Vietnam Considering More Tax Incentives for Listed Firms

Vietnam Considering More Tax Incentives for Listed Firms 

According to statistics, the total market value of all firms listed in the Ho Chi Minh City Securities Trading Centre, Vietnam's unique bourse, is currently around US$132 million. The figure is 434 times smaller than that of Indonesia, which is not a big market. With the proportion of only 0.4 per cent of Vietnam’s total gross domestic product (GDP), the ratio is tiny in comparison with the rate of 30-100 per cent in almost all other stock markets.

Currently, there are only 25 firms that are listed on Vietnam’s stock exchange, which is remarkably limiting to investors seeking investment opportunities.

Basing on the average daily trading turnover of listed shares in Vietnam’s bourse, it is able to say that liquidity of those listings on the stock exchange is very weak. A listed firm in the stock exchange carries transactions worth only around US$30,000 a day on average, much lower than that of a listed company in other regional bourses. The weak liquidity of Vietnam’s stock exchange is the main reason why some people can control the market, seriously affecting prices of most shares.

According to the Government Prime Ministerial Decision No 162/2003/QD-TT on the Approved Strategic Development Plan of the Vietnam Stock Market by 2010, the market will be developed with total market values to reach up to 2-3 per cent of Vietnam’s total GDP by 2005 and 10-15 per cent of GDP by 2010.

In comparison with the ratio of 0.4 per cent of total GDP in 2004, the Vietnam stock exchange must be expanded by 5 times to meet the target by 2005 and by 100 times to reach the rate of 40 per cent of total GDP of other regional markets.

Why firms not want to be listed on the local stock exchange?

Normally, the image of businesses will be broadened and enhanced when they are listed on stock exchanges, however, the situation seems opposite in Vietnam’s stock market as daily trading turnover is small, valuing only some millions of Vietnamese dong per firm.

When listed on bourse, companies have to fulfil several additional obligations such as transparency of their financial situations. Information disclosure must also be carried out immediately and regularly and several advanced management systems are applied for listed firms.

The companies also have to spend more time and money on consultancy and auditing services and on rearranging the accountant systems to provide exact financial information for shareholders.

In addition, companies will face harsher competition and challenges because their rivals can understand their trading activities when they disclose information to shareholders.

Moreover, it is difficult for companies to raise more funds via issuing new shares and via paying dividends by shares to shareholders due to weak liquidity of most listed stocks and due to the low demand of investors.

Benefits from the proposed tax incentives

The Vietnamese government must intensively develop the local stock market. More local firms must list on the bourse with a long-term goal of mobilising funds for business expansion. As a result, one developed stock market will help the government reduce the burden from providing preferential loans to local businesses.

Under the prime ministerial decision No 39/QD-TTg dated March 27, 2000, companies benefit from 50 per cent cooperate income tax (CIT) reduction for 2 years after they list on the local stock exchange, said Mr. Ly Tai Luan, Chairman of Vietnam Association for Financial Investors (VAFI).

However, in the current situation, the 50 per cent CIT reduction is still not attractive enough to local businesses to trade their shares on the bourse. The tax policy has not become a momentum behind the development of Vietnam’s stock market, he said.

In the next five years, the Ho Chi Minh City Securities Trading Centre will need an additional 200 firms and it is feasible thanks to the vast number of eligible unlisted companies and the government’s state-owned enterprises (SOEs) privatisation program.

According to VAFI, tax incentives will not be the same for all firms listing on the local bourse. If eligible firms register to list on the bourse in the first year after the new tax policy takes effect they will enjoy CIT reduction of 50 per cent for the first five years.

Meanwhile, if they register in the second year and the third year they will enjoy the same tax reduction for four and three years, respectively. If firms register later than the third year (after the new tax policy becomes effective) they will be subject to 50-per cent CIT reduction for only two years as is currently the case. And of course, those firms must complete their listing within 18 months after registering with the MoF and the SSC.

The purpose of the proposed preferential tax policies is to reach the development target of Vietnam’s stock exchange by 2010.

However, the pending policy also regulates that money from the CIT reduction is not allowed to be used to pay as dividends for shareholders. It can be used for operation expansion only.

According to Mr. Luan, the proposed tax policy in combination with the government's current measures will help the market strongly develop after the next three years. The policy will not have much effect on state budget revenues, but it will help increase state budget revenues in the future when listed firms expand operations via raising funds through the stock market. The issue of preferential CIT policy will play a part in the development of Vietnam’s stock exchange, urging hundreds of businesses to float their shares on the local bourse.

• Mai Anh