A New Law Blog Has Been Launched in Vietnam

A new law blog called Vietnam Law Insight has been launched this month by LNT & Partners, a Vietnam-based law firm with offices in Ho Chi Minh City, Ha Noi, Hong Kong and San Francisco.

As the firms’ LinkedIn page outlines, “the firm is among Vietnam’s most prominent, representing a wide range of multinational and domestic clients, including Fortune Global 500 companies as well as well-known Vietnamese listed companies on a variety of business and investment matters.”

At a time when foreign direct investment in Vietnam is booming and law firm clients are increasingly turning to the internet for news and information, LNT & Partners’ launch of Vietnam Law Insight blog could not have been more timely.

A blog dedicated to “Law in Motion”

As Dr. Net Le, a partner in the firm told me about the new blog: “LNT & Partners are very happy to launch Vietnam Law Insight, a law blog that is dedicated to law in motion, with real case studies and practical views on Vietnam.  Not many countries can enjoy a strategic location, a young population and sizeable market like Vietnam does. But foreign investors often see a paradox that how Vietnam’s achievement is still far from its potential. They found that there are gaps between law in the book and law in action.  The blog is an attempt to fill these gaps. It needs your contribution, and it serves your business.”

A “Gateway to Vietnam’s Legal Environment”

Ms. DANG Phuong Trang,  Business Development Executive with the firm outlined that:  “Vietnam Law Insight blog is a gateway to Vietnam’s legal environment. This blog will give you comprehensive legal and business updates. We hope it will become a platform for lawyers, in-house counsels – and everyone – to discuss and share their knowledge on legal issues.”

By @JohnGrimley
Editor & Publisher of Asia Law Portal

The New Obligation of Foreign Direct Investment Enterprises (“FDIE”)

The new obligation of foreign direct investment enterprises (“FDIE”) to use a national information system of offshore investment (“System”)

After five years from the original approval date of the plan for information technology application in activities of competent authorities in period of 2009 – 2010, on 29 January 2015 the Ministry of Planning and Investment promulgated Official Letter No. 579/BKHDT-DTNN, it is time for official application of operation of the System. As such, from 01 March 2015, all FDIE within Vietnam are obliged to use the System to declare certain information prior to submitting hard copies of the dossiers on request of investment certificate issuance. The FDIE must also submit a report of their projects via the System.

More specifically, prior to submitting hard copies dossiers to the investment certificate issuing body, the investor must register information relating to the dossier, the investor, the enterprise and the project in form as provided at the link:

http://fia.mpi.gov.vn/tinbai/1308/Tai-lieu-huong-dan-su-dung-he-thong-thong-tin-quoc-gia-ve-DTNN

Once registration is successfully completed, the investor shall obtain a registration code. In order to complete procedure for request of investment certificate issuance, the investor is obligated to submit certificate issuing body such registration code accompanied with the hard copy dossier as provided by laws within 48 hours from the moment the registration code is provided to the investor. After the aforementioned time limitation, the registration code shall be automatically cancelled.

In addition, the FDIE shall be provided with an account to submit its online report of the project. The report form is available at this link:

http://fia.mpi.gov.vn/tinbai/1308/Tai-lieu-huong-dan-su-dung-he-thong-thong-tin-quoc-gia-ve-DTNN.

The FDIE then must accordingly submit report of project on a monthly basis (on 18th of each month), a quarterly basis (in the last month of each quarter) and finally on an annual basis.

It is believed that the System is a useful data source about all the FDIE in Vietnam.

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

Vietnam Structuring an Appropriate Transfer Pricing Policy

Compared to other countries, the Vietnamese tax authorities do not have extensive experience on dealing with transfer pricing.

However, transfer pricing recently has become one of the main concerns of the National Assembly (i.e. the Vietnamese Parliament) due to three factors.

The first factor is the increase of foreign investment in Vietnam, which according to official sources reached USD 30 billion in June 2008. The second is due to tax incentives and the rather underdeveloped tax regime in Vietnam. Last but not least, in preparation of Vietnam’s accession to the World Trade Organisation on 11 January 2007, the government liberalized the market and abolished trade barriers, such as the regulations on minimum prices for imported products.

These deregulations created various opportunities for multinational companies to do tax planning, whereby a correct transfer pricing policy is becoming more and more vital.

In 2007, the Ministry of Finance (MOF) reported that the tax collected from foreign invested enterprises (FIE) in 2006 missed its projected target by USD 122 million. Many sectors, such as automotive or pharmaceuticals, where the market price in Vietnam is higher than elsewhere in the Asian region, have actually reported losses. The MOF suspected that a large volume of business profits were shifted abroad due to transfer pricing issues. The fact that the British Virgin Islands (BVI), a tax haven, is among the top 5 “biggest foreign investors” in Vietnam is only one example.

As the Government suspects profit shifting by FIEs, transfer pricing becomes a challenge for multinational companies. However, transfer pricing regulations in Vietnam are not very clear, and therefore what might appear to be a correct transfer price on the date of conducting a transaction might later, in case of an audit, result in heavy tax penalty.

The Government is trying to catch up. The MOF has published transfer pricing examples and clarified its position on key topics. Circular 117/2005/TT-BTC dated 19 December 2005 (Circular 117) contains guidelines on how to calculate market prices in business transactions between affiliated parties.

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

“Create” or “import”?

At a recent conference of the Vietnam Chamber of Commerce and Industry (VCCI), a review was made over the practicality of 16 law codes.

When mentioning some of the insufficiencies of the Law on Investment and other laws, Dr. Le Net, LNT & Partners Law Firm, said: “Where will it go if we continue making laws through patchwork and groping around? The wheels have been made – is it necessary to “re-create” something? Do we have enough time to do that?”

Keep being amended

Dr. Le Net’s concern is a common one regarding the quality of law and practices, as well as the current lawmaking methods. It has been said that laws have never been issued as much as in recent years. Each year, dozens of laws and thousands of by-laws are produced, contributing to the adjustment of social relations. Simultaneously, the law has never been continuously modified to the extent as is currently experienced now.

Perhaps the first example to which this can be drawn is the legal system regulating land. The Law on Land has been amended six times (1987, 1993, 1998, 2001, 2003 and 2009), meaning that it takes 3.6 years on average for one modification. After each amendment, millions of people suffer “a cold sweat” due to a change, especially changes related to pink books and red books, which have caused controversy during the years. As expected of the National Assembly, this law is going to be amended and supplemented again!

In relation to foreign investment, in 18 years, 6 issues and amendments of the law were made (1987, 1990, 1992, 1996, 2000 and 2005). The current Law on Investment (2005), which was considered as a “breakthrough innovation” to form the mutual space for domestic and foreign investment enterprises, also faces the pressing proposal for amendments or abolishment. The longevity of the law, according to experts, is only 4-5 years or even lower. For instance, the Law on Complaints and Denunciations was issued in 1998 and amended in 2004, then immediately amended once again in 2005.

Similarly, the Ordinance on Public Employees was produced in 1998, amended in 2000, amended again in 2003 and by 2008, it was replaced by the Law on Cadres and Civil Servants. There are even some cases where the law has just been enacted, but then immediately becomes obsolete and unenforceable because of “encroachments” against other laws. The Law on Intellectual Property (contrary to Vietnam – U.S. Bilateral Agreement on Term of Copyright Protection) and the Law on Housing (contrary to Law on Land regarding housing documents) are just come examples. In order to be implemented, these laws must be amended again.

With by-laws, the situation is more tragic. “A lot of Government decrees or circulars and decisions of ministries have to be modified, replaced only after one or two years, or even several months. We, the lawyers, cannot update them all”, lawyer Nguyen Thanh Tam said.

Acquisition

According to Dr. Le Net, the current manner of making law in our country is like “changing horses in midstream”. We grope around and create laws “in accordance with the Vietnamese circumstances”. However, as mentioned, most of the laws have problems in the implementation. The laws are then amended, “to be carved” through time and “peculiar” final products are finally made.

Experts suppose that the fastest and most cost-effective way to improve the legal system is to absorb the legal achievements of the world. Even in some cases, it is acceptable to “import” a particular law for application. “Previously, Cambodia was laughed at due to their entire application of the U.S. Corporate Law excepting the red seal of the National Assembly of Cambodia. However, not only Cambodia but also Singapore, Malaysia, Japan, Korea did it”, Dr. Le Net demonstrated.

Dr. Nguyen Van Nam stated that the famous Civil Code of Germany (Bürgerliches Gesetzbuch – BGB) has been voluntarily acquired by many Asian countries such as Japan, South Korea and Thailand, because they acknowledge the enormous benefits of this code. “Particularly, Japan has acquired a nearly complete draft of BGB. They just slightly modified it to accommodate its national identity based on saving the nation’s philosophy”, said Mr. Nam. According to Mr. Nam, Vietnam is building its market economy and integration to the world, there is no reason to “create” one that were preceded for hundreds of years on. “Most of the legal issues and problems we are experiencing nowadays have been settled by laws of many countries long time ago”, said Mr. Nam.

In agreement to the comments as above, Dr. Nguyen Quoc Vinh, who used to work at a legislative drafting agency, also warned of a possibility of failure if we only acquire without a thorough understanding about the spirit and roots of the law. “Japan had built its Civil Code on the basis of the French one, and then had to throw it away shortly afterwards. Likewise, during the Asian financial crisis 1997-1998, under pressure from the IMF, Indonesia built a new Law on Bankruptcy with foreign expert consultancy only in a few dozen days. Consequently, this law also fell into “bankruptcy”.

Dr. Vinh said that in legislative activity, Vietnam actually acquires legal documents of the world. However, for various reasons, this acquisition is unsystematic and lacks an obvious philosophy. For instance, the Civil Code is influenced by Soviet law (in connection with the administrative rules in the code), has some details of the French Civil Code and has a bit influence from Japan and Germany. The patchwork causes not only conflict among the laws but also the self-destruction of different provisions in the same law.

According to Mr. Vinh, it cannot be said that Vietnam has no competent and dedicated professionals in making law. However, there are many cases where their drafts could not retain the “soul” of legal thought due to being cut and modified through a number of layers of submission and approval procedures. Vietnam should avoid administrative interference in professional work. Apart from this, taking the experience from Japan, in the formulation of law, Vietnam should change from a passive to active status. That means, Vietnam should take the initiative to invite Vietnamese and foreign experts to be drafters for practice. We should avoid making and amending laws as proposed by foreign donors. Finally, when the law is enacted, it must be enforced, not be regarded as ornaments.

Do not assume that it is “creative”!

Another example of the patchy and halfway acquisition was offered by Dr. Nguyen Van Nam, commenting on the Law on Competition.

For example, the Act Against Unfair Competition of Germany and many European countries makes regulations of unfair competition as follows: “Everyone in business transactions for the purpose of competition that makes unmoral acts may be forced to cease such acts and to indemnify for damages”.

Our Law on Competition also contains similar provisions but with additional conditions that such acts of competition must “cause damage or have the possibility to cause damage”. “We think of this as creativity, but it turned out to encourage acts of unfair competition, since the acts of unfair competition are settled only when the damage is proved. In other words, the acts of unfair competition are allowed if damage has not occurred or has not been determined yet”, said Mr. Nam.

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

Levy on houses and lands

Levy on houses and lands should be imposed on speculators

In experts’ opinions, collecting tax on houses and land is not only an economic but also a social issue. When the country’s economy and the citizens’ livelihood have seen little improvement, applying another type of tax may cause negative reactions.

Dr. Tran Du Lich, Deputy Group Leader of HCMC National Assembly Delegation who is also an economic expert, in a talk show regarding “Draft law on house and land tax” held on 19 January at the Southern National Assembly Office, HCMC, asserted that the imposition of tax on houses may not be implemented for the time being, even in 10 more years, since the annual average income of the citizens still remains low at approximately US$1,000. The Government should collect only tax on houses from the business sector to restrict speculation, which has created a “bubble in the real estate market.

Having the same opinion, Dr. Le Net, Founding Partner of LNT & Partners Law Firm, recommended that heavy taxes should be imposed on those who buy and sell houses repeatedly. The closer the period between selling and buying, the higher the tax rate should be. For example, the Government should impose a heavy levy on the first transfer of houses or lands within 1 year (i.e., 50% of the discrepancy between selling and buying prices). The rate will be 30% for the second year’s transaction and will be reduced on a yearly basis.The higher the frequency of house and land trading, the higher the tax rate for this activity

If this succeeds, trading in houses and land in such a “sliding” manner will certainly be decreased. The Government may impose tax on land possession. If a land owner cannot use such land in an effective way, he/she must sell it due to an inability to pay tax imposed on it. If the land owner leases such land, the lessee will pay the relevant tax accordingly.

Ms. Nguyen Thi Tuyet Nhu, Deputy Director of Tan Vu Minh Real Estate Company, said that: levy on houses should not be imposed on those who own only 1 house but on those having 2 or more houses to restrict speculation. Controlling housing areas and valuation for tax calculation is quite complicated. For this reason, it is better to collect taxes on land first, not on houses.

Tax rate should be based on the specific location of each house

According to Dr. Nguyen Thi Thuy, Head of the Department in charge of Law on Finance and Banking of University of Law, Ho Chi Minh City, if a tax on houses is considered a type of tax on property to be collected when the houses are in use, this will be unreasonable. This is because houses for living will depreciate over time and owners will have to spend money on repairing or re-building. To avoid complexities of collecting housing, Ms. Thuy suggested that tax calculation should not be based on housing areas but on particular location of each house.

As for houses in Vietnam in general, especially those in urban areas, the location of a house will decide its value. Therefore, imposing tax on house cannot be “founded on” the house’s size but on the house’s location. For instance, a 100-square meter house on Nguyen Hue Street (District 1, HCMC) may certainly cost a hundred times more compared to one in Binh Chanh District. Moreover, houses in District 1 can make a hundred times more profit than those in Binh Chanh District. For this reason, many experts asserted that the particular location of each house is the main factor to be considered in order for an appropriate tax rate to be applied.

Mr. Trinh Minh Tan, Ho Chi Minh City Bar Association, proposed another solution: tax calculation should be founded on housing size, not on number of houses owned by one person. This is because someone may have only 1 house with an area of up to thousands of square meters while someone may have up to 3 houses with total area of only less than 200 square meters.

In addition, only houses of Levels I and II should be subject to tax, whereas Levels III and IV houses should be entitled to tax exemption (since houses of Levels III and IV have yet been considered standard houses). “Many houses, especially those in urban areas, are used for living and doing business too; therefore, these houses cannot be listed as houses for business because they may be used as a store in the day and a normal house at night,” said Mr. Tan.

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

Is it time to impose a levy on house?

As planned, Law on House and Land Tax will be reviewed and adopted by the National Assembly at its 7th Meeting (held in May 2010) and will be effective from 1 January 2012.

However, according to Head of Economy Committee of the National Assembly, Mr. Ha Van Hien, many delegates of the National Assembly have yet to “agree” on the levy on houses. From Mr. Hien’s explanation, during the construction of a house, construction materials have to be levied, and an amount of money has to be paid for the use of the land; therefore, the levy on houses will lead to an overlap against multiple taxes.

The authorities in charge of drafting and verifying the law in question maintain their viewpoint

Notwithstanding Mr. Hien’s explanation, the National Assembly’s Budget and Finance Committee (the one verifying the draft Law on House and Land Law) and the authority drafting such law maintain their viewpoint that houses should be levied on the reason that imposing a levy on houses will help to enhance management work as well as gradually and reasonably control and regulate payments into the state budget. The collection of taxes on houses also helps to limit speculation in houses, especially condominiums. Since the tax rate proposed in the draft law is not high, and subjects on which the levy will be imposed are narrowed, the majority of citizens have yet been affected by such law. In addition, the application of tax on houses will not result in an overlap among tax types for taxes on houses, and land is considered as a tax on property which is independent from other tax types.

The National Assembly’s Budget and Finance Committee has proposed two solutions: the first solution is only collecting house taxes against second houses or houses thereon owned by the same person at the rate of 0.03%. This solution helps to assure each citizen a house. The second solution is to impose a levy on the first house but the house’s value subject to house tax will be increased up to 1 billion dong instead of 500 million dong as proposed in the draft Law on House and Land Tax submitted to the National Assembly. With this solution and from the calculation of the Minister of the Ministry of Finance, Mr. Vu Van Ninh, the majority of people having houses in rural and urban areas of 400m2 for Level I houses or more or Level II houses will be excluded from paying this tax.

Concerns still remain

Nevertheless, the Standing Deputy Head of the Bar Association of Ha Noi City, Mr. Nguyen Hong Tuyen, following careful review of the 15 articles in this draft law, commented that the drafters have not taken today’s citizens’ living standards and conditions into consideration. One of the purposes of constructing this law is to restrict the speculation in houses and land, yet there are few provisions that “target” speculators as opposed to citizens. Agreeing with this opinion, Dr. Tran Du Lich, Deputy Group Leader of the National Assembly’s delegation of Ho Chi Minh City and economic expert, asserted that imposing tax on houses may not be implemented for the time being – perhaps not even in 10 years’ time – since the annual average income of citizens still stands low at approximately US$1,000.

Following analysis of these two solutions proposed by the National Assembly’s Budget and Finance Committee, Head of the Committee for People’s Aspiration, Mr. Tran The Vuong, still has many concerns. In his opinion, the first solution will soon show its impracticality when some people only own one house but its value is ten times the value of other houses. Regarding the second solution, a housing tax based on house values will lead to many complicated problems. For example, “what will happen if House A is valued at 1 billion dong early that year but its value drops down to 700 million dong later in the same year due to the then frozen real estate market? My concern is that there will be a lot of complaints when this law is applied.”

The National Assembly’s Head of Economy Committee, Mr. Ha Van Hien, expressed: “Our people’s livelihood is still low and officers’ incomes are low too; therefore, it is essential to limit payments…”

In order to reasonably settle the collection of tax on houses and lands, Dr. Le Net, Founding Partner of LNT & Partners Law Firm, recommended that the State should only collect housing tax from the commercial realm to restrict the speculation in houses and lands. Particularly, heavy taxes should be imposed on those who buy and sell houses repeatedly. The closer the period between selling and buying, the higher the tax rate should be. For example, someone owns land and wants to sell it immediately for profit. To limit these types of purely commercial transactions, the State may possibly impose a heavy levy on the first transfer thereof within 1 year (i.e., 50% of the discrepancy between selling and buying prices). The rate shall be 30% for the second year’s transaction and shall be reduced on a yearly basis. If this succeeds, trading in houses and lands in such a “sliding” manner will certainly be decreased. The collection of tax on houses on a large scale from the second house or more should only be carried out in the future when the citizens’ livelihood has been improved. Upon application of the Law on Personal Income Tax (PIT), houses have become a type of property made from the disposable income of each individual after PIT. If any levy is imposed on the only house, “the overlap among tax types” is inevitable. For the collection of tax from the second house or more, however, the houses’ areas should not be used for tax calculation. Instead, such collection should be based on a particular location of each house. This is because for houses in Vietnam in general, especially those in urban areas, the location of a house will decide its value. A 100-square meter house on Hang Dao Street, Hoan Kiem District, Ha Noi will certainly cost approximately similar to ten similar houses in Dong Anh district.

Issues about houses and land as property are sensitive as they directly affect every citizen. Therefore, the application of an additional tax will probably causes disagreements. What is more, it is a proven fact that controlling housing areas and valuation for tax calculation is quite complicated, while conditions for implementing them are not available. For this reason, it is preferable to collect tax on land first, not houses. This also reflects the opinion of the Vice President of Vietnam Fatherland Front Committee of Ha Noi City, Mr. Dang Viet Quan.

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