IPBA 2015: Recap of Day 1: “CEO/GC” and “About the Firms” Panels

by Dr Net Le, Partner, LNT Partners, Vietnam

Below is LNT Partners report from last week’s 2015 IPBA 25th Annual Conference in Hong Kong (May 5 – 10).

Day 1 – Summary of Plenary Sessions

Part 1: from CEO/General Counsel (GC)

  • IPBA vision for the future: increased role of lawyers in KYC banking & finance. Or the rise of rule of law in general.
  • While Justice Ma talked emphatically about Magna Carta and the Rule of Law, other CEOs don’t like over-regulation. Globalisation, labour protection, customer protection, anti trust, anti corruption.
  • dreamstime_l_27792085Right now US is dictating the way laws should be drafted or interpreted. Speakers excited to see how China might change this. For ASEAN countries who fall into this — it’s hard to find the right way to interpret the law.
  • Although global law firms play important role in serving clients, MNEs are starting to use more local law firms because local regulations and local market need local knowledge.
  • For the future, China will impose rule of law to the market and make the interpretation of the law more clear. So it is the future for ASEAN countries.
  • The special feature about China (or Vietnam) is that the law is policy driven and therefore should be predictable if we try to understand the policy and not just the Rule of law as an abstract concept with liberal interpretation.
  • China was praised for having “effective” government. Rule of law is the way in all countries but at the same time people become more reasonable with mediation and arbitration instead of court settlements .
  • As for China silk road, it is a counter action with US TPP. Not sure about this assessment but I think TPP is more transparent and free-trade driven. Another major China initiative is AIIB. This is a challenge to ADB.
  • The challenge now is to understand the client’s needs. Clients must understand their host governments and consumers. They need local knowledge.
  • Another trend is legal training for clients so the clients are responsive to the government action and build long term relationships.
  • In short: Not only lawyers need a business mindset but also business people need to have a legal mindset.

Part 2: From Firms

  • Reaction from law firms to CEO vision of the future:  Establish closer relationships with corporate counsel. Law firms should be more efficient as clients save cost as they build internal legal departments. Lawyers can learn from accounting firms to survive.
  • While trying to become efficient, law firms make their products less bespoke but more  a commodity. This must be offset by legal training and client care.
  • With Globalisation, big firms will get bigger but boutique firms can do well.  Each firm should have a strategy to either go global or go boutique. This thinking is not what I saw in previous sessions. I think even when clients go global their needs are local. Local firms are important for tax, employment and litigation — at least .
  • Speakers said every firm, whether global or local, would need to be proactive . They need to have customer and legal insight rather than just being global or big.
  • Technology will restructure the legal market, including legal fees. Clients expect fix fees/capped fees in most transactions, except disputes.
  • Market will become more fragmented . Law firms must be more technology-efficient. Clients want cost control.
  • At the same time, the challenge for global firms is that partners and associates demand more and more each year. That might urge them to employ less and cooperate with local firms to save cost and pick the best lawyers.
  • More big firms are using the salary partner model to grow. The role of MP will become more important than consensus. So vision, strategy and delegation are watch words.
  • Client GC wants: “Make me look good”.  It all comes down to communication.

For more information:  Dr. Net Le’s Profile and LNT & Partners website is located at: LNTPartners.com.

This was also published by Asia Law Portal

New Guidance on Customs Procedures

On 25 March 2015, the Ministry Of Finance issued the Circular No.38/2015/TT-BTC guiding custom procedures; which entails custom audit and supervision, import and export duty and tax administration for imported and exported goods (“Circular 38”).

There are three significant changes provided by Circular 38 including (i) classifying and evaluating enterprises in terms of tax and customs regulations; (ii) reviewing the declared custom value and suspending the customs procedure solely in the event that a sufficient amount of proof is discovered, and (iii) review and approving the Certificate of Origin (C/O) shall be in conformity with the goods’ location of origin.

Regarding the goods’ value that is declared by enterprises, Circular 38 provides more details on this, which will help the involved parties to conduct the relating procedures more easily. Accordingly, clear requirements of the type of proof which need to be obtained are listed clearly.

The C/O will be reviewed on the basis of the principal of goods’ origin. As such, a C/O will only be rejected if the difference between the C/O and the customs declaration dossier is stipulated in this Circular 38. As a result, although C/O contents are not compatible with customs declaration dossiers, the declarer will have the opportunity to provide evidence as proof of such content.

In addition, goods shall only be suspended in the event that clear and sufficient proof on the difference between the C/O and the goods are provided.  Otherwise, such goods must be released and a consultation procedure would commence if necessary. This regulation helps the owner of the goods to avoid any delays during the customs declaration process without reason.

Another key point that should be noted is that the Circular 38 helps to abolish the registration requirement on material codes and consumption norms for export processing and manufacturing. Neither the processing contract, nor the norms registration procedure, nor the material products codes need to be notified.

Circular 38 provides more details on the customs procedures so that the declarer may follow easily. In addition, the Circular also provides some regulations in favor for the declarer to avoid any goods stuck without clear and sufficient evidence from the customs agency. This may help the customs procedure to function more smoothly, and cut down the time required by enterprises for the importation and exportation processes.

The Circular No.38/2015/TT-BTC will take effect on 01 April 2015.

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

New Guidance on Unemployed Insurance

On 12 March 2015, the Government issued Decree No. 28/2015/ND-CP that provides detailed regulations on the implementation of a number of aspects in the Law on Employment, with specific regard to unemployment insurance (Decree 28). The new Decree replaces Decree No. 127/2008/ND-CP on the same subject, and Decree No. 100/2012/ND-CP which amended and supplemented a number of articles in Decree 127.

Decree 28 provides guidance on regulations relating to entitlement of employees as well as employers under unemployment insurance policies, including support given to the employer for training, fostering and raising vocational skill levels of the employees, unemployment allowances and jobs consultancy and vocational training with the highlighted points as follows:

  • The employer who satisfies conditions on full unemployment insurance payments, suffering from economy decline, or having insufficient funds to arrange training to enhance vocational skills level of the employees and having a plan for such training, shall be entitled to a supporting amount of VND 1 million per month for each employee. If the incurred cost is higher, the employer will bear the exceeding amount;
  • Employees that have entered into a seasonal labour contract before the effectiveness of the Law on Employment (i.e. 01 January 2015) shall be eligible to join unemployment insurance if the remaining span of the labour contract is more than 03 months;
  • The required duration for submission of applications for entitlement to unemployment insurance from the date of job loss is extended to 3 months, instead the previous regulations stipulation of 7 days.

Additionally, Decree 28 provides a detailed guidance on the procedures and timelines for payment and entitlement of unemployment insurance; and stipulates the rights and obligations of the employer and employees, social insurance agency and other relevant authorities. In general, the Law on Employment and Decree 28 provide both employees and employers more support either for sustaining jobs or in case of job loss.

Decree 28 takes effect on 1 May 2015.

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 Competition Annual Report 2014

On 02 April 2015, the Vietnam Competition Authority (VCA) published the annual report of 2014 on its website (the Report), drawing a panorama of the Vietnamese competition activities during the year.

From a  legal perspective, the Report produced an overview on the subject matters of three new legal instruments enacted in 2014 governing competition activities e.g. Decree No. 42/2014/ND-CP and Circular 24/2014/TT-BCT on administration of the multi-level selling of goods; and Decree 71/2014/ND-CP on penalties for breaches in competition sector. Furthermore, in 2014 there were two international treaties containing competition regulations executed including the Vietnam – Customs Union of Russia, Belarus, and Kazakhstan Free Trade Agreement, and Korea – Vietnam Free Trade Agreement.

Regarding the practical context of competition, the Report furnished an analysis of the enforcement of competition laws and policies particularly in 2014 and generally in the period from 2006 and 2014. Upon the comparison between 2014 and the whole period, it is clearly stated that there is a downturn in the number of activities that breach the laws on competition pertaining to two sectors; restraint of competition, and activities of unfair competition that have been investigated and had a penalty imposed. This data could be considered as a promising sign of the development of a fair and competitive business environment in Vietnam.

With regard to the global factors e.g. the establishment of ASEAN Economic Community, and the execution of a number of bilateral and multilateral agreements together with domestic factors i.e. the re-structuring of the Vietnamese economy, the competition between the entities is forecasted to intensify. The breach of competition is foreseen to be conducted in more sophisticated methods. Additionally, the economic concentration of transactions shall increase in number.

Below is the link to the Report on VCA’s website:

http://www.vca.gov.vn/uploads/file/2015/04_02/VCA%20Annual%20Report%202014-Vn-0204.pdf

The 2015 First Tax Decree

When it comes to tax policy, the government starts 2015 with the Decree 12/2015/ND-CP (“Decree 12”) dated 12 February 2015. Decree 12 appears to keep up the spirit of Law No. 71/2014/QH13 (“Amendment Law”) on amendment of laws on taxes, which is adopted on 26 November 2014 and takes effect on 01 January 2015. The Amendment Law is designed to clarify and reduce bureaucracy and further liberalise tax laws. Decree 12 provides implementation for the Amendment Law and amends and supplements current applicable tax decrees in respect of corporate income tax (“CIT”), personal income tax (“PIT”), value-added tax (“VAT”), natural resources tax (“NRT”), and tax administration. This legal briefing highlights salient changes and new provisions that may interest the business.

  • CIT

Taxable Income of Foreign Company

Decree 12 expands on the sources of taxable income of foreign companies by adding income generated from transfer / assignment of equity, investment projects, rights to contribute capital, rights to participate in investment project, rights to explore, exploit and processing natural resources and minerals in Vietnam.

Educational Expenses are Deductible

Decree 12 allows businesses to deduct expenses for vocational and training education in accordance with the law. As this is a general regulation, there is likely to be further guidance for this provision.

Changes of Incentive policy

At the time of investment certificate issuance, the investor shall be entitled to a CIT incentive. In the event the CIT regulations change and the investor still satisfies conditions to obtain CIT incentive in accordance with new regulations, the investor may choose the incentive schemes in either old or new regulations. If the investor chooses to have the incentive under the new regulations, the new incentive shall be applied from the effective date of the new regulations.

  • PIT

Tax Withholding for Capital Assignment

Decree 12 includes a provision in the event that an individual transfers their equity ownership in a company. Accordingly, the company is responsible for ensuring that the transferor will submit documents proving his or her completion of the tax obligation in respect of the transferred equity before the company register the change of ownership in accordance with the laws. If the company registers such a change of ownership without documents proving completion of tax obligation, the company will be responsible to pay the PIT on behalf of the transferor.

Securities Transfer

Under Decree 12, a taxable income from securities transfer shall be determined upon the selling price of each transfer. The selling price shall be (i) the prices on the stock exchange if the securities are listed on the stock exchange; or (ii) if it is not the case, the prices inscribed in the transfer agreement or the prices in accordance with the accounting books of the company (whose securities are transferred) at the time of the most recent financial statements prior to the transfer.

Real Estate Transaction

Under Decree 12, a taxable income from a real estate transaction shall be determined upon the selling price of each transfer. The selling price shall be determined upon the price inscribed in the transfer agreement. The time to impose the PIT on a real estate transaction shall be (i) the date that the buyer registers for its ownership and/or right to use the real estate if the transaction agreement provides that the buyer shall pay the PIT on behalf of the seller; or (ii) if it is not the case, the date that the transaction agreement takes effective in accordance with the laws.

Decree No. 12/2015/ND-CP shall take retroactive effect from 01 January 2015, i.e., the date which the Amendment Law takes effective.

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

Employer’s Liability to Indemnify for Work-related Accidents or Occupational Diseases

On February 2nd, 2015, the Ministry of Labour – Invalids – Social Affairs (MOLISA) has released Circular 04/2015/TT-BLDTBXH (Circular 04), which provides guidelines for employers to indemnify their employees for suffering from work-related accidents or one of the 30 occupational diseases (as given in the Appendix 2 of Circular 04).

In general cases:

Employees who have their working capacity reduced due to work-related accidents or occupational diseases will be entitled to the 3 payments, including: (i) Compensation (as defined in Column I) or allowance (as defined in Column II); (ii) ; and (iii) their wage.

labor law

Remarks:

  • “r” refers to the rate of reduction of working capacity of the employee (ranged between 0% to 100%).
  • “W” refers to the average wage of employees for 6 months preceding the date when the employee has suffered from a work-related accident or occupational disease.
  • Employer shall decide on the compensation or the allowance entitled to the employee within 5 working days from the date of the medical examination report and shall complete payment of compensation or allowance within further 5 days;

In particular cases

  1. If the employer provided health insurance covers a part of the aforementioned payments, the employer shall pay the difference between the minimum level of such payments (as stated in the Table) and the amount paid by the insurer.
  2. In case the employees are subject to the statutory social insurance under the Law on Social Insurance but the employer does not pay insurance premiums for them, the employer shall also pay employees with allowances that are equivalent to the amounts the social insurance regime entitles employees to.

This Circular 04 takes effect from March 20th, 2015

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

Regulation for Signature Validation and Transaction Notarization

Pursuing the roadmap to simplify the administrative procedure in Vietnam, the Government recently issued Decree 23/2015/ND-CP (“Decree 23”) on 16 February, 2015. Decree 23 regulates, among others, the notarization of signature and transaction.

Signature validation is a procedure whereby a competent authority, as prescribed in Decree 23, validates the signature belonging to a person in a document. Signature validation is a fairly simple procedure, yet certain restrictions should be observed. The competent authority shall not validate a signature in a document of which the content is, among others, (i) contrary to the laws and social ethics; or (ii) an agreement or transaction, except for a power of attorney which (a) has no fee; (b) the authorized representative is not obliged to compensate; and (c) does not involve a transfer of asset ownership and the right to use real estate.

Transaction notarization is a procedure whereby a competent authority, as prescribed in Decree 23, will legally validate and is responsible for (i) the time and place of concluding an agreement; and (ii) civil capacity, free will, and signature of the parties of the agreement. The parties who request a notarization shall be responsible for the content and legality of the agreement.

The competent authorities under Decree 23 include a district level justice department, ward people’s committee, consulate, and notary public. Each authority shall have different scope of validation and notarization. For instance, the district level justice department only deal with transactions or agreements involving movable assets.

Decree No. 23/2015/ND-CP shall take effect from 10 April 2015

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

Next Milestone for Recognizing Judicial Precedent in Vietnam

On 23 March 2015, the Supreme Court issued the Official Letter No. 53/TANDTC-KHXX to instruct Chief Judges of the Provincial Level People’s Court and equivalent Courts to collect effective judgments with a number of conditions and send to Supreme Court before 25 April 2015 so that the Supreme Court can prepare a set of precedent cases, which can then submitted to the Judges’ Council for approval.

This could be considered as a clear action from the Supreme Court to implement a policy that had been approved by the Politburo of Vietnamese Communist Party, first announced in 2005.

To be concise, although not formally introduced as a legislative document until present, a number of Judges have been using a kind of precedent when adjudicating cases. This is in the form of cassation judgments approved by the Judges’ Council of Supreme Court. Of course, not every cassation judgment is used to adjudicate any other similar cases, but when one Judge adjudicates a case, another Judge can make use of the legal analysis and arguments to apply to their case. This method however is not an official application of judicial precedent in Vietnamese Courts.

Judicial precedent in lawsuit adjudication has been a model to other foreign law systems, especially countries with a common law system, where legislative provisions are formed by the Judges themselves, or even in countries with civil law system, but where laws only provide legal framework and leave the adjudication to Judges.

As a member of WTO, Vietnam has been attempting to demonstrate greater transparency in general, with particular focus on its judiciary system. Consequently, the introduction of judicial precedent is a principle that Vietnam cannot ignore.

Along with the set of precedent cases, what we are also waiting for is the guidance on the application of the Official Letter (53/TANDCKHXX); hopefully to be announced together as a set.

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

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

New Rules on Remittances of Profits Overseas

Regulations restricting remittances of profit overseas are of considerable concern to foreign investors. Which makes it surprising that no new regulations have been issued to govern this topic since the approval of the Law on Investment back in 2005 – leading to a situation of “new law, old guidance”.

Until now, the Ministry of Finance issued Circular No 186/2010/TT-BTC on November 18 providing guidelines on remittance of profit overseas by foreign organisations and individuals deriving profit from direct investment in Viet Nam. It finally replaces Circular No. 124/2004/TT-BTC issued under the old Law on Foreign Investment back in 2004.

The new circular governs remittances of profits from different forms of direct investment, namely investment in an enterprise, under a contract, to develop a business, or make a capital contribution to an enterprise.

Profits are defined in the circular as lawful profits derived from direct investments under the Law on Investment after fulfilling tax and other financial obligations to the State of Viet Nam in accordance with regulations (Article 2.1). Profits can be annual profits or profits realized upon termination of direct investments in Viet Nam.

Annual profits are defined as profits distributed to or received for the fiscal year based on audited financial statements and income tax declarations, plus or minus other profits and expenses. This distribution is conducted at the end of fiscal year after the enterprise has fully discharged its financial obligations to the State, lodged audited financial statements, and made a corporate income tax declaration for the fiscal year to the tax office with jurisdiction over the enterprise (Articles 3.1 and 4.1).

The total amount of profit received by the foreign investor during the process of its direct investment in Viet Nam, less profits used for re-investment, profits already remitted overseas and profits used to pay other disbursements in Viet Nam, is used to determine the amount of profits to be remitted overseas at the termination of investments in Viet Nam (Article 3.2). The investor must also have fully discharged its obligations under the Law on Tax Management.

In cases in which, based on financial statements of an enterprise in which the foreign investor has invested, accumulated losses remain after carrying forward losses in accordance with the Law on Corporate Income Tax, the foreign investor shall not be allowed to remit profits overseas. This is new point of the circular aimed at restricting some foreign investors from preparing a fraudulent report on losses when remitting profits to a parent company.

Lastly, the new circular provides the standard form which the foreign investor must submit to the tax office at least seven days prior to the intended date of remittance of profits overseas.

The new regulation takes place 45 days after its promulgation and is expected to establish a solid legal framework for the regulation of remittance of profits abroad by foreign investors.

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

Foreign Distributors Face Hurdles

On January 1, 2009, the restrictions on foreign investment in retail distribution were lifted pursuant to Viet Nam’s commitments to the World Trade Organization. In reality, however, there remain a number of obstacles to foreigners seeking to invest in this sector.

The Law on Investment and Decree No 139/2007/ND-CP provide that a joint venture with 49 per cent or less foreign capital is treated as a domestic enterprise and is established in accordance with investment procedures applicable to such enterprises.

But, on March 18, 2009, the Ministry of Planning issued Official Letter No 1752/BKH-PC which stated that a joint venture with 49 per cent or less foreign capital must obtain an investment certificate, i.e., it is subject to foreign investment procedures.

In theory, the provisions of the Law on Investment should prevail, since Official Letter No 1752 is a document of inferior legal effect. In practice, however, licensing authorities will rely on Official Letter No 1752 when deciding whether to issue investment licenses to joint ventures. Therefore, a distribution company with even 1 per cent foreign capital must be established in accordance with foreign investment procedures, including a requirement that the opinion of the Ministry of Industry and Trade be obtained. The upshot is that it would take up to twice as long to establish a foreign-invested distribution company as it would to establish a similar domestic company.

With respect to the distribution products, a foreign-invested distributor must also have a harmonised system code (HS Code) as listed in the nation’s import tax laws. This requirement can be problematic as HS Codes are limited in scope and do not cover all products which a foreign investor might intend to import and distribute. A foreign investor seeking to distribute a product which does not fall within one of the HS Codes must seek an opinion in writing from the customs department, another costly and time-consuming process.

Financial capacity and experience of the foreign investor are also carefully considered by the licensing authority. One local licensing authority has informally confirmed that it will only approve investment certificates for distributors with charter capital of at least US$200,000.

The ability of the foreign investor to demonstrate experience in distribution services can also be problematic, creating significant obstacles to foreigners seeking to invest in distribution in Viet Nam.

Under Vietnamese law, distribution enterprises are established with the intent to conduct retail activities. Circular No 09/2007/TT-BTM provides that the application for a single retail outlet can be considered and approved by the licensing authority alongside the establishment dossier. However if the investor would like to establish additional retail sales outlets, a separate dossier must be submitted to the licensing authorities.

Under WTO commitments, the establishment of additional retail outlets shall be allowed on the basis of an economic needs test. However, there are currently no detailed regulations as to how the test is defined, what the necessary requirements are to establish economic need, and who the competent authority is. In practice, it’s difficult for investors to meet the ENT condition unless they can locate the additional retail outlet in a business centre. This is because such centres will have already been deemed to have met the ENT requirement when their original establishment license was granted. Otherwise foreign investors have to use franchising or establish many branches to circumvent this obstacle.

A final obstacle is that foreign-invested enterprises are licensed for a duration of only five years. This is a very short term for the investor to recover its investment and discourages long-term investment in Viet 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

Comments on Decree 139 & Decree 108

Together with a draft decree amending Decree 108/2006/ND-CP guiding the Investment law’s implementation, the Ministry of Planning and Investment (the MPI) is finalising a draft decree (the Draft Decree) amending Decree 139/2007/ND-CP on implementation of the Enterprise Law (Decree 139) which was hinted to take effect from this November.

This article streamlines some issues that foreign investors may need to be aware of in making their investment decisions in the future, particularly in relation to procedures for the foreign investment by way of capital contribution, purchase share, and establishment of enterprises with less than 49% foreign owned capital (herein after referred to as the “Enterprise(s)”).

Presently, there are different provisions applicable to establishment of the Enterprises according to Decree 139 and the Investment Law. Pursuant to Article 9.3.b) of Decree 139, in case of establishing the Enterprises, the investors shall carry out procedures for establishment of an enterprise in accordance with the Enterprise Law. The enterprise shall then register its investment project as same as domestic enterprises.

However, this provision is claimed to be inconsistent with Article 50.1 of the Investment Law stipulating that foreign investors who first invest in Vietnam regardless of percentage of their ownership in the newly established enterprise must have investment projects and carry procedure for registration of investment. In the event of conflict, the legal instrument with higher validity shall apply, and thus Article 9.3.b) should be void. Consequently, in practice the licensing authorities applying Circular 10725/BKH-PC of the MPI request that the Investors establish and register their investment projects which ironically, in turn, contrary to the provision of Decree 139.

Hence, one of the key objectives of the Draft Decree is to resolve the discrepancies with the provisions of the Investment Law. Indeed, the drafters have amended the Draft Decree in compliance with the provision of Investment Law.
According to Article 12 of the Draft Decree, foreign investor who first invest by establishing an enterprise shall need to conduct the investment registration procedures. The enterprise shall then be issued an investment registration certificate which is at the same time its business registration certificate. That means in establishing the Enterprises, foreign investors shall have to prepare documentation, including, among others, a statement of financial capacity of the investor, required for investment project with foreign capital stipulated in the Investment Law. Therefore, on the one hand this revision has fixed the inconsistency between the laws; on the other hand it creates burdens on foreign investors in proving their financial ability which would have not been the case if the provision of Decree 139 was to apply.

Further, under the current draft decree amending Decree 108, the foreign investors contributing capital or purchasing shares to established enterprise must conduct procedures for evaluation of investment conditions as stipulated in article 60 of Draft Decree 108. According to this Article, foreign investors shall be required to submit evidences of their financial capacity instead of submission of the statement of financial capacity as required by Decree 108. In so doing, the investor shall need to prepare a range of financial-related documents, such as a letter of comfort issued by a bank or credit institution attesting the current status of the investor’s bank account, a financial undertaking for the project or financial statements applicable for corporate investors operating for three years or more, to convince the licensing authorities that they will be able to implement the intended project.

One may take a view that making these amendments is actually taking a step backward in attraction of foreign investment in Vietnam. That is because the evaluation requirement will not only impose more cost on the foreign investors but also take longer time for the licensing authorities to assess applications. This concern is real given current workload of the licensing authorities in Hanoi and Hochiminh city. In future, if the draft decrees are approved, the workload of these authorities shall sharply increase meanwhile the human resources cannot be quickly trained to meet the increasing demands. Indeed, the draft decree amending Decree 108 has extended the statutory time-limit for evaluation from 15 days currently to 30 days. However, it should be noted that under the current evaluation process, very rare projects have been issued an investment certificate within the statutory time limit.

Another issue that raises the investors’ concerns in this regard is that these amendments would create room for bureaucratism. Even though the content of evaluation is restricted, there is no restriction that the licensing authority must not expand the scope of their evaluation to the extent required by law.

Further, two related issues that remains conflict between the provisions of Decree 139 and those of Decree 108 are: First, whether the foreign investors have to carry out project registration in the case where the ratio of foreign own capital exceeded 49% because the capital contribution of the foreign investors or the decrease of capital of the Enterprise. Second, whether an enterprise with less than 49% foreign investment will be restricted by WTO’s commitments, such as distribution enterprises are not allowed to establish more than one distribution point or foreign investment enterprises establishing a restaurant must invest in hotel business, etc. Unfortunately, these issues have not yet been addressed by the Draft Decree. Though, in light of above analysis, it appears that the mindset is in case of conflict whichever is more stringent shall be applied.

In conclusion, despite the expectation that the Draft Decree would further facilitate foreign investment in Vietnam, the provisions of Decree 139 were amended to stringent requirements and procedures for foreign investment. The reason behind these amendments was that there are many foreign investors have delayed the implementation of their projects and thus forcing the local authorities to withdraw their investment certificates. Given the time constraint, it is unlikely that the final Draft Decree would be significantly different from the current draft.

Therefore, to save time and cost, it is advisable that foreign investors should carefully select their investment project as well as prepare all required document, particularly those proving their financial capacity, before submitting to the licensing authority.

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