Vietnam Investment Incentives: Abundant but Ineffective

Vietnam Investment Incentives: Abundant but Ineffective 

Tax incentives hardly have any impact on investment decisions by over 80 per cent of beneficiary private enterprises in Vietnam. This is a typical example of numerous generous investment incentives but ineffective for enterprises in Vietnam now.

It can be said that investment incentives in Vietnam have to date not brought satisfactory results in drawing and encouraging investment.  Low efficiency has resulted from unnecessary tax incentives (tax reduction and exemption). In other words, investors still carry out their projects although there are no tax incentives. According to a survey on investment incentive application in Vietnamese enterprises by the Vietnam Competitiveness Initiative (VNCI) project, over 80 per cent of private enterprises, which are tax preferential beneficiaries, confessed that incentives have no influence on their investment decisions. Although no official overall assessment has been made, the complicated incentive mechanism can be seen as a reason. For example, regulations, which are changeable and inconsistent, are ungrouped but provided for in different laws and therefore, officials as well as enterprises face hardships in realising and approaching them. In addition, tax incentives aiming to resolve social issues (i.e. job creation and workforce diversification) have been not fully brought into play because these preferential incentives may reduce the competitiveness of enterprises. 

Irrationality in Investment Incentive Administration

The Ministry of Planning and Investment has admitted that investment incentive administration is still irrational and has a negative impact on investment efficiency. First, investment incentive administrators are very subjective because of insufficient clarified regulations. Second, enterprises are unaware of whether they are incentive beneficiaries or not. In some cases, enterprises exploit the investment incentive policies to bag illegitimate earnings from taxes while administrators get briberies due to unclear regulations.

The reason for those shortcomings is partially attributed to the fact that any investor can ask for an incentive certification from a competent agency without any conditions. Besides, the irrationality comes from races to draw investors by all localities, which may exceed their authority to provide incentives for investors.

According to statistics from the Ministry of Finance, two thirds of 50 provinces and cities have violated the law in introducing local investment incentives. Any improper action from the central government may destroy enterprises’ trust on State-funded agencies.

In conformity with the law, enterprises will receive incentives when they have sufficient conditions as a matter of course. However, in fact, enterprises have to resettle time-consuming and uneconomical administrative procedures. To avoid wasting time, many enterprises have to hire intermediary service agencies at a cost of VND20-30 million (USUS$1,250-1,875), according to a VNCI representative.

To a large extent, investment incentives of Vietnam are still unequal, for instance, between the initial investment and the extended one, between enterprises inside and outside export processing zones and between local and foreign enterprises.

All these factors have diminished the efficiency of investment attraction and encouragement in Vietnam.

Restructure instead of renewal

An effective incentive mechanism must reach investment attraction targets at low costs. This requires a selective, clear, simple and transparent system to avoid subjective assessments and considerations during the process of implementation. More importantly, an effective investment incentive apparatus must be based on operational results not on planned or proposed results.

In general, the current investment incentive system in Vietnam fails to meet these criteria. In the context of the Common Investment Law being compiled and Vietnam preparing for the WTO entry, Vietnam should restructure its investment incentive system into a completely new one that goes in line with the international practice, instead of continual amendments. This is a desire of almost all investors who are in Vietnam and will arrive here.

Opinions of administrators and enterprises

Mr. Ta Quoc Khanh, Deputy Director of Investment Consultancy and Technology Transfer Company (Investconsult Ltd),

Currently, Vietnam has no common official document to define a list of zones to enjoy investment incentives in terms of tax exemption and reduction and land rental reduction for foreign-invested enterprises and land-use tax exemption and reduction for local individuals and organisations. Consequently, there is no clear legal corridor for enterprises.

Mr. Russell Muir, a Lead Economist in the World Bank’s Foreign Investment Advisory Service (FIAS)

The Vietnam’s investment incentive system mainly bases on tax exemption - one of the most complicated systems in the region. One of the reasons for the complication comes from amendments being made too regularly; Vietnam should focus on restructuring the system, not continuing to amend it. Our proposal is that Vietnam should build an incentive system based on the investment-subsidised model - incentives provided in accordance with the percentage of total investment capital in the year when corporate income tax is imposed and incentives are discounted from corporate income tax. This is a successful model in many countries.

Mr. Nguyen Van Phung, Deputy Head of the Tax Policy Department (under the Ministry of Finance)

Until now, our investment incentive policy has tended to attach more importance to fresh projects than intensive and extended investment projects. In reality, several enterprises seek incentives by setting up new enterprises which have the same business lines. The consequence is that their efficiency is diminished due to the supplement of a redundant management apparatus and the added costs to set up a new one. Therefore, the new incentive policy should equally cover both new and extended investment projects.

Mr. Pham Xuan Mai: Secretary General of Ho Chi Minh City's Leather and Footwear Association

Only a few enterprises with considerable financial sources are able to approach investment incentives in Vietnam. Many enterprises in our association are uninterested in incentives because of cumbersome procedures. All of them think that incentives bring in only a small benefit and they feel that the application procedure isn’t worth the trouble.

Mr. Toshihide Hashima: Head of Vietnam Business Forum Committee, the Japan Business Association in Vietnam

No matter how the investment incentive policy changes, the most important factor is that Vietnam needs a stable and common law system to be able to protect the rights and interests of investors.

• Thi Van