved, the MPI monitors and regulates the performance of licensed projects. To direct foreign investment into priority areas, the MPI publishes an investment priority list which provides information regarding projects, industries and locations identified by various Vietnamese authorities as those appropriate for foreign investment. For evaluation purposes, investment projects are classified as Group A or Group B, with mandated approval periods of 65 days and 45 days, respectively.

Group A requires the approval of the Prime Minister and includes projects in industrial zones, export processing zones and BOT; projects with investment capital of US$40 million or more; projects in the areas of culture, press and publishing; projects related to national defense and security; and projects that use five hectares or more of urban land and 40 hectares or more of other types of land.

Group B includes all other projects and are approved solely by MPI. Although the license application and approval processes are standardized, the process is bureaucratic and it can be timeconsuming. Investors can expedite the licensing process by informing and consulting with the relevant State and local authorities about the investor's purpose and progress before formal submission of the application.

Several elements of an application carry weight in MPI's evaluation criteria: 1) legal status and financial capabilities of the project's foreign and Vietnamese partners; 2) tangible and equitable benefits to the Vietnamese party; 3) compatibility with the government's policy goals and priorities in terms promoting economic and social development, jobs creation, greater production capability, and technology transfer. The application package must be in Vietnamese and one other commonly used foreign language.

Performance requirements/incentives
Vietnam has certain requirements, such as localization of production and export commitment for specific industries and projects. Requirements are usually discussed during contractual negotiations with the Vietnamese partner or during the investment licensing process. Subsequently, the negotiated terms are set forth in contracts establishing the joint venture or may be expressly stated in the foreign investment license.

Incentives
In general, a licensed foreign investment is eligible for the incentives specified below:

- Profits tax: The standard rate is 25 percent, which compares favorably with rates of 25 percent, 35 percent or 45 percent specified for Vietnamese-owned enterprises. Preferential rates of 10 percent, 15 percent and 20 percent may be applied to investment projects meeting certain criteria or identified as projects of special importance prescribed by the MPI. Rates of less than 25 percent are valid for a period of between five to 10 years from the date the investment license is issued. The tax rates are determined by MPI and are reflected in the investment license.

-Turnover Tax: It is possible to receive temporary exemption in limited circumstances (e.g. import-substitution businesses or businesses operating in geographically difficult areas).

- Import Duty: A joint venture company, 100 percent foreign-owned enterprise and the foreign party to a BCC are exempt from paying duty on the import of equipment and materials which form part of the capital contribution of the foreign investment.

Technology transferred as part of a foreign party's capital contribution is also exempt from import duty. Export manufacturers receive reimbursement on import duties paid on materials used in production once the finished products are exported. Some investors report difficulty in actually receiving reimbursement, however.

- Others: Tax refunds are available on profits reinvested for at least three years. Joint ventures and 100 percent foreign-owned enterprises may carry forward their losses for up to five years. Foreign investors may also enjoy tax concessions and holidays for investments in Export Processing Zones (EPZ) and Industrial Zones (IZ).

EPZ are industrial areas which are developed to support the production and export of goods. IZ are concentrated industrial areas established for export manufacturing and domestic production.

The concept is to provide these zones and parks with essential utilities and infrastructure for operations and tax incentives and preferential treatment to encourage investment. Projects located in EPZs enjoy the following investment incentives, among others:
- Exemption from export tax on finished products exported from the EPZ to foreign markets;
- Tax rates of 10 percent for production enterprises and 15 percent for service enterprises;
- Exemption from tax on profits for the first four profitable years for production enterprises and first two profitable years for service enterprises;
- A tax rate on profit remitted abroad of five percent

Projects located in an IZ enjoy the following investment incentives, among others:
- Profit tax rates of 18 percent for production enterprises and 22 percent for service enterprises. Enterprises which export at least 80 percent of their production enjoy a lower rate of 12 percent;
-Exemption from profits tax for the two profitable years for production enterprises and one year for service enterprises;
- Export processing enterprises located in an IZ are still entitled to enjoy EPZ tax incentives.

Remittances
Subject to foreign exchange availability and after payment of all tax obligations, foreign investors may repatriate their share of legal after-tax profits (only during the year in which profits were actually made), principal and interest due on loans, royalties or fees paid, invested capital and any other legally owned money and assets. This guarantee is valid if the activities are supported by an underlying contract that has been approved by the relevant government authorities.

Land ownership
The principle of private ownership of land does not yet exist in Vietnam. Foreign investment under the FIL permits foreign investors to use land by leasing it directly or through a joint venture relationship with a local partner who has been allocated land use rights by the State. Land leases to foreign entities may be granted up to 50 years, or in special circumstances 70 years with the approval of the Prime Minister. In the case of a joint venture, the State grants the land lease to the Vietnamese partner (invariably State-owned) who usually contributes the land as legal capital worth the value of the land use right.

The land use right issue has proved particularly vexing for foreign investors due to uncertainties and limitations with respect to valuation of the land-use rights for capitalization, the protracted approval process for acquisition, the difficulties and cost of clearing the land of its current users, and the inability to apply land use rights as collateral for foreign loans.

Conversion and transfer policies
Under the FIL, foreign parties to a BCC and foreign invested enterprises are generally required to be self-sufficient in foreign currency requirements to pay expenses, repatriate profits, repay loans and other foreign currency expenditure requirements. As all transactions in Vietnam are required to be in dong, which is non-convertible and does not circulate outside of Vietnam, access to foreign currency is a significant issue for most foreign investors unless their business is exporting in exchange for hard currency.

Foreign invested enterprises may apply to the State Bank to purchase foreign currency. However, it distributes available foreign currency according to official priorities and favored projects, such as infrastructure construction and import-substitution, having priority.

Expropriation and compensation
The FIL expressly provides guarantees against nationalization and expropriation for all forms of foreign investment. The FIL also states that where the benefits of a licensed foreign investor are "reduced due to any change in the law of Vietnam, the State shall take appropriate measures to protect the interest of the investors."

Investment law amendments
The new Law on Foreign Investment, ratified by the National Assembly in May 2000, now contains 21 fresh additions and 20 changed articles. Major changes include alteration to investment forms and voting procedures in joint ventures. Investors will now be allowed to open offshore accounts and can expect investment procedures to be simplified.

A number of import tariffs and tax exemptions have been changed while land use rights concerning mortages and clearance have been improved. Joint venture boards will be required to reach mutual agreement when making appointments and dismissals of general and deputy general directors. Mutual agreement will still also be required for changes to business functions.

Other important issues like the voting procedures requiring mutual agreement when making annual final accounting reports, loans, and appointment and dismissal of chief accounts were noticeably missing in the amendments. One change now allows companies which suffer monetary losses from changing regulations to offset those losses against their income to lower their tax bill.

The amendments will reduce some of the current and fixed expenses for investors which were already too high compared to regional countries - for example, electricity is 25 percent higher than the region while post and telecommunications charges are four to five times higher. Investors are now allowed to open offshore accounts, assuming approval from the State bank. The taxes on profits reimbursed overseas were lowered to 3, 5, and 7 percent from the previous 5, 7 and 10 per cent bracket.

Overseas Vietnamese
A surge in Viet Kieu (overseas Vietnamese) investments could follow some key rule changes. Inter-ministerial Circular 10/2000/TTLT has removed some major obstacles faced by Viet Kieu, and expatriates who possess certificates of permanent residence in Vietnam. Viet Kieu have traditionally preferred to invest under the name of relatives in order to avoid dual-pricing and access better tax rates.

Officially, 50 Viet Kieu projects worth US$200 million operate under the FIL. Additionally, there are 370 businesses, with registered capital of US$28.6 million established under the Law on Encouraging Domestic Investment. However, observers believe that taking into account unofficial investments, Viet Kieu have invested at least US$1.2 billion in the homeland, mainly in property, software, aquaculture and fishery-processing.

The latest circular stipulates that Viet Kieu, and resident expatriates, can now invest through Amended Decree 51 on Encouraging Domestic Investment. The circular is effective from September 1. This will allow these investors to receive the same land tax-rate and land-rent incentives as domestic investors . The circular also applies the one price mechanism for land rents, raw materials, fuel and a number of other services. Viet Kieu, resident foreign investors and their close relatives will pay the same price for accommodation, travel, water, electricity, medical treatment, telecom, education and training as locals.

Viet Kieu investment in Vietnam will receive a 20 percent profits tax reduction. Viet Kieu investors also no longer have to file a legalized curriculum vitae (which among other things states whether or not a person has a clean police record). Viet Kieu have often complained such documents are hard to obtain in some countries, and do not even exist in others. Under the new provisions, Viet Kieu are to be given clearer opportunities to legally lay claim to cloaked investments. Entrance and exit procedures will also be simplified for such investors.

Overseas Vietnamese would like to see the scrapping of the rule which requires them to obtain a certificate of blood-descent in order to be officially registered as a Viet Kieu investor. Lost or non-existent records have turned this requirement into a huge obstacle for some would-be investors. Similarly, they would like to be able to rent property.

Oil and gas
Amendments to the oil law in May 2000 offer more financial incentives to foreign investors. Investors will be allowed to earmark up to 70 percent of the output value to recover their investment capital, compared to the 30-35 percent range previously applied. Moreover, foreign investors can open bank accounts and raise funds abroad to finance their projects in Vietnam.

Under the previous law, an across-the-board 50 percent corporate income tax applied to oil projects. Deep-sea oil exploration projects now enjoy a 32 percent tax . Article 3 defines encouraged oil and gas projects as those carrying out oil and gas operations in deep water areas, offshore waters and areas which have especially difficult geographic and geologic conditions according to the block list decided by the Prime Minister.

Costly SOEs Foreign assistance is officially being sought to help Vietnam pay the US$0.75 billion cost of shedding around 400,000 state workers. The Ministry of Finance is drafting a proposal to seek offshore funds that would greatly help ease the burden caused by so many redundancies.

The National Enterprise Reform Commission (NERC) says the capital would help officials resolve a dilemma - on the one hand, over the next three years they want to take around 114,000 workers annually out of the state firms system, but on the other hand, they want to make sure that all these workers are given new employment, pensions or compensation. Available state funds to meet the second objective are not adequate. And if it is not met, attempts at creating a leaner state sector will flounder. The World Bank believes that current targets should see SOEs releasing 600,000 workers by 2005. Planned equitizations, mergers, dissolutions and bankruptcies should produce this figure, it says.

Forty percent of SOEs are not making consistent profits, another 40 percent are hardly achieving any success at all and the other 20 percent are losing. NERC wants to see 1,498 SOEs equitized, leased or sold off during 2000-2002, 380 merged and 368 dissolved or bankrupted. THeir debt is estomated at US$1.51 billion. Vietnam officially has 5,280 SOEs with total state capital of around VND106.9 trillion. This means SOEs have an average capital base of around VND18.43 billion (US$1.31 million).

Local licencers From July 1, 1999 foreign investors no longer had to pay local licensers to register business applications. The ruling is applicable to all forms of foreign direct investment in Vietnam. Previous Ministry of Finance rules said that foreign investors had to pay 0.01 percent of the project's total amount as a registration fee at a minimum US$50 and maximum USD10,000 per project.

Chapter 6

(Special to Asia Times Online)

back to the top

©2000 Asia Times Online Co., Ltd.

Asia Times Online is designed and produced by Multimedia Asia Co., Ltd.