Stringent e-commerce rules for Vietnam coming up ahead

Linh Bui

The draft decree provides for more stringent conditions for foreign investment in the e-commerce sector to prevent foreign investors (through their investment in Vietnamese companies) from dominating the Vietnamese distribution market.

To this end, it is proposed under the draft decree that foreign investment in a company engaging in e-commerce business must satisfy two key conditions.

First is that the foreign investor must be included in the list of ‘globally reputable technology companies engaged in the e-commerce industry’, to be periodically published by the Ministry of Industry and Trade (MoIT). Investors not listed will not be permitted to invest in Vietnamese e-commerce companies.

According to the MoIT’s official explanation on the draft decree, this list will be issued by the MoIT by reference to publications of prestigious international organisations (for instance Forbes, Nasdaq, NYT, and TechCrunch) and other criteria which may be prescribed by the government. At this stage, the list has not yet been issued and it is unclear what types of companies will be included – for example whether they include financial investors or only technology companies engaged in the e-commerce industry.

According to the MoIT, the purpose of this new condition is to ‘improve technology standards, encourage joint ventures, and strengthen association and technology transfer between domestic enterprises and foreign direct investment enterprises’.

Second is that appraisal opinion of the Ministry of Defence and Ministry of Public Security will be required for any ‘control’ investment by a foreign investor in one or more companies in the group of five companies with a dominant position in the e-commerce service market in Vietnam, according to the list issued by the MoIT. Dominant market position of a company will be determined by the MoIT in accordance with the competition law, and companies having less than 10 per cent market share will not be included in the list of top 5 e-commerce companies.

‘Control’ is not defined in the draft. Based on other regulations, however, control generally includes direct or indirect ownership of 50 per cent or more of equity interest or voting rights, the right to appoint the majority of the board or the right to amend the charter of the target.

It is not entirely clear whether ‘foreign investor’ referred to in the above two provisions covers offshore entities and individuals only; or also includes foreign-invested companies in Vietnam which are treated as ‘foreign investors’ in accordance with the Law on Investment. In our view, the second interpretation would be more consistent with the general policy of Vietnam to capture investment by foreign investors directly or via their subsidiaries in Vietnam.

The draft decree does not expressly provide that the above conditions will apply retroactively to existing foreign investment in Vietnamese e-commerce companies made before its effective date. In the absence of such express provision on retroactive effect, and based on the general principles of Vietnamese law, the above new conditions will not affect existing foreign investment in Vietnamese e-commerce companies, and foreign investors should not be required to divest from these companies.

However, if the draft is issued in its current form, there will be major impacts and limitations on the ability of Vietnamese e-commerce companies to raise funds from new foreign investors.

Also, foreign financial and private equity investors have been a significant channel for fundraising of e-commerce companies in Vietnam. However, based on the current draft wording, it is unclear if and how these investors will be listed in the MoIT’s list of ‘globally reputable technology companies engaged in the e-commerce industry’.

Vietnam’s e-commerce sector is booming and now requires a proper framework for foreign participation, photo Le Toan

Stricter requirements

Under the draft, companies operating e-commerce platforms must be subject to the following additional requirements during their operations:

- Promptly remove illegal goods or services from the website within 24 hours of receiving a request from the competent authorities;

- Cooperate with the authorities to remove any products in breach of intellectual property rights; and

- Filter and restrict information published on the platform using key words restricted by the authorities from time to time.

Failure to comply with the above requirements may subject the e-commerce platform operators to joint liability for distribution of such illegal goods/services.

The draft also removes the provision under the current decree that the operator of an e-commerce platform is not considered as the ‘third party providing information’ under the Law on Consumer Protection (who is responsible for the accuracy and sufficiency of the relevant information) in respect of any information directly posted by sellers on the platform.

Although neither the draft decree nor the MoIT explanation provides any further guidance or rationale behind such removal, it seems to suggest that the operator of an e-commerce platform may be now required to be responsible for the accuracy and sufficiency of any information posted on its e-commerce platform, regardless of whether such information is posted by the operator itself or by third-party sellers.

Moreover, in respect of any e-commerce platforms with functions of ordering and online payment, in addition to the current requirements of publishing policy on dispute resolution and supporting customers to resolve any disputes with the sellers, the operators now must do three things.

First is to provide the state authorities with adequate tools to search for and identify sellers and relevant transactions conducted on the e-commerce platforms to support the authorities’ inspections and resolution of complaints and disputes.

Secondly, operators must represent foreign sellers on such e-commerce platforms to resolve complaints from customers; deduct and pay withholding tax in relation to such foreign sellers’ sale of goods/service as required by law.

Thirdly, operators must receive and resolve any complaints from customers in respect of any transactions performed in the platforms involving more than two parties.

The above provisions would impose stricter operational requirements and place additional and burdensome administrative works in receiving and handling claims from consumers on companies operating e-commerce platforms.

Expansion and payments

The draft expands the entities/websites being subject to regulations on e-commerce through two parts. First is adding ‘social networks’ to the forms of e-commerce platform subject to Vietnamese e-commerce regulations if such social networks have any of the features of an e-commerce platform (for example allowing participants to open booths, post news on selling/buying goods and/or providing services).

Second is amending the definition of ‘traders/organisations providing e-commerce services’ to further include any traders/organisations developing e-commerce websites to carry out their ’commercial intermediary activities’. According to the MoIT explanation, such ‘commercial intermediary activities’ include representation for traders, commercial brokerage, goods sale or purchase entrustment and commercial agency.

Under the draft, companies owning e-commerce websites which have online payment functions must allow customers to elect to make payment via ‘guarantee payment method’. To this end, it is proposed that the e-commerce companies must sign agreements with intermediary payment service providers, under which payment by customers for transactions conducted on the e-commerce websites must be kept in an intermediary account for a certain period of time as a guarantee for settlement of claims between the customers and sellers. It is not clear as to how long such a ‘certain period of time’ will be for holding the purchase price before being released to the e-commerce companies and sellers.

This proposed new requirement may cause financial implications on the e-commerce companies and sellers (especially small sellers who may not have strong financial capability) as it would cause certain delays in the payment process and thus potentially affect the cash flow of e-commerce companies and sellers.

Under the current e-commerce regulations, any e-commerce websites for sales (meaning e-commerce websites created by entities/individuals to support the promotion or sales of their own products or services), including those created only for the purposes of marketing (for instance introduction or display of products) are subject to the requirement of notification of the websites to the MoIT.

The draft had made it clear that only e-commerce websites for sales which have online order functions are now subject to this requirement. This is a welcome change to reduce administrative burden on owners of e-commerce websites for sales.

The approach to foreign investment in the e-commerce sector under the draft decree seems to be consistent with the government’s general policy under the new Law on Investment. However, in our view, the proposed restrictions on foreign investment are too stringent and may severely impact Vietnamese e-commerce companies that rely on funds from foreign investors for rapid growth and expansion in the country.