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Solidifying confidence of European businesses
When Antonio Tajani, Vice President of the European Commission (EC), met representatives of foreign and domestic companies as well as reporters in HCMC this week, he emphasized a stable business environment and innovation as the key contributors to the success of companies operating in Vietnam.
There is a very good reason behind the remarks of the high-ranking EC leader, who has just wrapped up his “Mission for Growth” trip to Vietnam from November 12 to 13, as his points have also been highlighted by economists and experts. Most recently, the success factors and business concerns mentioned by the EC Vice President are also echoed in the sixth edition of “Whitebook of Trade/Investment Issues and Recommendations” that the European Chamber of Commerce in Vietnam (EuroCham) launched on Monday.
In the Whitebook 2014, EuroCham lists the main problems facing around 800 EuroCham member companies in various business sectors for the Government to address with priority to win the confidence of investors from Europe and elsewhere.
Problems with consistency
In the annual publication, EuroCham hails the Government’s efforts for improvements in certain areas but urges stronger endeavor to ensure better benefits for foreign and local businesses as well as the society. To this end, EuroCham insists on consistent legislation that helps constitute a stable environment for businesses and investors.
EuroCham Chairman Preben Hjortlund draws attention to the inconsistent implementation of regulations, despite the fact that comprehensive legal frameworks have taken effect in a number of areas.
In the Executive Summary for the Whitebook 2014, EuroCham indicates that problems arise when a time lag exists between the adoption of a law and its implementation through various decrees/circulars/decisions. The Whitebook 2014 has eight cross-sectoral and 13 sectoral chapters about human resources, IPR, taxation, transport and logistics, banking and finance, energy, fast moving consumer goods, information technology and tourism. EuroCham has added a chapter on sustainability in the publication to highlight its efforts in this area and the successful Green-Biz 2013 Conference in September.
“By the time the relevant legal documents have been published, the context or understanding of the law might have changed. In addition, rules and regulations are often subject to differing interpretations and application by local authorities, which causes lack of clarity and inconsistency,” EuroCham says in the summary.
European businesses cite granting equal access to foreign companies as a case in point. Decree 102/2010/ND-CP says companies established in Vietnam with foreign ownership of up to 49% can enjoy the same investment treatments as those applicable to local companies. However, EuroCham members complain conflicting interpretation and application of the rules among the local investment licensing authorities, with some still holding the view that a Vietnamese company would become a foreign-owned company regardless of the foreign ownership ratio.
Inconsistency also lies within taxation, as EuroCham members prove that the implementation of tax incentives has been arbitrary with regards to the discretion of local tax authorities in interpreting the basis of the incentives.
“For instance, the list of areas entitled to favorable investment conditions and incentives are currently provided under both investment regulations and tax regulations (import duty and corporate income tax). Because of this overlap, tax authorities adopt favorable investment conditions and incentives only in accordance with the tax laws rather than the investment laws,” the summary notes.
In a survey conducted by EuroCham in October, its members expressed their concerns about the negative impact of legislative changes on their operations in 2013 and next year. The 13th quarterly EuroCham Business Climate (BCI) survey found 67% of the participating businesses ticked lack of or inconsistent implementation of legislation as the second key challenge, after corruption (72%) and above administrative difficulties (52%) and lack of transparency (45%).
Absence of clarity
In addition to inconsistency, EuroCham’s Motorcycle industry members refer to the lack of clarity regarding incentives of the Corporate Income Tax (CIT) for expansion investment. According to them, on June 19 this year, the National Assembly passed the Law No. 32/2013/QH13 amending and supplementing a number of articles in the Law on the CIT, to be effective from January next year. However, the law does not clearly specify whether the expansion investment implemented before January 1, 2014 is entitled to tax incentives for the remaining period, if meeting all the required conditions.
EuroCham acknowledges the Government’s draft decree of detailed instructions for the amended CIT law, including guidelines on the implementation of tax incentives, but repeats the main challenge remains around the consistent application of these by local tax authorities.
“This is largely due to the lags between the law and the implementing documents as well as varying interpretations and applications at local authority levels,” EuroCham Chairman Preben Hjortlund remarks.
Therefore, EuroCham members recommend greater coordination between various regulatory bodies and streamlined administrative requirements would enhance the implementation of the legal framework, thus helping to solidify investor confidence.
Harmonious cooperation between relevant agencies is also needed to enforce intellectual property rights (IPR) and penalize violators. EuroCham asserts that as foreign investors are not well aware of the competent agency for handling their particular type of infringement, clear provisions should be in place to clarify the responsibility of agencies for not only types of IPR violations but also those in other areas.
EuroCham believes strong enforcement of IPR and the laws in other areas will lead to greater confidence amongst businesses and consumers in the State’s ability to protect their rights. This also encourages foreign companies, particularly those from Europe bringing technologies and innovations to Vietnam to help local firms and to support sustainable growth of the country’s economy.
Further market opening
Despite having to deal with a number of macro-economic uncertainties, the Vietnamese Government has demonstrated its firm determination for further international integration. Vietnam and the European Union (EU) have completed the fifth round of negotiations for their Free Trade Agreement and plan the sixth round early next year. The two sides look to conclude this agreement at the end of 2014, as EC Vice President Tajani told the Daily at a press conference in HCMC on Tuesday.
The FTA is poised to expand the trade relations and investment opportunities for the benefits of both the EU and Vietnam. Under this agreement, it is estimated that Vietnam’s GDP could grow by over 15%, skilled real wages could increase by around 12%, unskilled wages by 13% and the value of exports could increase by almost 35%.
But, EuroCham says the potential benefits could be undermined unless Vietnam is fully committed to international trading rules and ensures effective implementation of these. EuroCham gives as an example that under the WTO commitments, as of 2012, foreign investors have the right to set up new 100% foreign-owned companies in Vietnam. Also, Decree 58/2012/ND-CP allows foreign investors to own 100% of the charter capital of operating securities companies or to set up a new 100% foreign-invested brokerage. However, foreign ownership in all Vietnamese listed enterprises (except securities firms) remains capped at 49% under current regulations.
Similarly, there are different requirements for foreign investors and domestic investors for merger and acquisition transactions. EuroCham claims if an acquisition is made between two local partners, the buyer needs to go through a simple registration process or ask the target to update its share registry with the buyer’s name. On the contrary, foreign investors acquiring stakes in local companies are often requested to retain two separate licenses.
There are also complaints that the existing regulations are unclear as to whether a foreign-invested pharmaceutical company can undertake both importing and marketing of its products. Therefore, EuroCham suggests specific guidance for pharmaceutical companies so that they will know how to set up fully foreign-owned subsidiaries in line with Vietnam’s WTO commitments.
“Many companies desire to increase their investment in the pharmaceutical sector and establish legal entities in Vietnam. “This potential investment would result in additional high-end jobs for Vietnamese people, increase tax revenue for Vietnam, and create a more competitive healthcare sector as more companies enter the market,” EuroCham says.
EC Vice President Tajani says more companies, especially small- and medium-sized enterprises from Europe, are interested in exploring business and investment opportunities in Vietnam as this market holds big potential for them. The clear evidence for this is the fact that nearly 50 representatives from EU industry associations and companies accompanied the EC leader in his Vietnam trip.
Though the EuroCham BCI survey shows reduced confidence among EuroCham members in the business outlook in Vietnam, the majority express long-term commitment to this growing market. “The decline is worrying and further underlines the urgent need for the Vietnamese Government to address the issues negatively impact foreign investors,” EuroCham says.