Weighing loss against gain is vital

While some criticise the government’s decision to grant the highest tax incentives to big foreign hi-tech companies,
others see the deal as one weighted in Vietnam’s favour - Photo: Le Toan

In 2006, when the world’s largest chipset maker Intel decided to set up its largest global factory in Vietnam, it was granted the country’s highest tax incentives as a recognised hi-tech manufacturing enterprise set up in Vietnam in accordance with the Law on High Technology.

Four years later, South Korea’s Samsung Group  also asked the Vietnamese government for recognising the group’s first manufacturing complex in northern Bac Ninh province as a hi-tech enterprise associated with the eligible highest corporate income tax incentive of 10 per cent for the project’s lifespan as a condition for the group to expand its investments to $1.5 billion in this complex. After two years of negotiations, the Vietnamese government agreed to recognise the electronics giant’s Bac Ninh complex as a hi-tech business, thus granting it the best favourable tax breaks.

This move is considered the key motivation for Samsung’s continued expansion in Vietnam with the construction of its second manufacturing complex worth $2 billion  in neighbouring Thai Nguyen province, where the South Korean electronics firm just announced it would pour additional $1.2 billion in the near future.

The cases of both Intel and Samsung inspired some other multinational companies to ask for similar tax incentives when setting up shop in Vietnam. Nokia, which relocated their European factories to Asia, is among them. The Lumia smartphone maker is now building a $302 million manufacturing facility in Bac Ninh. Once the factory opens this year, Nokia will also enjoy tax incentives similar to Samsung’s.

Bosch Vietnam two weeks ago announced that it had received in-principle recognition as a high-tech company from the prime minister, overcoming the last obstacle to continue expanding its investments in a continuously variable transmission pushbelt manufacturing plant to 230 million euros by 2015.

And LG Group, another South Korean giant, is also expecting to get the nod from the Vietnamese government within this quarter for the highest tax incentives that would green light the firm investing an additional $1.5 billion in the country.

In reality however, not one of these projects met the criteria to be recognised as a high-tech company under the Law on High Technology. The law regulates that a company can only be recognised as hi-tech after three years of manufacturing operations and after relevant governmental agencies confirm it meets other criteria on research and development activities, average turnover of hi-tech products, as well as environmentally friendly and energy-saving solutions to production and product quality management.

So, why did the Vietnamese government agree to go beyond the current regulations to grant the highest tax incentives possible to these foreign investors?

One important purpose of attracting foreign direct investment (FDI) projects is tax collection. But for investments from Samsung, Intel, Nokia or LG, tax collection was not the main purpose for the Vietnamese authorities, claimed Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises.

While other companies operating in Vietnam at present have to pay 25 per cent of corporate income tax (CIT) on their profits each year, or 22 per cent in the future if the National Assembly approves the amended Law on Corporate Income Tax this month, the giant recognised hi-tech foreign investors just have to pay CIT of a mere 10 per cent rate on their profits. Moreover, they are exempt from the CIT for the first four years of operations with profits and the rate is reduced by half in the following nine years.

In the case of Samsung Electronics Vietnam, which runs the $1.5 billion manufacturing complex in Bac Ninh, its total revenue during 2009-2012 was VND436.239 trillion, or approximately $21 billion at the current exchange rate, according to Bac Ninh Provincial Tax Department. The firm’s total profit was VND35.526 trillion, or $1.7 billion. However, the firm’s total tax contributions including CIT, personal income tax and value added tax till April 26, 2013 were just around VND1 trillion, or $48 million, the department reported.

Some local economists criticised the government for giving the recognised hi-tech foreign investors too strong incentives, for very little tax collection.

“This is an issue, a real issue,” Minister of Planning and Investment Bui Quang Vinh told VIR. But he said the government had to weigh the interest of the foreign investors against that of the country to ensure “harmonisation.”

“Giant foreign investors have the right to ask for good conditions for their investments. We have to weigh what we benefit, if we give such preferential incentives to foreign investors, and what benefits they gain. Overall, if the investment plans are good for the country, we should encourage them to invest here through offering preferential incentives,” said Vinh.

He also advocated not accessing the overall impact of giant investment projects to the country through tax collection alone.

Vietnam is moving from luring low-value-added foreign direct investment (FDI) to high-value-added manufacturing projects. And there is no doubt that foreign investors like Intel, Samsung, Nokia and LG are putting Vietnam on the map for hi-tech investments, helping the country attract more and more investments from the hi-tech electronics firms.

In the case of Samsung, up to August 2012, its Bac Ninh complex helped drawing in 53 foreign suppliers to invest in Vietnam to support the group’s production, with the total committed investment capital of $350 million, according to a report by Bac Ninh Provincial People’s Committee. By 2015, Samsung may need 96 foreign part suppliers and a similar number of local suppliers for its Bac Ninh complex.

In addition, Vinh said, these investment projects also help change the structure of the nation’s economy. Last year, Vietnam’s export turnover of telephones, electronic equipment and computers weighed in at $21.5 billion, surpassing garment and textiles, footwear and agricultural products for the first time. Shipments of telephones and components rose 97.7 per cent from one year earlier in 2012.

Job creation is an important indicator for the Vietnamese government to offer tax incentives to the recognised hi-tech foreign investors. Till the end of last year, Samsung’s Bac Ninh complex created 23,000 jobs for local workers. The firm announced it could also employ tens of thousands of local workers for its under-construction Thai Nguyen complex. Meanwhile, Nokia has committed to employ around 10,000 local workers for its Bac Ninh factory.

“Look at those projects, just within an area of around 100 hectares, they could create about 25,000 jobs and generate the export turnover worth tens of billion dollars. These are our benefits,” said Vinh.

Mai, who has studied FDI in Vietnam over the past 25 years, said the incentive policy was a “wise decision” to attract multinational companies in the context of growing competition between nations seeking FDI.

“We will collect less tax from them, but it is still better than having nothing if they leave for another country,” Mai added.