Auto assembly tax issues leave car industry in a spin

In late 2010, local customs agencies forced Vinamotor Vietnam Group to pay tax arrears,  saying its imported sets of parts including seats, glass and exhaust pipes did not meet the breakdown levels in  the Ministry of Science and Technology’s (MST) Decision 05/2005/BKHCN on breakdown levels of automobile parts. 

Not only Vinamotor, but scores of other automobile assemblers in Vietnam have also been either hit by tax arrears payment bills or listed as enterprises forced to pay tax arrears, because breakdown levels failed to meet the requirements of the Decision 05.

According to the Ministry of Finance (MoF), these firms include many automobile joint ventures like Ford Vietnam, Toyota Motor Vietnam, Honda Vietnam and Vietnam-GM Daewoo Company.

The parts failing to meet regulations under the Decision 05 include two-piece exhaust pipes, door and window glass, seats’ completely-installed buffers and frames.

Vietnam Automobile Manufacturers’ Association (VAMA) said that the Decision 05 failed to take technological progress in automobile designing and manufacturing into account, while assorted automobiles had applied high environmental protection and safety standards. VAMA recommended that the breakdown levels of automobiles’ imported parts be revised and updated.

 Question about tax arrears payments

It is unclear whether automobile firms will pay the tax bills. The same is also true of the revision of the Decision 05 and the Circular 184/2010/TT-BTC dated November 15, 2010 specifying the import tax rates on automobiles. These problems have even been proposed to be submitted to the government for consideration.

Recently, the MST, ministries of Industry and Trade and Transport, and customs agencies established an examination team to look at automobile assemblers and the breakdown levels of the sets of imported components, so final tax arrears decisions can be made. The team also included representatives from the Ministry of Public Security as the case can relate to possible trade fraud.

However, some firms said the sets of imported parts were already under strict supervision.

Prior to the Vinamotor’s  case, the MST and MoIT directly appraised Vinamotor’s imported parts in November, 2010 to determine the breakdown level of parts as compared to the Decision 05. The final results showed that the breakdown level of these parts was “acceptable under the Decision 05”.

After that, the MoF agreed to Vinamotor’s tax payment under the tariff imposed on the set of parts. However, this case is yet to be wrapped up.

It is likely the MoF also asked some locally-owned automobile firms, which had sets of automobile parts similar to Vinamotor’s, to pay import tax arrears. Thus if Vinamotor’s sets of parts met old tax rates, many other local firms would enjoy this rate.

Notably, amid the controversial breakdown level of imported parts, in late April, 2011, the MoF issued a draft revising the Circular 184. Under this, if at least one part included in the imported set of parts failed to meet the breakdown level prescribed in the Decision 05, that part would be subject to import tax rates inflicted on the completely built unit (CBU). If other parts met the breakdown level under the Decision 05, the tax rates inflicted on them would be subject to the MoF’s Preferential Import Tariff. But, if a part fails to meet the breakdown level under the Decision 05 yet is still certified by the MST to  meet the Decision 05’s conditions, this part would be imposed with a parts tax rate.

According to the MoF, when the imported sets of parts had at least a part with the breakdown level lower than stipulated in the Decision 05, it was unsuitable for the firm to be subjected to import tax rates applied to whole sets of parts.

Attention to firms’ production

In fact, the Circular 184 is designed to calculate tax rates based on the determination of the breakdown level of sets of parts under the Decision 05. Prior to that, this decision was made based on the situation of Vietnam’s automobile assembling industry during 1995-2002 and in the context of the country’s automobile assembly boom.

Under this decision, firms were required to meet automobile assembling and manufacturing standards spelt out in the Ministry of Industry and Trade’s (MoIT) Decision 115/2004/QD-BCN on the issuance of the Regulation on Standards of Automobile Manufacturing and Assembling, and meet the Decision 05’s breakdown level regulations, before the firms can enjoy tax rates for parts.

Truong Hai Group’s chairman and general director Tran Ba Duong said many firms had intentionally not invested into production and misunderstood legal regulations to buy completely-assembled automobiles overseas and disassemble and then import them into Vietnam. After that they declared the vehicles in form of sets of parts to enjoy tax priorities. These firms also sought state policy loopholes to get supplementary certifications from the MST and the Ministry of Transport’s (MoT) Vietnam Register, to  cheat customs agencies when importing products.

Underscoring the Decision 05’s regulation that “the automobile’s body must be separated in parts without being welded, rivetted and painted”, Duong said the breakdown level of the automobile’s body was the core of assembling, as if the breakdown level failed to be ensured, no manufacturing could be implemented. Thus, any authorised agencies’ proposal that the breakdown must be lower than that in the Decision 05 was not considered at all in any case.

In fact, importing parts disassembled from an overseas CBU vehicles and then reassembling the parts without much investment for production lines in Vietnam is not new to authorised agencies and Vietnam-based automobile firms.

According to Toyota Vietnam, the Decision 05 must be amended to tighten the breakdown level of parts imported for producing and assembling automobiles. This would encourage technology transfer and development of local automobile industry. While many firms were shifting to importing CBU vehicles from investing into manufacturing and increasing localisation in Vietnam, it was necessary to strictly control firms’ taking advantage of tax differences between parts and CBU vehicles

Also, many genuine firms said the inter-ministerial examination team needed to physically examine all automobile assemblers’ production, not firms listed. This was also a “post-examination” stage towards automobile assemblers and manufacturers, whose total number in Vietnam was about only 25.

Authorised agencies also needed to examine the whole operation process of the firms over the past five years, in terms of labourers, and input costs for compulsory production stages like the coating line as prescribed in the MoIT’s Decision 115.

“If the firm really engages in automobile assembling, not importing disassembled parts of a CBU automobile, the firm’s costs, invoices and labourers will be very clearly seen,” said a representative from an automobile assembling firm.

This is not only a legitimate wish from firms with investment into their production under the government’s regulations, but also a solution to help Vietnam limit its massive importation of automobiles.

Moreover, with new difficulties in importing CBU automobiles under the MoIT’s recently issued the Circular 20/2011/TT-BCT imposing measures for tightening import of automobile, mobile phones and cosmetics, it is likely that the disassembling of CBU automobiles into parts to import them into Vietnam, then legitimise them at some firms’ factories which meet standards under the Decision 115 would become popular.