Simplify Requirements in Importing Used Machinery – Vietnam Law Insight

Enhancing the government’s regulation on importation of used machinery, equipment and production line (“used Machinery”), new provisions have been provided as follows:

Manifest clearly groups of imported used Machinery to be governed by Circular 23 which are Chapter 84 and 85 of Vietnamese List of Goods imported and exported provided for in Circular 103/2015/TT-BTC, whereas the precedent Circular 20/2014/TT-BKHCN (“Circular 20”) did not;

Expand governing scope to used accessories, component and replacement parts of used Machinery falling into the above-mentioned groups;

Change requirements for used Machinery to be imported which are more simple;

Used Machinery listed in Dossier of Investment Project which is issued Decision on Investment Policy or Certificate of Investment Registration can be imported regardless of requirements set out in the Circular;

List of Goods banned from import is to be publicized on official website of Ministry of Science and Technology (“MST”), whereas such list is combination of lists provided for in specialized legal documents;

List of Qualified Examination Organizations is to be publicized on official website of MST and foreign organizations can be listed by providing certain information to the Ministry, such information is less severe than these stipulated in Circular 20;

Importers can take used Machinery before completing customs clearance procedures in order to put the goods in preservation, whereas in the past, importers could not;

Comments/Impacts

Requirements and procedures for importing used Machinery is more transparent as such requirements, procedures are provided for in Circular 23 and publicized in website of MST. These helps enterprises import used Machinery easier albeit regulates more strictly import of used accessories, component and replacement parts.

For used Machinery listed in Dossier of Investment Project, they can be imported straightforwardly without further requirements. This provision make it more feasible especially for FDI enterprises since they all have to obtain Certificates of Investment Registration. By incorporating list of desire used Machinery into the Dossier, FDI enterprises can save more time.

Unlike Circular 20, foreign Qualified Examination Organizations nowadays have more chances to issue acceptable qualified test certificate if they are listed on website of MST. FDI enterprises can actively obtain a certificate at importing countries to save time in Vietnam.

Finally, used Machinery while waiting for a qualified test certificate can be put on preservation. Importers therefore could decrease expenses.

By Vietnam Law Insight

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us at info@LNTpartners.com

Vietnam, FDI and the TPP ISDS: a Tentative Look

The Trans-Pacific Partnership Agreement (“TPP”) is a multilateral agreement currently being negotiated that, when finally agreed, will encompass approximately 40% of the worlds GDP under a new generation of multilateral economic governance that is focusing on competition policy, labour rights, international investment law and the harmonization of other areas of law and aimed at boosting trade, investment and economic growth between members, who at the advanced negotiation stage include Japan, the USA, Vietnam, Australia, Singapore, Brunei, Malaysia, New Zealand, Chile and Peru, with Canada and Mexico interested in joining. One of the most controversial aspects of the negotiations is that they are largely being held behind closed doors – with only limited information on draft chapters being released through memorandums, or via the medium of Wikileaks, hence why this short article is a tentative look – a detailed analysis at this stage is not possible until the final draft is released or leaked, which will not be for some time yet. This lack of transparency has helped foster strong opposition to the agreement before even considering the provisions contained within. This article considers some implications of the TPP’s Investor-State Dispute Settlement (“ISDS”) for investors of inward and outward FDI in Vietnam.

Opposing views mean uncertainty for ISDS in TPP

The ISDS provisions of the TPP have both strong support, and strong disapproval. The strong support comes primarily from the Japanese and US governments and firms that see the ISDS as crucial to the success of the TPP, and the need to protect their investment interests particularly in the SE Asian parties to the agreement. On the opposing side, with a particularly vitriol response is Australia, which has undergone a unique policy shift among developed countries and chosen to accommodate anti-ISDS voices, arguing that it ISDS is a threat to domestic rule of law and has an undermining effect on national judiciary systems. In light of this, Australia has become a proponent to abandoning the ISDS mechanism in the TPP. While the inclusion of an ISDS is still highly likely to be included as part of the agreement – with the USA pressuring opponent parties to endorse the ISDS – and arguing that there won’t be a TPP without it, there is still uncertainty around how the final draft of the TPP will be structured.

ISDS could bring new forms of investment to Vietnam

The inclusion of ISDS into the TPP agreement could have the effect further reducing the risk associated with foreign investment, which could encourage companies from developed countries party to the TPP such as those in the US, to engage in “discretionary” outsourcing, this refers to foreign investment that does not require a foreign presence to be successful (while “non-discretionary” investment outsourcing refers to investment that requires outsourcing to a foreign jurisdiction to be financially viable) , and to ensure performance, would usually be kept in the home country jurisdiction where investment is less risk averse. Such investment can include high quality manufacturing, research and development and others. This discretionary investment could further raise investor confidence in Vietnam as a destination for high tech, R&D and other forms of investment.

Vietnamese outward investment could be boosted

2014 was regarded as a bumper year for Vietnamese outward FDI, with approximately US$1 billion going to 129 projects around the world. While the biggest recipients of Vietnamese FDI have been Myanmar and Cambodia, the US and Singapore were also destinations, both of whom are parties to the TPP negotiations. This suggests that Vietnamese firms would be able to benefit from the ISDS mechanisms. While the US and Singapore have highly developed legal frameworks for the enforcement of foreign arbitral awards; both countries and Vietnam are indeed party to the New York Convention, this could seek to enhance Vietnamese enterprises’ access to a neutral ISDS mechanism. The wide scope of the Japanese and American positions on ISDS covering all major contracts between foreign investors and the host state, if agreed, could protect many forms of Vietnamese FDI to the US and Singapore.

A potential Appellate structure could enhance ISDS for investors

Although not confirmed as yet, the US has taken a leading role in the TPP negotiations in calling for an Appellate structure to the TPP ISDS. Such a mechanism has been widely promoted in US-led international investment agreements, and is included in the US model BIT as a review mechanism. Furthermore, the International Centre for Settlement of Investment Disputes (“ICSID”) secretariat has also considered reform to include an Appellate structure for reviewing arbitral awards. Such a mechanism in the TPP ISDS could have two implications for investors. Firstly, such a structure could harmonize the interpretation of the TPP treaty text, and allow for the correction of awards from the many private commercial arbitration institutions from different jurisdictions that contain different rules of interpretation, and provide a more legitimate investment framework for investors. Indeed, the basis behind the ICSID Appellate structure was to achieve the aforementioned.

Summation

This short look at some of the potential implications on both inward and outward investors in Vietnam suggests that there will be benefits to the international framework for investment in the region that will have the effect of boosting investor confidence between TPP members, on the back of a re-energized ISDS mechanism. With suggests that such negotiations are at an “advanced stage”, it is likely that more aspects of the agreement will be made public in the months to follow.

Bibliography

  • Sappideen, R. Ling Ling, He. ‘Investor-state Arbitration: The Roadmap from the Multilateral Agreement on Investment to the Trans-Pacific Partnership Agreement’, 40 Fed. L. Rev. 207 2012
  • Cai, Congyan. ‘Trans-Pacific Partnership and the Multilateralization of International Investment Law’, 6 J. E. Asia & Int’l. L. 385 2013
  • Ikenson, D. ‘A Compromise to Advance the Trade Agenda: Purge Negotiations of Investor-State Dispute Settlement’, 57 Free Trade Bulletin 2014
  • Mayer Brown JSM ‘A Guide to doing business in Vietnam’ 2015
  • Mayer Brown JSM ‘Will Vietnam Sink or Swim Amid a Proliferation of FTA?’ International Trade Asia, 2015
  • http://www.talkvietnam.com/2015/02/vietnams-outward-fdi-is-the-tide-turning/ Accessed 7/4/15
  • http://kluwerarbitrationblog.com/blog/2011/05/11/reconsidering-icsid-awards/ Accessed 7/4/15

By Joseph McDonnell – Vietnam Law Insight.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Competition law key factor in M&As

While investors’ interest in Vietnam has translated into healthy growth in mergers and acquisitions (M&As) and foreign direct investment (FDI), the potentially far reaching impact of the Competition Law is not understood by many players, writes Dr. Nguyen Anh Tuan from LNT & Partners.

As Vietnam’s increasingly outward looking economy and Competition Law develop, the country’s merger control regulations should not be overlooked – not least because of the hefty penalties that they attract. A fine of up to 10 per cent of a company’s total revenue in a financial year may be imposed for a breach of merger controls, including requirements on notification. Other severe penalties include forced demerger or withdrawal of a company’s business certificate.

It is also worth remembering that investors who have just completed transactions are not out of the woods yet. Competition authorities can still penalise companies up to two years from the date of the breach and prospective or existing investors must be aware of how these merger controls affect them and how to deal with potential non-compliance risks.

The term, “economic concentrations”, under the Competition Law includes company mergers, consolidations and acquisitions, as well creations of joint ventures. The law imposes certain merger controls on these economic concentrations that investors should be aware of, especially when dealing with larger transactions.

These merger controls focus on the consideration of the economic concentration’s “combined market share”. The market share of a company is calculated by referencing its percentage of turnover from sales or inwards purchases against total turnover from sales or inwards purchases by all companies in the business of the same type of goods in the relevant market for a month, quarter or year. The combined market share is defined as the total market share in relevant markets of all companies participating in an economic concentration. The job of looking at the extent of the combined market share falls to the Vietnam Competition Authority (VCA) when assessing whether an economic concentration will be subject to notification or prohibition under the Competition Law.

This makes it crucial for investors, before entering into an economic concentration, to calculate the resulting combined market share to evaluate potential risks of offending Vietnam’s merger control regime. This prudence will allow investors to determine whether VCA notification of the transaction is required.

The data necessary to determine market share can be obtained from government agencies, such as the General Statistics Office, the ministries of Finance and Information and Communications or the State Bank, depending on the respective industry. Reputable market research can also be used.

To prevent an under or overstatement of this market share figure, investors also need to identify the “relevant market”, because market share will be calculated on an assessment of the relevant product market and geographical area. For example, the market share of a company may be more than 95 per cent for the Ho Chi Minh City area, but only 5 per cent for the whole country.

With respect to notification requirements, there are generally no restrictions against an economic concentration if the resulting combined market share in the relevant market will be below 30 per cent, or if the resulting economic concentration is considered a small or medium-sized enterprise (SME).

If the combined market share falls between 30-50 per cent, the VCA must be notified of the proposed transaction before the parties can execute it. The parties can only proceed with the transaction once the VCA approves it.

Economic concentrations that result in a combined market share of more than 50 per cent will be prohibited, unless the VCA grants an exemption. Such an exemption can be granted if one or more companies in the economic concentration will be at risk of dissolution or bankruptcy or if the economic concentration will contribute to the country’s socio-economic development or technical and technological progress. However, these exemptions are not guaranteed and will be at the authorities’ discretion.

An open door to VCA consultation

If investors harbour doubts or concerns over whether a proposed transaction will be prohibited or require VCA notification, they may actively consult the VCA for guidance.

This VCA consultation function has proved successful and resulted in VCA assistance in accurately calculating combined market shares in certain cases. PV Drilling and Mirae are two key recipients of VCA expertise. These companies were advised not to make a notification (with regards to respective deals or a combined  deal/merger) as the participants’ combined market share did not meet the threshold stipulated by law.

However, despite VCA being on hand to provide this free service, only a handful of companies have utilised it. In fact, it was called into action just nine times from 2008 to 2011.

The VCA offers two types of consultations – general and specific consultations. The former, which can be done through email or phone, is primarily used for clarifying general Competition Law concerns. The latter is used when considering whether the proposed transaction requires notification or is prohibited. Through the provision of salient details on a proposed transaction, the VCA can help ascertain the relevant market share and its potential market impact.

It must be remembered that this consultation service does not excuse companies from legally notifying the VCA of larger economic concentrations, however such consultations are an invaluable resource for investors in navigating through the country’s complex merger control regime. Moreover, they could potentially save millions of dollars in penalties and legal headaches, as well as save time and costs in ascertaining whether a breach has occurred.

Confronting early notification fears

There have also been growing investor concerns about the serving of notification letters to the VCA, a Competition Law requirement, on proposed transactions.

Particularly, fears over the possibility of the VCA preventing the transaction from going ahead and breach of confidentiality are still commonplace among prospective investors.

However, the VCA does not act as a roadblock to transactions upon receiving a notification. In fact, it has not objected to any of the notified economic concentrations. These include substantial economic concentrations that have resulted in considerable increases in local market share, such as the merger of Nippon Steel and Sumikin Bussan Corporation and the proposed merger of AIA and Prudential.

In regard to confidentiality concerns, the VCA is prohibited by law from disclosing or using confidential company information and the extent of information disclosed in notices and applications for exemption vary on a case-by-case basis. For example, future business plans are often needed if an application for exemption is made. Companies can rest assured though that sensitive information, such as prices and detailed post-transaction business plans, will almost never need disclosure.

With this in mind, it is unclear why prospective investors unnecessarily chance facing a substantial fine for a Competition Law breach. Failure to notify the VCA as required by law may result in a company getting hit with a substantial fine of 3 per cent of its total turnover for the preceding fiscal year.

For this reason, prospective investors must put irrational fears aside and notify the VCA to comply with the Competition Law. In addition, companies are not bound to proceed with transactions after receiving VCA approval. Notification should be provided as soon as the commercial terms of the transaction have been reached or even earlier during the deal negotiations.

Sound advice on offer

Vietnam’s Competition Law regime is challenging for new and seasoned investors, despite the sound VCA support on offer. For investors that strive to comply with the law, their combined lack of experience and knowledge in Vietnam’s business and legal environment have often resulted in drawn out VCA assessment or consultation processes, largely a result of improperly prepared notifications and explanations.

For this reason, seeking assistance from professional advisers is highly recommended. In dealing with the VCA, legal assistance will leave an invaluable footprint on the preparation of notifications and explanations – particularly when it comes to how much information should be disclosed on the proposed transaction.

While Vietnam’s Competition Law arguably lacks the sophistication of other developed jurisdictions, with substantial penalties and the potential to make or break a deal, they are often the overlooked elephant in the room for larger transactions.

Competition Law compliance should always be on the agenda when investors propose and negotiate an upcoming economic concentration. However, there is no need to be daunted.  For prospective transactions to proceed as smoothly as possible in agreement with the Competition Law, the VCA should be considered a friend, not a foe.

The VCA is ready to serve investors and the nation in promoting healthy competition and maximising foreign investment to the greatest extent permissible under the Competition Law.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com

Draft circular to make foreign drug importers sick

The Ministry of Health (MoH) has just introduced the latest draft circular (Draft 13) providing guidelines for foreign direct investment (FDI) pharmaceutical enterprises to implement import-export rights in the pharmaceutical field in Vietnam.

Although it reflects some suggestions by FDI enterprises in relation to the expansion of businesses’ rights, LNT & Partners’ partner Nguyen Anh Tuan says it still has some shortcomings that need to be addressed before promulgation.

The category of “FDI enterprises in the pharmaceutical field” that are permitted to carry out drug import-export activities is defined by Article 3.11 of Draft 13.

According to this provision, in order to implement the drug import and export rights, FDI enterprises must invest in one of the following activities – drug manufacturing, drug storage services and drug testing services. This provision expanded the range of enterprises permitted to have the drug import-export rights defined under Decree No79/2006.

However, enterprises with drug import rights stipulated in their investment certificates still cannot directly import from overseas, even if pursuant to the Pharmaceutical Law, drug import and export are drug business activities that are independent from these aforementioned activities. In addition to the aforementioned business lines, in accordance with Article 5 of Draft 13 “Conditions for implementing the drug import rights”, FDI pharmaceutical enterprises must meet other conditions for being considered a grant of a Certificate of Satisfaction of Conditions (CSC) for drug import activities. These include(1) being licenced with drug import rights in its investment certificate, (2) holding the respective CSC for implementing drug manufacturing, drug storage services and drug testing services and (3) having drug storage warehouses with GSP standards. Upon satisfaction of all these conditions, FDI enterprises operating in the pharmaceutical field seeking to implement drug import and export rights need to undertake the following steps, (1) complete the registration for issuance of the investment certificate with the investment management authorities, (2) have a drug preserving warehouse of GSP standard and (3) request for issuance of the CSC in the pharmaceutical field (Article 6 of Draft 13). As a direct consequence of the above restrictions, FDI pharmaceutical enterprises are not permitted to conduct drug import activities independently. In order to implement the drug import rights, they are required to engage other drug trading businesses (such as drug manufacturing or drug storage services) together with drug import activities in their investment licences, obtain the relevant CSC and build a warehouse of GSP standard for drug preservation.

These requirements not only increase the investment capital of FDI pharmaceutical enterprises, but also consume a lot of time. In addition, as mentioned above, these restrictions conflict with Vietnam’s WTO commitments and Article 11 of the Pharmaceutical Law. Hence, their legitimacy is in dispute.

Notwithstanding being restricted on conditions for drug import, FDI pharmaceutical enterprises are also limited to choices of business partners in Vietnam. According to Article 7.3 of Draft 13, FDI enterprises are only permitted to carry out trading activities with and selling imported drugs to certain Vietnamese pharmaceutical entrepreneurs who meet distribution conditions regulated by the MoH, namely the enterprises that either (1) engage a chain of GPP pharmacies, (2) have distribution centers as regulated by the MoH or (3) have warehouses of GSP standard, and a drug distribution system of GSP standard and a computer software system to manage goods. As such, this regulation if passed, will directly limit FDI enterprises’ right to choose business partners, thereby centralising the imported drug distribution rights to a few domestic enterprises that meet the above standards. As a matter of law, since the Pharmaceutical Law and its promulgating documents regulate the conditions for granting the CSC for drug distribution activities, these limitations are not necessary and lack convincing foundations.

In relation to distribution activities, FDI enterprises are still not allowed to implement drug distribution activities in Vietnam, except for distributing drugs that are manufactured by themselves in Vietnam (Articles 9.1 and 9.2 of Draft 13). Also, FDI enterprises are not allowed to conduct some activities relating to the implementation of distribution rights as specified in Article 9.3, which includes contributing charter capital to Vietnamese distribution enterprises. This limitation conflicts with Vietnam’s WTO Commitments in which foreign investors are allowed to do their business by way of establishing new companies, contributing capital or purchasing shares in enterprises in Vietnam.

Moreover, when the circular is promulgated remains a valid question. It appears that FDI enterprises that seek to be licenced with a CSC must wait until this proposal is officially promulgated. It is not difficult to recognise that these limited regulations of adjusting the FDI enterprises’ activities relating to drug import-export activities regulated by the MoH decrease the competitiveness of FDI enterprises in the Vietnamese pharmaceutical market. Hence, FDI enterprises face many difficulties in expanding their business in order to meet their patients’ needs and to serve the public’s health system.

For the time being, pharmaceutical products may only be imported into Vietnam through domestic pharmaceutical companies possessing import licences. FDI pharmaceutical enterprises that have been granted drug import rights in their investment licences can only import drugs through consignment due to an absence of a CSC for drug import activities.

The inconsistency in the regulations and the MoH’s postponement of promulgating documents instructing the import-export activities of FDI pharmaceutical enterprises has inadvertently created policy barriers against FDI pharmaceutical enterprises in penetrating drug import and distribution fileds in Vietnam.

Although it was expected to remove these barriers to create free and fair competition between FDI and local enterprises in pharmaceutical markets, unfortunately Draft 13 has not yet met this expectation and requires further revisions to meet this goal.

By Vietnam Law Insight, LNT & Partners.

Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com