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Current Issue

Issue No. 19
April 1999

A Periodic Report to Our Clients
(higher numbers indicate more recent dispatches)

See VVG's  monthly feature on Current Economic Indicators

Current Dispatches

FOREIGN INVESTOR CONCERNS - There is a large amount of activity in Vietnam. It all seems due to the status of the US-Vietnamese bilateral trade negotiations.

In preparation for the recent, 7th round of US-Vietnamese Trade Negotiation talks, and the even more intense round of spinning the results of those talks, the level of discussion has taken on a life of its own. 

The World Bank concluded its own meetings with the Government of Vietnam and addressed a wide assembly of interested listeners, including a unique joint meeting of the EU Business Council and the American Chamber of Commerce.  In the face of the "Banana War," that event is newsworthy in and of itself.  Among the issues the World Bank presented to the government was a long, long list issues that included concerns of private investors in Vietnam.

The American Chamber of Commerce and the Vietnamese Chamber of Commerce and Industry have adopted a joint statement to the effect that both organizations urge their respective counterparts to complete negotiations on a comprehensive Bilateral Trade Agreement.

The AmCham has taken the position that it urges both the US Trade Representative and the Vietnamese Government to complete negotiations on a strong and comprehensive Bilateral Trade Agreement to enhance market access for US goods and services in Vietnam and to strengthen the protection of intellectual property rights.

The Vietnam  Consultative Group, Private Sector Forum, an organization of foreign investors in Vietnam that meet regularly in Hanoi, compiled a list of issues and suggested actions which is intended to be a dynamic document.

The Government promised to listen to all of this advice.  The question that always remains is, with the Government listening, are the foreign invested companies addressing the proper audience to achieve necessary change?  The article that immediately follows this gives us all a better perspective to understanding that answer.   We lastly offer a private assessment from a leading figure involved in the subject matter.

A    Level the Playing Field

1.    Protectionism - Effort to build up the State sector holds back the domestic and foreign private sector while providing support to State companies regardless of whether they are efficient or not. Consider a policy to promote the development of the private sector, including acceleration of equitization.

2.    Lack of Follow-up on reform initiatives. Consider inviting the business associations to participate irregular meetings with the Prime Minister together with key representatives of the policy making bodies. Track action on suggestions with Private Consultative Group.

3.    State Owned Partners often have conflicting or unclear objectives, which make decision-making difficult and sometimes lead to unnecessary disputes.   State Owned Enterprise (SOE) regulatory and commercial (profit) functions should be separated with government assuming more regulatory functions so that SOEs can concentrate on commercial tasks.

B    Business Costs

1.    Dual-price system: telecommunications, transportation, and utilities rates charges to foreign companies are much higher than those charged to Vietnamese companies.  Introduce a single pricing system

2.    Discrimination in advertising rates:  There are no written laws, by-laws, regulations, or decrees saying that domestic companies should enjoy better rates than foreign invested companies , or that media rates, in particular TV advertising rates, charged to foreign invested companies should be denominated in US dollars.  However, for the same TV spot, the rate for foreign companies is about five times more than local companies and denominated in US dollars.   Remove the price discrimination in advertising rates between foreign invested and domestic entities. Convert US dollar denominated prices for goods/services into VND.

3.    Deductibility of marketing expenditures: set by Decree 12 is limited to 5% of enterprise income tax deductible expenses.  This reduces long-term profitability and viability of foreign investments in the consumer goods sector.   Remove the 5% limit on advertising marketing expenses

4.    Required use of Employment Service Agencies: The supply of Vietnamese labor to foreign run organizations has to done through an employment service agency, adding unnecessary both cost and bureaucracy in doing business in Vietnam.   Allow all foreign organizations in Vietnam (including representative offices, branches, etc.) to engage Vietnamese labor directly.

C    US Denomination/De-dollarizing the Economy

1.    Denomination in US dollars:  Many utilities, services, etc are denominated in US dollars which is inconsistent with the Government's stated aim to move to a Vietnamese dong-only economy.  Government and main State owned companies should take the lead in denominating all charges in Vietnamese dong and requiring payment only in Vietnamese dong.

2.    US dollar based salaries:  This has led to unjustified net salary pay increases when there is a devaluation of the Vietnamese dong; complicated the payroll system; results in higher tax/insurance bracket and thus higher costs to the employers; increased overheads are difficult to pass on to consumers, thus there is a reduction in competitiveness of foreign invested companies in Vietnam and less incentive for others to invest here.  The Government should remove US dollar denomination in labor cost policies.

D    Taxation

1.    VAT Tax: implementation only this year shows the need for dramatic reform as deductions are not clear, required filings for each business location is not workable, and two categories of VAT payers in inherently unfair. There should be no limitation on legitimate deductions, only the "head" office should file for the entire company, and all companies should be held to the same standard of the law.

2.    Personal Income Tax: on local employees is too high even when compared to foreign employees, which discourages development of local talent.   Tax on world-wide income regardless if the income is not related to Vietnam is unfair, discourages investment, and encourages understatement of income.  The Government should reduce personal income taxes for locals, remove "super" tax on higher income earners, and remove tax on tax when employer pays the tax; and restructure tax basis for income earned relating to Vietnam.

3.    Corporate Tax, when contrasted to other nations seeking foreign investment makes Vietnam an unpopular location for investment.   Overall tax rates must be lower to encourage investment.

E    Foreign Exchange

Foreign Exchange Access: Only foreign invested companies in Vietnam that produce import substitutes or which are classified as "important" or "infrastructure" projects have the right to convert Vietnamese dong to foreign currency. All other companies must apply for such rights on a case-by-case basis, resulting in most foreign invested enterprises not being able to manage their foreign currency balance needs. There is always uncertainty if they will be entitled to convert their Vietnamese dong revenue into foreign currency IF foreign currency is available for such purpose. The government should grant the right to convert to all foreign invested companies subject to availability, giving the State the right of first purchase, and second right to such companies which produce import substitutes or which are classified as "important" or "infrastructure."

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THE GOVERNMENT RESPONDS. Following the successful 1998 meeting last year between the Prime Minister and representatives of the foreign investment community in Ho Chi Minh City, Prime Minister Phan Van Khai and Deputy Prime Minister- Foreign Minister Nguyen Manh Cam held forums in Hanoi to discuss various new initiatives to attract foreign investment, and to respond to the concerns raised by the foreign business community in Vietnam. Quoting from the actual Decision (translated by the law firm Phillips Fox with the help of MPI), the following was announced:

Decision No: 53/1999/QD-TTg:

THE PRIME MINISTER

Pursuant to the Law on Organization of the Government dated 30 September 1992;
Pursuant to the law on Foreign Investment in Vietnam dated 12 November 1996;
In order to further encourage and facilitate activities of enterprises with foreign owned capital;
Following the proposal of the Minister of Planning and Investment;

DECIDES

Article 1. Price of goods and services

To adjust price of certain goods and services as follows:

1. Electricity selling price -  With effect from 1 July 1999, the electricity selling price applicable to production activities of enterprises with foreign owned capital (for normal hours, 6KV-20KV power supply) shall be 7.5 cents/kWh.  Based on the above electricity selling price, the Government Pricing Committee shall determine specific electricity selling prices applicable to production, business and service activities of enterprises with foreign owned capital.

2. Telecommunication fees and charges -

With effect from 1 July 1999, the telephone installation fee for enterprises with foreign owned capital and foreigners shall be the same as applicable to local enterprises and Vietnamese nationals. With effect from 1 July 1999, the telephone subscription fee applicable to enterprises with foreign owned capital and foreigners shall be US$10 per telephone per month; charges for domestic calls shall be calculated according to the tariffs applied for local enterprises and Vietnamese nationals.

With effect from 1 July 1999, the current charges for international telecommunications from Vietnam to other countries shall be reduced by an average of 10%; and from 1 July 1999, the telecommunication surcharge charged by hotels shall not exceed 15% of the charges imposed by the post office.

Based on the above fees and charges and after consulting with the Government Pricing Committee, the General Department of Post & Telecommunication shall determine specific telephone installation fees, telephone subscription fees, charges for domestic calls and for international telecommunications from Vietnam to other countries.

3. Clean water price - With effect from 1 July 1999, the People's Committees of provinces and cities under central authority shall apply a clean water tariff based on the purpose of use irrespective of whether the user is a domestic enterprise, enterprise with foreign owned capital, Vietnamese national or a foreigner in accordance with the regulations of Inter-Ministry Circular 02/TTLB dated 28 April 1997 of the Ministry of Construction and of the Government Pricing Committee.

1. With effect from 1 July 1999, the same visiting charge shall apply for both Vietnamese and foreign visitors at each historical, revolutionary or cultural relic. The Ministry of Finance, the People's Committees of provinces, and cities under central authority shall be responsible for providing guidance on and supervising the implementation of this provision.

2. The Ministry of Finance shall submit to the Government a proposal on the amendment of Decree 193/CP dated 29 December 1994 of the Government which aims at only imposing an administrative fee in respect of registration of assets of enterprises with foreign owned capital for implementation from 1 July 1999.

3. From 1 July 1999, the fee for establishing a representative office of a foreign economic organization in Vietnam shall be VND 1.000.000; and there shall be no fee for any extension.

4. Pursuant to Decree 04/1999/ND-CP dated 30 January 1999 of the Government, the Ministry of Finance shall decide within its power, or submit to the Prime Minister a proposal on reduction or elimination of fees and charges imposed by Ministries, People's Committees of provinces and cities under central authority and provincial Boards of Management of Industrial Zones that are beyond their authorities or are of an improper nature or purpose, or implementation from 1 July 1999.

Article 3. Currency applicable to service prices, fees and charges

With effect from 1 July 1999, service prices, fees and charges shall be stipulated in Vietnamese Dong, except as otherwise regulated. Service prices, fees and charges determined in US Dollar as specified in Articles 1 and 2 of this Decision shall be converted to Vietnamese Dong at the average exchange rate of the inter-bank foreign exchange market announced by the State Bank.

1. From 1 July 1999, both the minimum wage and wages of Vietnamese employees working in enterprises with foreign owned capital shall be stipulated and paid in Vietnamese Dong based on the conversion of both the current minimum wage and current wages stipulated in US Dollars, into Vietnamese Dong at the average exchange rate of the inter-bank foreign exchange market announced by the State Bank.

With effect from 1 July 1999, if the consumption price index increases by more than 10% compared with the latest adjustment, both the minimum wage and wages of Vietnamese employees working in enterprises with foreign owned capital shall be adjusted accordingly.

2. The Ministry of Labour - War Invalid and Social Affairs shall reclassify locations for application of the minimum wage according to Decision 385/LDTBXH-QD dated 1 April 1996 of the Ministry of Labour - War Invalid and Social Affairs for implementation from 1 July 1999.

The minimum wage specified in this clause shall apply to the projects licensed after the effective date of this Decision. In respect of the projects licensed before the effective date of this Decision, enterprises with foreign owned capital and the collectives of employees shall voluntarily negotiate the payment of wages in accordance with the provision of this clause on the basis of keeping stable production and maintaining employment.

3. The Ministry of Finance shall submit to the Government the proposed regulations on the implementation of Point b, Clause 2 of Article 16 of the Law on Trade Unions. The deduction of the trade union fee from the salary budget shall not be applied to enterprises with foreign owned capital.

The Ministry of Labour - War Invalids and Social Affairs shall submit to the Government a proposal on the amendment of Decree 58/CP issued by the Government dated 3 October 1996, to authorize provincial Departments of Labour - War Invalids and Social Affairs and provincial Management Boards of Industrial Zones to issue work permits to foreigners working in enterprises with foreign owned capital in accordance with simple and convenient procedures, for the implementation from 1 July 1999; the work permit duration shall be consistent with the term of the labour contract signed between the enterprise and the foreign employee.

Article 6. Recruitment and training of employees

Enterprises with foreign owned capital shall recruit Vietnamese employees through Vietnamese labour supply organizations. An enterprise shall be entitled to directly recruit Vietnamese employees if the Vietnamese labour supply organization is unable to meet the requirements made by the enterprise within a maximum of 30 days after receiving the request made by this enterprise. The Ministry of Labour - War Invalids and Social Affairs shall submit to the Government a proposal on the amendment of Decree 72/CP dated 31 October 1995 and Decree 85/1998/ND-CP dated 20 October 1998 issued by the Government in order to implement this provision from 1 July 1999.

The Ministry of Labour - War Invalids and Social Affairs shall re-organize and strengthen labour supply organizations in order to improve the quality of labour supply services to enterprises with foreign owned capital.

The Ministry of Labour - War Invalids and Social Affairs, in co-ordination with People's Committees of provinces and cities under central authority, shall organize vocational training for the purpose of labour supply to enterprises with foreign owned capital.

1. Enterprises with foreign owned capital and foreign parties to business cooperation contracts shall be entitled temporarily to defer the VAT payment on raw materials and materials imported for manufacturing exported goods in the period of temporary deferring of the payment of import duties in accordance with laws on import - export.

2. The Ministry of Finance shall submit to the Government a proposal on the amendment of Decree 28/1998/ND-CP dated 11 May 1998 and Decree 102/1998/ND-CP dated 21 December 1998 of the Government to provide that the following goods imported by enterprises with foreign owned capital and foreign parties to business co-operation contracts to form fixed assets (which are exempted from import duty in accordance with Article 63 of Decree 12/CP dated 18 February 1997 and Article 10 of Decree 10/1998/ND-CP dated 23 January 1998 of the Government) shall not be subject to VAT:

- Equipment, machinery, specialized transportation means belonging to a technological production line used for forming fixed assets of the enterprise;

- Construction materials used for forming fixed assets of the enterprise and not locally produced.

1. Except for goods which are prohibited exports, domestic enterprises and individuals shall be permitted to sell goods to export processing enterprises, and be exempted from export duty and only be required to make a declaration with the Customs Office of the Export Processing Zone.

2. Export processing enterprises shall be permitted to sell their products to the domestic market, including:

- Raw materials and semi-finished products sold to enterprises directly manufacturing export goods;

- Goods specified in the List of Essential Import Substitutes which the domestic market needs to import;

- Commercially valuable scrap and substandard products.

Import procedures and the payment of import duties in respect of the above goods shall be in accordance with current regulations.

Industrial zone enterprises and export processing enterprises shall be granted land use right certificates with a term up to the term of the contract signed with the industrial zone or export processing zone infrastructure development companies.

The General Department of Land Administration shall issue necessary documents to implement the above provisions.

Article 10. Encouragement for outside construction of houses for workers and infrastructure facilities

Enterprises of all economic sectors and enterprises with foreign owned capital shall be entitled to lease land at the minimum land rental and shall be entitled to maximum exemption from and reduction of taxes for construction of houses for workers and infrastructure facilities outside industrial zones and outside the location of enterprises with foreign owned capital (e.g. education, training and health care facilities, etc).

1. Enterprises with foreign owned capital which meet one of the following conditions shall be entitled to enjoy the same incentives as those applied to projects in the List of Projects where Investment is Specially Encouraged;

a. Exporting at least 80% of its products;

b. Exporting at least 50% of its products and intensive use of local labour and raw materials (with a value of at least 30% of the production cost);

c. Investing in areas with difficult socio-economic conditions and meeting one of the following conditions:

- Exporting at least 50% of its products in the fields of breeding, planting and processing of agricultural, forestry and aqua cultural products;

- Exporting at least 50% of its products and employing more than 500 employees;

- Exporting at least 30% of its products and intensive use of local raw materials (with a value of at least 30% of production cost);

d. Producing mechanical, electric or electronic spare parts or accessories with high added value and intensive use of local raw materials;

e. Processing minerals exploited in Vietnam.

2. Projects manufacturing mechanical, electric or electronic spare parts or accessories shall be exempted from import duties in respect of raw material within three years of commencement of operation.

3. Foreign investors investing in mountainous and remote areas shall be entitled to a profits remittance tax rate of 5%.

4. Enterprises with foreign owned capital under difficulties in the implementation of the project that temporarily delay construction or operation shall be entitled to a reduction of or exemption from land rental during the period of temporary delay.

5. Enterprises with foreign owned capital which have been granted a rice exporting quota shall be permitted to purchase raw rice directly from producers in accordance with guidance provided by the Ministry of Trade.

1. This Decision shall be of full force and effect 15 days from the date of its signing.

2. Ministers, heads of ministerial equivalent bodies, heads of Government bodies and chairmen of People's Committees of provinces and cities under central authority shall be responsible for the implementation of this Decision.

THE PRIME MINISTER

PHAN VAN KHAI

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ASSESSMENT of Opportunities: 

To aid the reader who is not yet accomplished in reading conditional language and between the lines of what is written, we suggest that you more carefully re-read Decision 53, above.

It is taken directly from a draft translation of the decision provided to the foreign investor community by MPI.  We find that it contains a tremendous amount of conditional language, and substantial information is not stated.

There are also entire categories of stated  "concessions" to foreign concerns that are more apparent than real.  For example, we wonder what the government leaders might be thinking when they place so high on their list at Article Two, Paragraph No. 1 a commitment to a single-priced entrance fees at war museums and cultural events.

That act alone enhances the appearance of the Government's perception that such is an area of high concern to the foreign investment community.  Alternatively, it may have been meant for internal to Vietnam consumption only. However, lack of transparency in the decision making process is also part of the current problem.

To borrow from an informed source that does not want attribution:

While some in Vietnam may feel these promises constitute progress, from outside Vietnam the promises may appear strange. For example, almost no other country (except China) has a dual pricing system to begin with.   Getting rid of it (to the extent that they actually do so) merely starts to get Vietnam into the realm of normalcy in competing with other investment and trade partners. Just being "less bad" still doesn't make the investment environment good.

Legal Analysis.  The Law Firm of Phillips Fox provides the investor community with the favor of their analysis with the benefit of hearing MPI on the subject.   They advise:

The Decision is in substance a policy statement of changes that are to apply from 1 July 1999. Interpretation of some of the wording is difficult. A summary including some clarifications which we understand from MPI are as follows:

1. Electricity Price Reduction The reduction of 1 cent per kWh from 8.5 cents to 7.5 cents for "normal hours" is stated to apply only to "enterprises with foreign owned capital", that is JVs and 100% FOEs. It does not apply to parties to BCCs, Representative Offices, Branches or foreign individuals.

Further, the reduction only applies in cases of 6 kV or above power lines. Full details of this measure are to be determined by the Government Pricing Committee.

2. Telecommunications Charges Changes applicable to all consumers from 1 July 1999 will be:

- the same installation fees applicable to Vietnamese and foreign consumers.
- subscription fee for foreigners of US$10 per month
- the same domestic call charges applicable to Vietnamese and foreign consumers.
- international telecommunication charges reduced by 10%
- hotel surcharge: maximum 15%

DGPT are to provide full measures.

3. Water - The same charges will be applicable to Vietnamese and foreign consumers.

4. Tourist Sites - Vietnamese and foreign visitors will pay the same at each tourist venue.

5. Registration of Assets - Asset registration will only be subject to an administrative fee. Ad valorem charges will be abolished.

6. Representative Office Licences - These licences will now cost VND1,000,000, down from US$5,000.

7. Improper Fees - These fees are to be abolished according to a plan to be prepared by the Ministry of Finance.

8. VND Denomination of Prices - "Service prices, fees and charges" are to be stipulated in VND unless "otherwise regulated". We are informed this is a reference to Government charges although literally it could be interpreted as all charges by any entity, body or individual in Vietnam.

9. Currency of Denomination of Wages - This provision is not happily drafted. We are informed that there are two cases dealt with.

The first case is the MOLISA Decision on Minimum Wage made from time to time and hitherto stated in USD. This will now be converted into and henceforth published in VND.

The second case is current contracts of employees of "enterprises with foreign owned capital", that is JVs and 100% FOEs. The second case does not apply to parties to BCCs, representative offices, branches or foreign individuals who are employers. These contracts are to be converted into VND.

In both cases if the consumer price index increases by more than 10% since the last adjustment to the Minimum Wage Decision or employment contract, as the case may be, then the VND payable is to be increased" accordingly".

This all means that employment contracts are now to be stipulated in VND and become subject to automatic indexation in accordance with the consumer price index in steps of 10%.

How this will work in practice, in particular how it will interact with regular salary reviews by employers, is not yet clear.

10. Locations to which the Minimum Wage is applicable - Locations to which the minimum wage is applicable are to be revised for all projects licensed after 26 March 1999. For projects licensed prior to 26 March 1999 changes will be by "negotiation".

11. Work Permits - Simple and convenient procedures are to be devised but, once again, only applying to "enterprises with foreign owned capital", that is JVs and 100% FOEs. Hopefully actual legislation will have broader scope.

This much criticized provision requiring use of Vietnamese Labour Organizations lives on. It is embedded in the Labour Code as well as in Decree 85 with the result that it also applies to "enterprises with foreign owned capital", that is JVs and 100% FOEs, notwithstanding the silence of Decree 85 on this point.

The rule cannot be changed without National Assembly approval. Therefore to make things easier for foreigners a 30 day period has been introduced upon expiry of which (if no satisfactory result is obtained) the use of Vietnamese Labour Organizations may be dispensed with.

MOLISA is to prepare amending legislation to Decrees 72 and 85 which it is hoped will have coverage beyond just foreign owned enterprises.

13. VAT - VAT is to be deferred or exempted in certain cases connected with re-export and fixed assets.

14. Export Processing Enterprises - Export duty exemptions will apply to goods sold by domestic enterprises to export processing enterprises. Export processing enterprises may sell their goods in the domestic market subject to normal import and import duty procedures.

15. Land Use Rights - These are to be granted to industrial zone enterprises and export processing enterprises. The theoretical legal base for this where the relevant zone owner already possesses such rights will be interesting to discover unless transferred.

16. Outside Facilities - Land for worker housing and facilities is to be provided at minimum rent and maximum tax relief.

17. Projects Specially Encouraged - This category is entitled to most incentives in terms of taxation relief but has never been clearly defined. It is now defined as listed in article 11 of the Decision.

18. Import Duty Exemption on Raw materials - There is a three year exemption for raw materials for parts and accessories manufacture.

19. Remittance Tax - Remittance tax on projects in mountainous areas is reduced to 5%.

20. Land Rent - Land rent will be reduced or eliminated in cases of construction delay.

21. Rice Exporters - Rice exporters may purchase directly from producers

Outlook  The Vietnamese are a wonderfully persistent and pragmatic people.  Almost always, and to a fault, the internal political process of change (one of consensus and not one of authoritative, singular pronouncement) requires an "open" discussion that often involves the use of the State controlled press to air positions.   In many ways, it is not much different in that regard from the American political system, although the local government has a long way to go in terms of transparency in its decision-making process.

However, as in 1986 when the change was first announced to open the markets (out of necessity not only desire), and in 1991 when the international wars came to an unofficial end, those of us in Vietnam have a growing sense of reality. And that is the now pressing need for change is being well met by the equally growing local realization that if change does not issue soon, the US side will not be able to reach any agreement until well into 2001. 

The current talks will most probably halt in substance if not in fact by late summer 1999.  The substance of such talks will most likely not resume for at least two years. The talks will need to await the inauguration of the next American President and the time for the new administration to reach a  position about Vietnam.

Most annalists figure that the old flames of American passion over the horrible decade of war in Vietnam are presently dying a natural death.  However, that thought process continues, the hot flame will be re-ignited with the spark of a presidential election year.  No one wants to deal with that issue in a the light of a presidential election process.

We addressed this issue in an article first published in February 1998.  We remain of the same belief: Vietnam's window of opportunity is still open, but fixing to close very soon.  Now it is up to Vietnam to move forward to meet the minimum standards: setting a time-table for change in all needed sectors  is the minimum requirement for WTO entry.  If Vietnam can do that now, it will achieve for all its people the benefits that will only come from Normal Trade Relations with America.

Vietnam's concern is that if they agree to such standards, there is no guarantee that the America Congress will approve the Trade Agreement hammered out.  The answer is that projecting passage of such measures may be difficult from the America Congress, but it is leagues easier than trying to understand, much less predict, results from the ruling bodies in Vietnam.  In this case, the effort and benefits are both well worth the risk to the people of Vietnam.

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Vietnam Vignettes is a periodic report distributed since early 1994. It is NOT a newsletter although for the ease of linkage we have called it that.  It is a summary of domestically published  media reports from more than 17 industrial sectors that we at VVG follow and report upon for our clients. * Due to the importance of certain topics of key importance to trade with Vietnam, we will occasionally include some wire and other media reports.