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Vietnam Today

Refinements ongoing

Released at: 20:00, 27/01/2017

Refinements ongoing

Photo: Viet Tuan

Changes to Vietnam’s legal framework in a host of matters continued apace in 2016.

by Mr. Fred Burke / Managing Partner, Baker & McKenzie (Vietnam)

Vietnam saw many important changes to its laws and regulations in 2016, including some that have an impact on the country’s business environment and the entire society. Many of these changes did not make headlines, but they are important nevertheless. This article highlights several of them, and offers some suggestions to law makers on areas for improvement in 2017. It also tries to provide some useful orientation for businesses to take into consideration in planning for 2017 and beyond.

Employment and human resources

Vietnam’s human resources are often identified as one of the country’s most important competitive advantages in global markets. Developing that resource in a manner consistent with international commitments is a challenge that the government has clearly recognized in several different legislative initiatives.

For many foreign investors the most positive legal developments was the State Bank’s formal regulation of stock options granted to Vietnamese employees and resident foreign employees.
On December 31, 2015, the government promulgated Decree No. 135/2015 on offshore indirect investment. Decree No. 135 took effect on February 15, 2016 and confirms that an individual investor with Vietnamese nationality may perform offshore indirect investment in the form of participation in plans of awarded shares issued offshore of foreign entities for employees in Vietnam. On June 29, 2016 the State Bank of Vietnam (SBV) issued Circular No. 10/2016 to guide the implementation of Decree No. 135. Circular No. 10 took effect on August 13, 2016 and is the very first legislation on stock award plans in Vietnam. This may represent a significant change in the remuneration of Vietnamese executives working at multi-national companies and present new opportunities for multi-national companies to recruit and retain top talent.

Other notable developments included the strengthened enforcement of occupational health and safety regulations.

The Law on Occupational Hygiene and Safety No. 84/2015 adopted by the National Assembly (NA) on June 25, 2015, came into effect on July 1, 2016. Previously health and safety regulations were set out in the Labor Code and numerous decrees. Thus, this new law represents the first time all the regulations have been consolidated. Several decrees implementing the new statute have also been released, so the law is set out in far greater detail than before.

Proposed liberalization of union system

In a move with far reaching consequences, Vietnam agreed to amend its labor laws and trade union laws to conform to its obligations under the TPP. Even amid concerns about the ratification of the agreement, the government has expressed its commitment to go ahead with labor and trade union law reforms. Under the amended laws, the Vietnam General Confederation of Labor will continue in its role but additional and independent unions will be allowed within the workplace and eventually across multiple workplaces. The result will likely be that a multiplicity of trade unions may exist within the workplace.

As usual, a lot of attention was given to the increase in minimum wages and guiding regulations towards the application of social insurance contributions to foreign employees, and the calculation of social insurance contributions on total income including salary, allowances and all other payments starting in 2018, which all significantly increase labor costs for doing business in Vietnam. 

General minimum wages and regional minimum wages will increase by 5-7 per cent for 2017. This means that the capped amounts for contributions to social, health and unemployment insurance will all increase. By January 1, 2018, foreign employees may be required to contribute to social insurance, as well as employees with labor contracts for a term of under three months. In addition, the definition of salary from January 1, 2016 for the purpose of contributing to social insurance includes not only base salary but also salary allowances. From January 1, 2018 onwards, “other supplemental payments” will also be added into the definition of salary. This will significantly increase the labor costs for doing business in Vietnam. 

Financial services

There were some welcome developments in the regulation of financial services, particularly in the insurance industry. Decision No. 35/2015 (issued in late 2015 and implemented from early 2016) was not welcomed by the business community, however. The Decision requires life insurance policies be registered with the Ministry of Industry and Trade (MoIT), which decided to deem them to constitute model contracts for “essential goods and services”. Not mentioning whether life insurance should be considered an “essential service”, the Decision created overlapping and duplicate procedures for insurance product registration because such policies were already subject to the regulatory scrutiny of the Ministry of Finance (MoF). This move increased compliance costs for the life insurers in the market because the insurance regulations already require life insurance policies be reviewed and approved by the MoF.

However, the good news is that in response to the efforts of the Advisory Council for Administrative Procedure Reform and the Insurance Association of Vietnam, the government issued Decree No. 73/2016 (effective July 1, 2016), which simplified the registration procedures for life insurance policies. Basically, the Decree creates a one-stop-shop arrangement where the MoF is the sole agency to receive application dossiers for approvals and registrations of life insurance products and the MoF will coordinate with the MoIT to complete the registration process.

Import/export duties

Vietnam’s growing stake in the global supply chain was impacted by the new Law on Export and Import Duties dated April 6, 2016, which took effect on September 1, 2016.
Under prior law, an import duty exemption was applicable to goods imported for the production of products that would be exported under toll manufacturing contracts. Under the new law, such rule is extended to goods imported for production of products that will be exported under sale and purchase contracts (contract manufacturing). This replaces the cumbersome old system for such contracts, which stipulated a grace period of 275 days for the re-exports of finished products.

Tax on offshore share transactions 

Looking forward, serious issues remain in the tax area. Probably the biggest change in law for foreign investors was the tax on “indirect share transfers”. In brief, these are transactions in shares of companies outside of Vietnam, in cases where those companies have underlying investments in Vietnam. 

As a matter of law, the tax law of Vietnam did not address capital gains tax on indirect transfers until the introduction of Decree 12/2015 with effect from January 1, 2015. According to Decree No. 12, taxable incomes (or gains) derived in Vietnam by a foreign/offshore company (regardless of whether it has a permanent establishment in Vietnam and the location of doing business) are any incomes (or gains) derived from certain M&A activities, including the transfer of contributed capital, investment projects, rights to contribute capital, rights to participate in investment project, etc.

 However, Decree No. 12 and other relevant tax regulations do not specifically address how the taxable gain should be calculated and which party would be liable for tax declaration and payment in the context of indirect transfers. This has given rise to uncertainty and disputes in its implementation, even to the point of stalling some important transactions and deterring new foreign investment.

 By referring to Decree No. 12, tax authorities have recently challenged and enforced capital gains tax collection with respect to some indirect transfers. More aggressively, tax authorities have retroactively challenged transactions that occurred even before the entry into effect of Decree No. 12 by claiming that the tax regulations before Decree No. 12 already covered indirect transfers. 
Tax on IP royalties

Royalties charged on a transfer of use rights of intellectual property (IP) rights are subject to a withholding of 5 per cent VAT in addition to a withholding of 10 per cent CIT.

This position from the tax authority shows that it views a payment for a transfer of use rights of IP rights as (i) royalties subject to 10 per cent CIT from an CIT perspective but also as (ii) a service fee subject to 5 per cent VAT from a VAT perspective. This creates an inconsistency in application of the tax laws by treating the same payment differently for VAT and CIT purposes. Before this interpretation, royalties, irrespective of whether for the transfer of ownership of IP rights or the transfer of use rights of IP rights, were subject to a withholding of 10 per cent CIT only and were exempt from VAT.

 Tax incentives that were granted by the licensing authority in the past have been challenged and withdrawn, which makes the investment environment unpredictable. These cases should be considered carefully and treated consistently so as to message to investors that Vietnam has a stable investment regulatory environment.

Inconsistencies between tax regulations and investment regulations

 According to Circular No. 83/2016/TT-BTC dated June 17, 2016, the list of preferable industries entitled to EIT incentives provided under the EIT laws will prevail over the list of preferable industries provided under investment laws (Article 4.1).

 Meanwhile, the EIT regulations should follow the list provided by the Investment Law regarding business sectors entitled to investment incentives that include, among others, EIT incentives. Nonetheless, Circular No. 83 provides that EIT regulations will prevail. 

 For example, under EIT regulations (specifically Decree No. 218/2013), software manufacturing is a preferable sector while software services is not. However, according to Decree No. 118/2015 providing guidelines to implement the Investment Law, software services and software manufacturing are treated the same.

 However, there are also discrepancies between the two lists provided under the Investment Law and Decree No. 118. In fact, software services is not provided for by the Investment Law as a preferable sector but Decree No. 118 does include this sector to its list of preferable sectors. Decree No. 118 is for providing guidelines to implement the Investment Law and therefore the decree cannot create new regulations but just detail or specify a regulation provided by the Investment Law. 

 There is no principle that can make the EIT Law prevail over the Investment Law, or an EIT decree prevail over an investment decree. Therefore, Circular No. 83 introduces a quite controversial position from the MoF.
New Law amending the Law on VAT 

New Law No. 106/2016/QH13 dated April 6, 2016 and effective on July 1, 2016, amended the Law on VAT, the Law on Special Consumption Tax, and the Law on Tax Administration. 
Investors will have to take note of three changes to the law on VAT that each narrow the possibilities for obtaining VAT refunds.

First, under the former law, VAT could be refunded if input VAT is not fully claimed after a 12-month or four-quarter period. The new Law, however, abolishes this VAT refund, which may create significant cash flow problems for companies that need to carry large inventories and input materials due to the nature of their business. 

Second, VAT refunds for new investment projects during pre-operating periods still exist under the new Law. However, it introduces further restrictions whereby VAT refunds will not be allowed if the charter capital of the project is not properly contributed according to the registration, or in cases where the taxpayer fails to meet the operational requirements of its conditional business.

Third, VAT refunds for export business under certain cases are still maintained in the new Law but it excludes cases where goods are imported for export and where the export of goods is not conducted at customs operation zones stipulated by the Customs Law. Traders will need to plan accordingly to avoid VAT losses.

Cuts to list of services subject to conditions 

In a welcome development for foreign investors interested in filling in gaps in the service sector in Vietnam, the Ministry of Planning and Investment (MPI) helpfully revised the list of services that are subject to conditions in relation to the licensing process of the Investment Law. The Investment Law had itself stirred up controversy when it replaced the former one step “Investment Certificate” licensing system with a two step system, that requires either an M&A approval or an Investment Registration Certificate and an Enterprise Registration Certificate. This controversy has largely subsided as the licensing authorities showed that they were usually able to meet the tight timeframes for processing applications. However, the long list of services subject to special conditions remained a concern. 

However, at the same time, the eighth draft of the implementing decree on trading activities (intended to replace Decree No. 23) for the amended Investment Law and the Enterprise Law stirred up concerns about new roadblocks between foreign and domestic enterprises, especially SMEs. Businesses have expressed concern about the adoption of this decree. In particular, under the new draft Decree, not only companies conducting trading/distribution but many other services will need an additional business license from the MoIT. This license would be valid for a maximum of five years, which would discourage long-term capital investment. The services that would be subject to this new “business license” include everything from e-commerce services to management consulting and “services related to production” to “other commercial activities related to the purchase and sale of goods.” Investors have been given reassurances that this move will not impose new administrative burdens and costs on doing business that will handicap Vietnamese enterprises competing in the global supply chain, but it remains to be seen what new changes 2017 will bring.

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