Decree sparks foreign firms’ FDI concerns

In a letter to the Ministry of Planning and Investment last week, the Japan Business Association in Vietnam (JBA) said: “Alongside the Japan-Vietnam joint initiative to improve the business environment, the agreement on investment protection and promotion signed last November has brought about signs of a significant increase in Japanese direct investment [in Vietnam] since 2004.”
However, the association said Decree 164 had tempered that rising enthusiasm because if the preferential investment policies of other east Asian countries were considered, then Vietnam’s investment attractiveness had decreased in comparison.
The JBA warned of tougher competition for FDI, bearing in mind the wider range of attractive investment destinations open to investors today. China, for example, is an increasingly appealing location for foreign investment given its plans to reduce its corporate income tax (CIT) rate by 7 per cent to 24 per cent this year.
The JBA acknowledged Decree 164 reflected the Vietnamese government’s policy on eliminating discriminatory treatment in domestic and foreign investments, encouraging investment in areas with difficult socio-economic conditions, promoting the transfer of new technologies and advocating the employment of women.
“But on the other hand, it [the decree] consequently reduces the incentives for Japanese investment,” the letter said.
Specifically, it said the decree would reduce the tax incentives enjoyed by most Japanese investors who were manufacturing exports in industrial zones (IZs) on the outskirts of large cites such as Hanoi, Haiphong and Ho Chi Minh City.
Previously, manufacturers based in export processing zones and infrastructure development projects would automatically be eligible for a preferential CIT rate of 10 per cent.

Decree 164 now requires that these projects must operate in areas with particularly difficult socio-economic conditions to be eligible for the 10 per cent rate.

Similarly, a preferential BIT rate of 15 per cent will only apply to IZ-based service suppliers and production enterprises if they are operating in areas with difficult socio-economic conditions.

As far preferential as treatment as concerned, Decree 164 provides no distinction between service providers and production enterprises operating in IZs and EPZs. There is also no difference in preferential treatment between IZ & EPZ production and infrastructure development investments.

The JBA said no consultation with foreign investors was made before the issue of the decree, and the duration between the issue and effective dates was too short.

“All of these have gone against the agreement and the spirit of the Japan-Vietnam Initiative signed just last month,” it said.

The need for consultation with the business community before regulations governing economic activities are introduced was also high on the agenda at the Vietnam Business Forum held in early December last year. Foreign investors were critical about the fact that many regulations relating to the operation of enterprises had been developed without any consultation with businesspeople.

“We kindly request the Vietnamese government, by some methodology, to amend some provisions of Decree 164 so that, to a possible extent, the previous investment incentives can be maintained for new investors in industrial zones in the outskirts of large cities like Hanoi, Haiphong and Ho Chi Minh City,” the JBA said.

Director of the MPI’s Foreign Investment Agency, Phan Huu Thang, said his ministry was quickly gathering opinions from relevant parties, based on which the MPI would propose amendments to Decree 164 and Circular 128.

“We must complete [the amendments] quickly, otherwise FDI inflow could be hampered,” he said.

Deputy Minister of Finance Le Thi Bang Tam said a dialogue would be held between the ministry and foreign investors to revise the provisions in the guiding documents of the BIT Law.

“We [Vietnam] are striving to create a more open and favourable investment climate. Therefore the Ministry of Finance will devise measures soon to revise and amend provisions which are less preferential than the previous ones,” she said.