Cablegate: Vietnam: 2005 Investment Climate Statement
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 24 HANOI 000575
SIPDIS
STATE FOR EAP/BCLTV
STATE FOR EB/IFD/OIA
DEPT PASS TO USTR
CORRECTED COPY
E.O. 12958: N/A
TAGS: EINV EFIN ELAB KTDB PGOV OPIC VN APEC ASEAN FINREF BTA SOE LABOR IPROP
SUBJECT: VIETNAM: 2005 INVESTMENT CLIMATE STATEMENT
REF: Hanoi 00468
1. This cable provides the 2005 Investment Climate
Statement for Vietnam.
2. Begin text of the 2005 Investment Climate
Statement for Vietnam:
Vietnam - Investment Climate Statement
A1 Openness to Foreign Investment:
---------------------------------
Vietnam, in principle, maintains a policy of
encouragement of foreign investment. A crucial
element in its long-term development strategy is the
continued ability to attract and utilize relatively
large amounts of overseas capital, both foreign
direct investment (FDI) and official development
assistance (ODA). (Vietnam does not yet allow any
significant foreign portfolio investment.) For the
2001-2005 period, the Government of Vietnam (GVN) has
established targets for FDI at US$ 11 billion in
disbursements from existing and newly licensed
foreign investments and for approximately US$ 10-11
billion in ODA disbursed by foreign donors for a
total of US$ 21-22 billion from foreign sources.
These levels of FDI and ODA estimates are required to
support the government's GDP growth target of 7.5
percent per year.
By December 2004, Vietnam had attracted nearly US$ 46
billion in investment commitments since the country
was opened to foreign investment in 1988.
Approximately US$ 27 billion, or 58 percent, of that
amount has been disbursed in 5,109 projects. Sixty-
six percent of disbursed investment was made into
projects concentrated in or near the two major cities
of Ho Chi Minh City in the south and Hanoi in the
north. U.S. businesses have received 215 investment
licenses for projects worth nearly US$ 1.3 million
and have injected US$ 730 million thus far into
Vietnam. Significant additional U.S. investment is
counted as investment from third countries in cases
where, for example, the investment involves a third-
country subsidiary of a U.S. company. The United
States Agency for International Development (USAID)
and the Ministry of Planning and Investment have been
conducting research in this area. Their latest
estimate of total U.S. investment including all U.S.-
related investment is 251 projects with a total
registered capital of USD 2.5 billion (as of July
2004).
As the GVN continues to proceed with its long-
standing policy of reform of the economy, openness to
foreign business, and integration into the world
economy, Vietnam's rapidly growing population of 81
million should become an increasingly attractive
investment destination. Vietnam entered into the
Asia-Pacific Economic Cooperation forum (APEC) in
late 1998. It is committed to enter into and fully
comply with its obligations under the ASEAN Free
Trade Area (AFTA) by 2006. In addition, it is
currently engaged in negotiations to join the World
Trade Organization (WTO). Perhaps the strongest
recent signals of the country's commitment to
economic reform and improving business climate were
entry-into-force of the U.S.-Vietnam Bilateral Trade
Agreement (BTA) in December 2001 and completion of
agreements on economic reform with the International
Monetary Fund (IMF) and World Bank also in 2001.
Although the GVN and IMF allowed their agreement to
expire in April of 2004 because the GVN was unable to
meet IMF policy on audit and accounting arrangements,
the IMF remains fully committed to continuing an
effective partnership with the GVN to support the
implementation of the Comprehensive Poverty Reduction
and Growth Strategy and offer guidance on maintaining
macroeconomic stability. Moreover, the IMF gave
Vietnam good marks for its macroeconomic stability.
In light of Vietnam's strong macroeconomic
performance despite the global economic downturn and
continued progress on economic reform, Standard and
Poor's assigned Vietnam's foreign and local currency
bonds a BB minus long term and a B minus short term
rating and labeled the long term outlook stable.
Moody's was expected to upgrade Vietnam's long term
rating from currently B1 to BA3. These developments,
taken together with the country's relatively low-wage
work force and natural resource base, are convincing
foreign investors to consider Vietnam when looking
for their next investment location.
However, despite an official policy encouraging
foreign investment and a solid economic performance,
Vietnam remains a difficult investment environment
and potential investors should carefully scrutinize
any investment plans. Currently in a period of
transition from a command economy to a 'state-
supervised' market economy in which the state sector
retains a 'leading role,' Vietnam is implementing a
series of gradual reforms that will enable the
economy to function more efficiently. As the GVN
engages in this complex process, foreign investors
must cope with a wide range of problems and costs.
These include poorly developed infrastructure,
underdeveloped and cumbersome legal and financial
systems, an unwieldy bureaucracy, non-transparent
regulations, high start-up costs, arcane land
acquisition and transfer regulations and procedures,
and shortage of trained personnel. Issuance of
investment licenses can be a lengthy process.
Moreover, investment projects in both pre- and post-
establishment phases must cope with frequent changes
in the investment environment in areas such as taxes,
tariffs, import and export policies, and procedures.
Additionally, the Vietnamese courts have so far
proved unwilling or unable to enforce laws related to
investor protections, in particular, the enforcement
of arbitral awards. Finally, investors cite official
corruption as a significant problem in establishing
and running their business. In particular,
investments involving joint ventures with State-owned
enterprises have proven especially vulnerable to
corruption and abuse.
Foreign investment in Vietnam is regulated by the
Ministry of Planning and Investment (MPI) through the
Law on Foreign Investment (LFI) and related
implementing regulations, decrees, and circulars.
This law was first introduced in 1989 when the
country was opened up to investment and was followed
by a series of amendments and supplements in order to
improve the climate for foreign investors. The
latest guiding regulation is Governmental Decree
Number 27 issued in March 2003. It provides
amendments to the 2000 Decree Number 24, which
promulgated detailed regulations on the
implementation of the LFI. Decree 24 includes an
explicit pledge against expropriation, guarantees the
right to repatriate profits, and states the GVN's
intent to treat private and State sectors equally.
The law provides significant fiscal and tax
incentives to attract foreign capital.
Vietnam is also working to establish the legal
framework to support a healthier, more transparent
business environment and to level the playing field
between domestic and foreign investors. In 2004, the
National Assembly passed a revised bankruptcy law and
a Law on Competition. MPI also began drafting a
Common Investment Law and revisions to the Enterprise
Law, and anticipates submitting these to the National
Assembly by the end of 2005 to become effective in
2006.
There are four primary forms of investment for
foreigners in Vietnam:
a) Joint venture (JV) agreements pair foreign and
local companies sharing capital and profits. The
contribution of the local company, typically a State-
owned enterprise (SOE), to the JV frequently consists
solely of land use rights. The minimum percentage of
foreign involvement in a JV is 30 percent, but
examples of JVs where the foreign partner is not a
majority shareholder are rare. The minority partner
retains veto power over the majority partner
concerning selection of senior management and changes
in the JV charter. However, for U.S. investors,
these rights will be phased out within three years of
entry into force of the BTA. Joint ventures account
for the majority of foreign investment to date. Many
investors find JVs attractive because they can
benefit from the assistance of an established
Vietnamese firm in dealing with bureaucratic and
administrative procedures. They also provide foreign
investors access to land that may otherwise be
difficult to secure. Some investors complain the
government allows local partners to overvalue their
land use rights.
b) Business Cooperation Contracts (BCC) permit a
foreign firm to pursue business interests in
cooperation with a Vietnamese firm by investing
capital and sharing revenues without conferring the
right of establishment or ownership. In many
respects, it is the most flexible arrangement Vietnam
offers to foreign investors. However, a BCC license
typically does not contain tax holidays or
concessions given to other types of foreign
investments. BCC's have predominated in the
telecommunications sector and, as production sharing
contracts, in the petroleum sector, where the
government limits foreign involvement in operations
and management.
c) 100-percent Foreign-Owned Enterprises have become
more popular recently, as investors have learned to
navigate the local system on their own. The GVN has
shown increasing willingness to permit them on a
case-by-case basis, particularly in industrial
production for export.
d) Build-operate-transfer (BOT) agreements are the
least commonly used form of foreign investment.
While authorized under the LFI and specific BOT
legislation, the legal, regulatory, and financial
framework for BOT's remains incomplete. The LFI also
recognizes build-operate-own (BOO), build-transfer-
operate (BTO), and build-transfer (BT) forms of
investment. Under a BOT agreement, the investor
builds an infrastructure project, operates it for an
agreed period of time to recover the investment and
earn a profit, and then cedes it to the government
without further compensation. Several foreign-
invested BOT licenses have been granted, but many
others have been held up in protracted negotiations.
The most intractable BOT issues have been financing,
product pricing and government regulatory and cost-
recovery guarantees.
Foreign investors have pressured the Vietnamese
government for years to expand the permissible forms
of foreign investment. As part of an effort to
unify the laws governing foreign and domestic
enterprises, the Government issued Decree 38 in April
2003 providing for the conversion of a number of
foreign invested enterprises (FIEs) into foreign
invested shareholding companies (FISCs). The
conversion option is only available to JVs and FIEs.
A FISC must continue to implement the approved
investment project of the former FIE and will be
entitled to preferential treatment under the Law on
Foreign Investment and its implementing regulations.
Nevertheless, the rights of FISCs' shareholders and
the organizational structure of the FISCs will be
governed by the Law on Enterprises, the same as for
domestic shareholding companies. A FISC must have at
least one foreign founding shareholder and the total
shareholding of the foreign founding shareholder(s)
must be at least 30% of the FISC's chartered capital
throughout the life of the company. FISC will be
permitted to list on the Vietnam stock exchange.
To qualify for conversion, a FIE must be in operation
for at least 3 years, must have made profits in the
year immediately preceding the year of conversion,
and its legal capital must be fully paid up. All
conversions are subject to the Prime Minister's
approval. Only a limited number of FIEs have been
selected by the MPI, in consultation with other
ministries, for conversion into FISCs. The Prime
Minister approved six FIEs to take part in the first
round of conversion. This number is much lower than
the MPI's target of 20-25 participants. After the
first pilot FISCs have been tested, Decree 38 will be
reviewed by the Government and may be extended to a
wider range of FIEs.
Other reforms under the Government Decree Number 27
issued in March 2003 include:
?A new 100 percent Foreign Owned Enterprise (FOE)
may now be formed between an existing FOE and
(i) another existing FOE and/or (ii) new foreign
investor(s);
?A Business Cooperation Contract may now be
established by an existing joint venture
enterprise or an existing FOE with another
foreign organization or individual;
?A new Joint Venture Enterprise (JVE) may now be
established between an existing FOE and a
Vietnamese enterprise or between an existing FOE
OE
and an existing JVE. However, a JVE may not be
established between an existing FOE and a
foreign investor or an overseas Vietnamese
investor.
Decree 27 also abolishes the restriction that any
legal capital (equity) in the form of technology
transfer must not exceed 20 percent of legal capital,
and is subject only to agreement by the parties of
the company.
At present the Government maintains an extensive
investment licensing process that is characterized by
stringent and time-consuming requirements that are
frequently used to protect domestic interests, limit
competition and allocate foreign investment rights
among various countries. The Ministry of Planning
and Investment (MPI) is the primary point of contact
for most foreign investors. But Vietnam currently
does not offer at the central level a 'one-stop shop'
for investment negotiation and approval. Foreign
investors typically must contact and obtain support
and/or approvals from a number of national and local
agencies; indeed, licensing approval is required from
other ministries or government bodies which regulate
particular sectors, especially oil and gas,
pharmaceuticals, financial services. In addition,
investors may not always be aware of all regulatory
requirements for licenses, which have led at times to
complaints of unfair or discriminatory treatment.
Licensing is required not only for establishment, but
also in order to make significant changes to an
operating concern such as to increase investment
capital, restructure the company by changing the form
of investment or investment ratios between foreign
and domestic partners, or add additional business
activities.
In the early 1990's, all foreign investment projects
required approval by the Prime Minister. Overtime,
in an effort to reduce obstacles to foreign
investment, this list of projects subject to approval
at the highest levels was reduced. At present, Prime
Ministerial approval is required for investment
licenses for the following:
?projects with investment capital in excess of
US$ 40 million in electricity; mining,
metallurgy, cement, mechanical engineering,
manufacture, chemicals, hotels, apartments for
lease, tourism, and entertainment;
?projects of any value in the following sectors:
?Infrastructure construction of industrial
zones (IZ) and export processing zones
(EPZ), urban areas, build-operate-transfer,
build-transfer-operate and build-transfer
projects;
?Construction and operation of seaports and
airports; operation of sea and air
transportation;
?Oil and gas;
?Post and telecommunications services;
?Culture; including publishing, press; radio
and television broadcasting; medical
examination and treatment establishments;
education and training; scientific research
and production of medicine for human
diseases;
?Insurance, finance, auditing and inspection;
?Exploration and exploitation of rare and
precious natural resources;
?Construction of residences for sale; and,
ale; and,
?National defense and security projects.
?projects that use five hectares or more of urban
land or 50 hectares or more of rural land.
Vietnamese authorities evaluate investment license
applications using a number of criteria including:
?the legal status and financial capabilities
of the foreign and Vietnamese investors;
?the project's compatibility with Vietnam's
'Master Plan' for economic and social
development;
?the benefits accruing to the government or
to the Vietnamese party, especially
acquisition of new production capabilities,
industries, technologies, expansion of
markets; and job creation;
?projected revenue;
?technology and expertise;
?efficient use of resources;
?environmental protection;
?plans for land use and land clearance
compensation;
?project incentives including tax rates and
land, water, and sea surface rental fees.
Over time, the GVN has gradually but steadily
improved its investment licensing regime. Greater
. Greater
authority over investment licensing has been devolved
to provinces, municipalities, and investment zones.
Provincial People's Committees now have authority to
issue investment licenses for projects not subject to
Prime Ministerial approval, which do not exceed US$ 5
million in invested capital, or US$ 10 million in
invested capital in the areas of Hanoi and Ho Chi
Minh City. MPI is working on a proposal to
decentralize state management in foreign investment.
Under this proposal Hanoi and Ho Chi Minh would be
given authority to grant licenses for foreign
investment projects with capital up to US$ 40
million. Other provinces and cities would be
authorized to issue licenses for projects up to US$
20 million invested capital, except projects subject
to Prime Ministerial approval. MPI may also authorize
Provincial Industrial and Export Processing Zone
Management Boards to issue investment licenses for
those projects that are not subject to approval by
the Prime Minister and do not exceed US$ 40 million.
Several provincial committees and IZ management
boards have significantly streamlined licensing
procedures in their jurisdictions, reducing the time
to days if not hours in some cases. Ho Chi Minh City
is in the process of implementing a "one-stop shop"
for investment licenses its government is authorized
to issue. While this decentralization is frequently
in the foreign investor's favor, it has also given
rise to considerable regional differences in
procedure and interpretation of relevant investment
law and regulation.
In addition, the 2000 amendment to the LFI added a
"Registration" licensing procedure where previously
only an "evaluation" or approval procedure had
existed. Under Registration procedures: projects
cannot be refused a license so long as all the
necessary documents have been submitted; the
applicants are not required to submit a detailed
feasibility study; and the review time limit is only
15 days compared to the 45-day period mandated for
the licensing via the Evaluation procedure.
Registration procedures are only open to those
projects that are not subject to prime ministerial
approval and/or environmental impact assessment.
Government Decree 27 issued in 2003 has amended the
conditions for investment registration as follows:
Projects must satisfy one of the following
alternative conditions:
a.exporting 80% of products (reduced from 100%);
or
b.investing in an encouraged or specially
encouraged project located in an industrial
zone (as opposed to the previous requirement
of investing in an industrial zone and
satisfying export ratio criteria); or
c.belonging to the manufacturing sector with up
to USD5 million invested capital
Because it recognizes the need for increased foreign
direct investment if Vietnam is to reach the
ambitious development goal set out in the 2001-2010
Socio-Economic Development strategy, the GVN has a
policy of trying to improve the climate for
or
investment. Perhaps the single most important event
in Vietnam's recent economic history is the entry-
into-force of the U.S.-Vietnam Bilateral Trade
Agreement (BTA). Implementation of Vietnam BTA
commitments will help ensure fair access and
treatment for U.S. investment, goods and services.
The BTA provides a broad range of benefits for U.S.
investment in Vietnam that should significantly
enhance the investment environment for U.S. firms. A
major part of the BTA is devoted to investment which:
provides national and most-favored-nation treatment,
except where explicit exceptions have been made;
guarantees access to third-party investor-state
dispute settlement; disciplines trade-related
investment measures; ensures treatment of
expropriation consistent with international
standards. In addition, other chapters of the BTA
will reduce tariffs and quantitative restrictions on
U.S. investor's imports; permit U.S. investors to
engage directly in trade; require the government to
operate more transparently; open sectors of interest
to U.S. business including banking, insurance,
professional services, telecommunications,
distribution, etc.; and provide protection consistent
with World Trade Organization (WTO)-standards for
U.S. investors' intellectual property.
Also, a number of important policy decisions and
legal changes have been made which are intended to
create a more open, business friendly investment
climate for both foreign and domestic private
investors. On December 25, 2001, the National
Assembly adopted changes to the Constitution of 1992,
which contained several business related items in
Articles 15 and 16. One provided the constitutional
basis for Vietnam's integration into the
international economy. Another formally recognized
the foreign direct investment and the domestic
private sectors as components within the Vietnamese
economy in addition to the already recognized sector
comprising SOEs. Previously, the approach under
Vietnamese law was to permit a firm to engage only in
those activities for which it had explicit
permission. The amendment package formally stated
the principle that businesses could engage in all
activities except those prohibited by law. These
constitutional changes codified at the Constitutional
level changes in approach with respect to foreign and
domestic private sector investment contained in the
economic reforms of the 1990's, lending them a level
of permanence that they had heretofore not enjoyed.
In addition, in 2001-2002, both the Government and
the Communist Party of Vietnam (CPV) issued policy
documents supportive of the private sector, domestic
and foreign. In August 2001, the Government signaled
its intent to continue to improve the climate for
foreign investment when it issued a resolution
calling for continued efforts to improve Vietnam's
attractiveness to foreign investment in the next five
years by:
?expanding of the sectors open to foreign
investment, to include real estate, import
services and domestic distribution;
?easing conditions for foreign-ownership of
equitised state-owned enterprises;
?permitting foreign invested enterprises
(FIE's) to issue stock to be sold on the
local stock exchange;
?facilitating foreign investors'
participation in BOT's;
?narrowing the list of prohibited FIE
exports;
?establishing a level playing field among
foreign, domestic private and state-owned
enterprises; and
?continuing reform of laws and regulations on
foreign investment.
Perhaps more significantly, the CPV issued a
resolution in March 2002 clearly stating its support
for a mixed economy with equal treatment of foreign,
private domestic and state-owned enterprises. In
this document, the CPV made several important
recommendations which, when translated into actual
policy, will provide significant support for the
private sector in the future including: continuing
reforms to make it easier to do private businesses;
sses;
eliminating discriminatory treatment of domestic or
foreign private sector activity; making clear
distinctions between civil and criminal offenses so
as to avoid the prevalent criminalization of certain
commercial decisions and disputes; simplifying
lending procedures to give private enterprise greater
access to domestic credit; and amending existing
accounting procedures to encourage private enterprise
to perform financial audits and disclose the results
annually.
On 15 June 2004, the National Assembly passed the Law
on Bankruptcy to replace the 1993 Law, effective 15
October 2004. The main objectives of the 2004 Law are
to simplify bankruptcy procedures, to allow parties
other than creditors to participate in bankruptcy
procedures, and to give courts more flexibility in
dealing with insolvent businesses. Enterprise
bankruptcy is a normal phenomenon in a market
economy. It creates favorable conditions for
ineffective enterprises and business organizations to
exit the market and to be replaced by more effective
ones, making the business environment more healthy
and transparent.
The much-anticipated Law on Competition was passed in
November 2004 and enters into force on July 1, 2005.
The main objective of the Competition Law is to
create and promote an equitable and non-
discriminative competition environment, and to
protect and encourage fair competition. The Law
stresses the importance of the rights of
organizations and individuals to compete freely
within the law. Key elements of the law address
anti-competitive agreements, state monopoly, economic
concentration and unfair competition. The Law also
creates a Competition Management Department under the
Ministry of Trade and addresses breaches of the Law.
The introduction of a competition law is an important
step in the opening of the Vietnamese market to
international practices. However, ensuring proper
implementation, including training staff and judges,
is a crucial step that remains.
As part of Vietnam's efforts to create a level
playing field for investors, MPI commenced drafting a
Common Investment Law in April 2004. The Common
Investment Law would regulate investment guarantee
measures, sectors and areas where investment is
encouraged, and the investment incentives that are
commonly applied to both domestic and foreign
investors. To support the Common Investment Law, the
Law on Enterprises will also be revised to apply to
both foreign and domestic enterprises. The revised
Law on Enterprises would regulate establishment forms
and procedures, organization, management and
dissolution of enterprises of all economic sectors.
MPI plans to submit both of the above-mentioned laws
to the National Assembly by the end of 2005 and
become effective in 2006.
The above actions strongly indicate the Vietnamese
leadership's intention to continue to improve the
country's foreign investment climate, even if its
efforts sometimes fall short. This effort began in
1989 when the country adopted the Law on Foreign
Investment (LFI) and has continued with four major
amendments of the LFI, the most recent in 2000, and
the issuance and amendment of numerous implementing
regulations. Most recently, the GVN has issued laws
and regulations intended to facilitate foreign
investment by reducing or eliminating discrimination
against foreign investors in pricing for goods and
services, transfer requirements, use of land use
rights for mortgaging purposes, unanimity rules
applying to certain decisions made by joint venture
boards, rights of first sale and many others. Many
of these changes were mandated under the BTA.
In spite of these steps, policy does not always
translate into concrete action and many additional
official measures that discriminate against foreign
investment persist. These can be found listed among
the permanent exceptions to the non-discrimination
obligations contained in the BTA investment chapter.
Some must be eliminated at a later date under the
BTA; others will remain indefinitely. Additionally,
Vietnam continues to impose unofficial and arbitrary
measures that negatively affect foreign investors and
in some cases, threaten their capital investments.
At present, most foreign importers are barred from
direct participation in Vietnam's distribution
system, although foreign investors have the right to
sell, market, and distribute what they manufacture
locally. Foreign investors have the right to import
goods needed for their investment projects, provided
this right is included in their investment licenses,
however, they must import the goods through licensed
Vietnamese import/export firms. An exception is made
for foreign manufacturers importing inputs directly
related to production when such import rights are
explicitly included in their investment licenses.
Under the BTA, trading rights and market access in
distribution services for foreign investors will be
gradually expanded. While Vietnam has greatly
expanded in recent years the number of Vietnamese
firms permitted import/export rights, the vast
majority of general import/export companies remain
SOE's.
The GVN holds regular 'business forum' meetings with
domestic and foreign business associations to discuss
issues of importance to the private sector. Foreign
investors use these meetings to draw attention to
impediments to investment and commerce imposed by
Vietnamese law and regulation as well as by improper
implementation. These fora, together with frequent
dialogues between GVN officials and foreign investors
held between the semi-annual fora, have led to
improved communication and have sometimes allowed
foreign investors to make timely comments on and
influence legal and procedural reforms.
Foreign enterprises also have the right to apply to
the Ministry of Trade or the Department of Trade in
Hanoi or Ho Chi Minh City for a representative office
license, which gives foreign firms the right to
conduct market research and to pursue business
interests, short of actually selling products and
services in Vietnam. Foreign banks must apply to the
State Bank of Vietnam for representative office or
bank branch licenses.
Previously, Vietnam applied different corporate
income tax rates to foreign investors and to domestic
enterprises (being 25 percent and 32 percent
respectively). The National Assembly in its May 2003
session approved the Ministry of Finance amendments
to the Law on Corporate Income Tax, which provide for
a uniform rate of 28 percent applied to foreign
invested and domestic businesses, representing a
three percent increase for foreign invested
enterprises and a four percent reduction for domestic
companies. Tax incentives will also be the same for
both foreign invested and domestic enterprises and
will be offered to investors in selected priority
sectors and in remote areas. The Amended Law on
Corporate Income Tax took effect 1 January 2004.
Under this law, Government Decree 164 and Circular
128 of the Ministry of Finance issued in December
2003 abolish the tax on profits remitted by foreign
invested enterprises. In response to foreign
investors' long-standing complaints about the high
personal income tax rates for Vietnamese national
employees in the higher pay scales, which
significantly increases the gross salary employers
must pay to maintain competitive and reasonable take
home salaries, the Standing Committee of the National
Assembly promulgated Ordinance 14 on Amendments to
the Ordinance on Income Tax of High Income Earners in
March 2004. Under this legislation, the tax burden
on Vietnamese employees was reduced from 1 July 2004.
A-2. CONVERSION AND TRANSFER POLICIES
-------------------------------------
Vietnam's foreign exchange regime has been
significantly improved with the amendments to the LFI
(the 2000 Governmental Decree Number 24 and 2003
Decree Number 27), which explicitly gave foreign
investors the right to exchange local currency for
foreign currency to meet certain current transactions
or remit certain categories of earnings. In
addition, conversion of Vietnamese dong into hard
currency no longer requires a foreign exchange
license. Despite these significant improvements,
various subsequent decrees and circulars issued by
the State Bank continue to stipulate conditions on,
among other things, the opening of bank accounts,
conversion of Vietnamese Dong into foreign currency,
documentation requirements, and remittance of foreign
currency in and out of the country.
Foreign businesses are allowed to remit profits,
shared revenues from joint-ventures, income from
services and technology transfers, legally-owned
capital and properties in hard currency. Foreigners
also are allowed to remit abroad royalties and fees
paid for the supply of technologies and services,
principal and interest on loans obtained for business
operations, and investment capital and other money
and assets under their legitimate ownership. But
their ability to convert dong into hard currency is
subject to availability, causing Foreign-invested-
enterprises (FIEs) to experience problems in securing
hard currency. No information on average delays in
remitting investment returns is available. Approval
by investment authorities is needed to increase or
decrease the capital of a foreign-invested business.
In principle, most FIEs are expected to be 'self-
sufficient' for their foreign exchange requirements,
although this sometimes proves impractical.
Government of Vietnam guarantees to assist in the
balancing of foreign currency for foreign invested
enterprises and foreign business cooperation parties
that invest in the construction of infrastructure and
certain other important projects in the event that
banks permitted to trade foreign currency are unable
to fully satisfy their foreign currency demand.
A-3. EXPROPRIATION AND COMPENSATION
------------------------------------
The U.S. Embassy knows of no recent instances of
expropriation of a foreign investment by the
Government of Vietnam.
Under the BTA, in any future case of expropriation or
nationalization of U.S. investor assets, Vietnam will
be obligated to apply international standards of
treatment - that is taking such an action for a
public purpose; in a non-discriminatory manner; in
accordance with due process of law; and with payment
of prompt, adequate and effective compensation.
A-4 DISPUTE SETTLEMENT
------------------------
Vietnam's legal system, including dispute and claims
settlement mechanisms, remains underdeveloped and
sometimes biased against foreign entities.
Negotiation between the concerned parties is the most
common and preferred means of dispute resolution.
Although contracts are extremely difficult to enforce
in Vietnam, particularly if one party to a dispute is
a foreigner, investors generally should negotiate and
include dispute resolution procedures in their
contracts. However, even with such provisions,
resolution is not guaranteed.
In the event of an investment dispute, a number of
domestic avenues are available. Economic courts, in
addition to hearing bankruptcy cases, also have
jurisdiction over cases involving business disputes.
Administrative courts hear cases that concern alleged
infractions of administrative procedures by
government authorities. In such cases, the plaintiff
must pay a bond to the court, half of which is
forfeited if the dispute is resolved before the
beginning of court proceedings. Also, the court
proceedings must begin within six months of the date
of the dispute. Many international investors express
concerns about the ability of the court system to
render impartially and promptly a decision that
accurately reflects the facts and properly interprets
the relevant Vietnamese law and/or international law
and practice. Thus, they prefer to have other
options available to them. According to Vietnamese
press accounts, many court judgments on business
issues are ignored because the affected party can use
"influence" to forestall the application of the
judgment.
Outside of the court system, economic arbitration
centers operate in a number of provinces and cities.
However, it is not clear if these centers are legally
competent to settle disputes involving foreign
parties. Another type of arbitration institution in
Vietnam is the Vietnam International Arbitration
Center (VIAC), which operates in close coordination
with the Vietnam Chamber of Commerce and Industry
(VCCI). It has authority to settle disputes arising
from international economic transactions including
contracts on foreign trade and investment. However,
it is not clear if investors would be free to choose
foreign arbitrators. Nor can international standard
arbitration rules, such as those of the International
Chamber of Commerce (ICC) or the United Nations
Commission on International Trade Law (UNCITRAL), be
used. The decisions of the VIAC are final and cannot
be appealed to any domestic court. The center does
not yet have an established track record for
competence or impartiality, and questions have been
raised about the enforceability of its awards. For
now, most foreign parties choose to stipulate "third
party" arbitration in their contracts with Vietnamese
parties and the government.
Foreign and domestic arbitral awards are technically
legally enforceable in Vietnam. Vietnam acceded to
the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards in 1995,
meaning that foreign arbitral awards rendered by a
recognized international arbitration institution must
be respected by Vietnamese courts without a review of
the case's merit. In practice, however, the U.S.
Embassy is aware of contradicting judgments and
decisions by different Vietnamese courts with regards
to a foreign arbitral award for a case between a
subsidiary of a U.S. firm and an Australian-
Vietnamese joint venture. The foreign arbitral award
was recognized by a municipal Economic Court, but was
subsequently reversed by the Supreme Court (the
highest judicial level) upon appeal. The Supreme
Court rearbitrated the case in Vietnam (contrary to
the agreed upon procedures in the contract) and ruled
that as a construction contract did not fit the
narrow definition of commercial contract found in the
Commercial Code, a foreign arbitral award relating to
it could not be enforced in Vietnam. The results of
this case indicated that the enforceability of a
foreign arbitral award in Vietnam currently remains
questionable. In February 2003, the National Assembly
passed the Ordinance on Commercial Arbitration. The
ordinance defines "commercial activities" more
broadly to include, inter alia, leasing,
construction, consultancy, licensing, investment,
financing, banking, insurance, exploration, mining
activities and transportation. But, this ordinance
has not yet been tested and it is not yet clear
whether this change will positively affect the way
courts address these issues.
Under the investment chapter of the BTA, Vietnam
gives U.S. investors the right to choose a variety of
third party dispute settlement mechanisms in the
event of an investment dispute with the GVN. Vietnam
has not yet acceded to the Convention on the
Settlement of Investment Disputes between States and
Nationals of other States (ICSID), but has asked the
U.S. to provide advice in this area as part of the
U.S. technical assistance program designed to assist
Vietnam to fully implement the BTA.
Up until recently, exit strategies for foreign
investors have been limited and problematic. Since
the original Law on Business Bankruptcy was issued in
December 1993 ("1993 Law"), only 61 bankruptcy cases
have been brought to court. The small number of
bankruptcy cases is due largely to the deficiencies
of the 1993 Law. The new Bankruptcy Law, in effect
beginning October 2004, attempts to simplify
bankruptcy definitions and procedures to give both
investors and the courts more flexibility in
resolving insolvency.
A-5 PERFORMANCE REQUIREMENTS/INCENTIVES
-----------------------------------------
While Vietnam is not yet a member of the World Trade
Organization (WTO), under the BTA Vietnam is
obligated to gradually discontinue application of any
trade-related investment measures (TRIMS) or
performance requirements inconsistent with the WTO
TRIMS agreement. Vietnam currently imposes a number
of performance requirements with respect to the
establishment of an investment and/or the receipt of
a benefit or incentive. Under the terms of the BTA,
Vietnam retained the right to require that an
investment project export at least eighty percent of
its production for seven years in the following
sectors: cement; paint; bathroom tiles and ceramics;
PVC and other plastics; footwear; clothing;
construction steel; detergent powder; tires and inner
tubes for cars and motorbikes; NPK fertilizer;
alcoholic products; tobacco; and paper. In December
2001, Ministry of Planning and Investment issued
Decision 718 revising the list of products subject to
an export requirement. However, many of the products
identified in Decision 718 are not in the list agreed
upon in the BTA. According to Decision 718, Vietnam
currently has an eighty percent export requirement
for: motorcycles; minibuses and trucks (less than 10
ton); some irrigating pumps; medium voltage, low
voltage and normal electric transmission cables;
cargo ships, audio-visual products; aluminum profiles
products; construction glass; NPK fertilizer; PVC;
bicycles and bicycle parts; transformers under 35 KV;
and diesel motors under 15 CV.
Vietnam also requires foreign investors in some
sectors to use local content. This is particularly
applied to foreign investment in electronics,
motorcycle and automobile sectors as stipulated in
Decision 648 issued in 1999 by the Ministry of
Science Technology and Environment. Other sector
requiring the use of local raw materials include
sugar, paper, vegetable oil, wood processing and
milk. The BTA stipulates Vietnam must phase out
several TRIMS-inconsistent local content requirements
within five years or less of the BTA's entry-into-
force. Vietnam has eliminated trade-balancing
requirements previously imposed through restrictions
on the importation of goods used for production by
foreign investors. In the same vein, it has removed
foreign exchange balancing requirements. Under the
BTA, Vietnam is also obligated to refrain from
imposing requirements to transfer technology as a
condition for the establishment, expansion,
acquisition, management, conduct or operation of an
investment.
The GVN employs an extensive range of incentives in
an attempt to attract foreign investment into certain
priority sectors or geographical regions. The LFI
and subsequent decrees authorize MPI to 'encourage
investment in mountainous and remote areas' of the
country and in regions with 'difficult economic and
social conditions'. MPI also encourages investment
in export production, agricultural and forestry
production, high technology, ecology, research and
development, labor-intensive processing of raw
materials, and large industrial and/or infrastructure
projects. The law also favors to a lesser degree,
investments in metallurgy, basic chemicals,
petrochemicals, fertilizer manufacture, manufacturing
(especially electronic components and car and
motorbike parts), and planting industrial crops.
Under Circulars 1817 and 1818 (1999), the Ministry of
Science, Technology, and Environment (MOSTE) also
encourages projects in the areas of treatment of
environmental pollution and waste, production of new
or rare and precious materials, application of new
biological technology, application of new technology
for manufacturing communication and telecommunication
equipment, and electronic and informatics technology.
More recently, the GVN opened the healthcare and
education sectors more widely to foreign investment
and began providing a variety of incentives for such
investment. Although the GVN encourages investment
in the provinces, enforcement of investor protections
and BTA rights with Provincial Authorities has proven
difficult at best. Investors should use due
diligence when working at the Provincial or local
levels.
Depending on the sector, FIEs and foreign parties to
a BCC may be exempted from profits tax for a maximum
period of two years commencing from the first profit-
making year and may be allowed a 50 percent reduction
of profits tax for a maximum period of two
consecutive years. Certain 'encouraged' projects may
be exempted from profit tax for up to four years from
their first profitable year and may be allowed a 50
percent reduction of profits tax for a further four
years. Where the investment is 'especially
encouraged,' the maximum period of tax exemption
shall be eight years. Such exemptions are generally
written into a company's investment license.
The law on export and import duties specifies the
rates which FIEs and parties to BCC's must pay on
exports and imports. Equipment, machinery,
specialized means of transportation, components and
spare parts for machinery and equipment, raw
materials and inputs for manufacturing, and
construction materials that cannot be produced
domestically, which are imported to Vietnam to form
fixed assets of an FIE or a BCC are exempted from
import duties. Other exemptions or reductions of
import and export duties can be stipulated by the GVN
for 'encouraged' projects and are also generally
contained in an enterprise's investment license
Other special incentives are available to foreign
investors in build-operate-transfer (BOT) projects
and projects located in export processing zones
(EPZ), industrial zone (IZ) and high tech zones
(HTZ). BOTs may be joint ventures or 100 percent
foreign-owned. They are exempt from land tax and
from payment of duties on goods imported to implement
the contracts. They enjoy a lower profits tax rate
(10 percent), a five percent withholding tax rate
(the lowest normal rate), an eight-year tax holiday
starting from the first profitable year, and a
government guarantee for conversion of revenue from
local to foreign currency. The term of a BOT can
extend to 50 years, after which project ownership
reverts to the government.
Projects in EPZs are entitled to profit tax rates of
10-12 percent for the duration of the investments.
EPZs were the first production zones developed in
Vietnam, but interest in them has been less than
anticipated due to inadequate infrastructure and a
requirement that these firms export 100 percent of
their product. Ho Chi Minh City's Tan Thuan Zone is
Vietnam's largest EPZ, while others are planned or in
operation in Danang, Can Tho, Hanoi, and Ho Chi Minh
City. Export-producing firms wishing to operate in
an EPZ apply for licenses and pay taxes directly to
the EPZ management boards, which streamlines the
process. Imports of machinery and raw materials
enter the zones duty-free, and EPZ firms sometimes
also benefit from lower rents, fewer regulations, and
a variety of tax incentives.
IZs are open to companies engaged in construction,
manufacturing, processing or assembly of industrial
products, and service to support industrial
production. Companies submit license applications
and pay taxes directly to the IZ management boards.
IZ firms also are eligible for certain tax benefits,
including a 10 percent profit tax for the duration of
the investment. Companies that reinvest profits may
be eligible for refund of profit taxes. Foreign-
invested automobile manufacturing projects are
subject to local content requirements in their
investment licenses.
Vietnam has also instituted a number of incentives
designed to attract investment from foreign investors
of Vietnamese origin. They are allowed to choose to
operate under domestic, as opposed to foreign,
business licenses, although they may choose to
operate as a foreign business where doing so would be
advantageous to them. The land law has also been
amended to permit limited categories of these
investors to buy land use rights to build homes,
which other foreigners are not permitted to do.
However, the GVN often does not recognize the adopted
nationality of many Vietnamese origin persons unless
they have formally renounced their Vietnamese
citizenship and may consider them to be Vietnamese
nationals. U.S. investors of Vietnamese origin
should consult the U.S. Embassy in Hanoi or the U.S
Consulate General in Ho Chi Minh City for more
information.
A-6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
--------------------------------------------- -----
Until the late-1980's, the Vietnamese economy was
organized according to principles of socialist
central planning. Since then, the government has
moved to develop a market-oriented economy and has
formally recognized the existence of the private
sector. In recent years, the private sector, foreign
and domestic and, to a lesser extent, a small
collective sector have begun to play greater roles in
the economy, although current policy dictates that
the state sector will continue to "play a leading
role" in the economy.
SOEs continue to dominate the industrial economy of
Vietnam. A large majority of these SOEs suffer from
weak finances, high debt, obsolete plant and
equipment, poor management, poorly trained staff, low
labor productivity, and low product quality.
According to the National Steering Committee for
Enterprise Reform and Development (NSCERD), as of
December 31, 2004, Vietnam has approximately 3,300
SOEs, down from around 12,000 in the early 1990's.
NSCERD estimates that 50 percent of the remaining
SOEs are incurring losses.
As part of its 2001 economic reform agreement with
the World Bank and the IMF, the GVN committed to
equitise roughly one-third of the current SOEs over
three years and ensure that those remaining become
competitive. However, actual implementation of the
reform program has been slower than planned. In
addition, many international observers expressed
disappointment that the government did not agree to
completely dismantle its SOE sector over time.
Especially disconcerting to these observers is the
Socio-economic Strategy for 2001-2010 which
reconfirms the "leading role" of the state enterprise
sector and instructs the government to retain and
improve SOE operations in broad range of sectors
which hold considerable interest for the
international investor, including telecommunications,
banking, insurance, petroleum and more. At the same
time, however, the GVN has instructed agencies and
ministries to restructure or dissolve loss-making
SOEs.
A vibrant private sector is emerging in Vietnam.
Dozens of large-scale Vietnamese private enterprises
and tens of thousands small and medium sized firms
now exist. The single most crucial GVN action in
supporting of the development of the domestic private
sector was the enactment, in January 2000, of the
Enterprise Law, which provided, for the first time,
simplified domestic business registration rather than
discretionary government approval and licensing. At
the end of 1999, official statistics counted 45,000
companies in the formal domestic private sector.
Since, then over 120,000 enterprises have been
registered, the large majority of which are new
enterprises. The rest were previously-existing firms
that moved from the informal to the formal sector.
Also, as part of implementation of the new law, the
GVN has moved to abolish nearly 200 "unnecessary"
permits required by various ministries and localities
for operation of a business. Unfortunately, these
agencies keep adding to the list of these "baby
permits" in an effort to re-establish control over
issues they previously influenced via the licensing
system. Domestic private enterprises have created
substantial new employment in Vietnam, while
employment in the state sector has been stagnant or
declining.
Private firms, however, continue to be severely
disadvantaged relative to SOEs in terms of access to
credit and land, and in legal and regulatory
treatment. Private firms face restrictions in using
land use rights for joint ventures with foreign
investors. SOEs also receive most of the lending
from state-owned banks, which dominate the banking
sector. In general, despite these restrictions, the
relatively larger private firms that are emerging in
Vietnam operate with better management and greater
efficiency than the SOEs. Moreover, high-ranking
government officials have stated the GVN's intention
to put foreign and domestic investment on more or
less even footing with SOEs with respect to access to
credit, legal and regulatory treatment, pricing, and
fees. However, SOEs are likely to retain better
access to land and will continue to be expected to
"dominate" in key sectors as identified by the
political leadership.
A-7. PROTECTION OF PROPERTY RIGHTS
-----------------------------------
The Vietnamese legal system is in a state of
transition to support a more market-oriented economy
and undergoes frequent and at times significant
change. The rudiments of a legal system that
protects and facilitates property rights have been
established. But much more work needs to develop the
laws and enforcement mechanisms needed to adequately
protect property rights in Vietnam.
All land in Vietnam belongs to "the people",
administered or managed by the State. Private land
use rights (LURs) were established for the first time
in 1988 when agricultural land was decollectivized
and land use rights were granted to households. A
LUR is a State-granted right to use land for a
specific purpose. The 1992 constitution granted
stronger land rights to individuals, including rights
over commercial and personal property. LURs may be
granted for up to 50 years, depending on the specific
use of the land. Individual holders of LURs can sell
them if they move to a new location, change jobs, or
are unable to work. In the 1993 Land Law, the
National Assembly broadened LURs to include rights to
exchange, transfer, rent, inherit, and mortgage land.
In 1998 several additional changes to the land law
were enacted, primarily to distinguish between
corporate leaseholders, who can use their land for
domestic or foreign joint ventures, and individual
leaseholders who are not permitted to enter joint
ventures with foreign entities.
Additional amendments to the land law in 2001 and
subsequent implementing regulations decentralized
authority for leasing land to businesses and
permitted local officials to lease land to foreign
organizations, individuals and overseas Vietnamese.
Still, foreign investors can currently only lease
land from the Government or in industrial parks.
These limitations may soon be lifted. Government
Resolution Number 2 issued in January 2003, proposed
allowing domestic private companies with long-term
land use rights to lease their land to foreign
investors, provided that the lease is not longer than
the rights held by the leaser. The new Land Law
passed by the National Assembly in November 2003 and
in effect from 1 July 2004 allows domestic private
companies with long-term land use rights to lease
their land to foreign investors. Permission, however,
is subject to approval of the authorities who grant
the land use rights to the leaser, and the continued
requirement that a lease cannot be longer than the
rights held by the leaser.
Vietnamese LUR-holders have the right to mortgage
them, but Vietnamese banks generally value land at a
maximum of 70 percent of the total rent already paid
on the property, not the property's appraised value.
As organizations only were obliged to begin paying
rent in February 1995, the values of mortgages on
land are not large, which limits their usefulness for
property-based project finance. The amended LFI
permits foreign banks branches to accept mortgages of
land use rights. But to date, widespread use of
collateralized bank loan actions have been hampered
by a lack of central registration for mortgaged
assets. Foreign banks also want to see an amendment
to the land law to permit them to take possession of
the land after a foreclosure, and amendments to
banking regulations. In March 2002, a good first
step was made when the New National Register for
Secured Transactions opened for business in Hanoi and
Ho Chi Minh City. But the registry does not have
jurisdiction over land-use rights or buildings,
assets that remain under the control of local
authorities and the enforceability of collateral in
the form of LUR and property remains uncertain. The
National Register for Secured Transactions is working
on a draft law on registration of immovable assets
that is intended to give the registry jurisdiction
over land-use rights of buildings and assets. MPI
plans to present the draft law to the National
Assembly for consideration by the end 2005.
IPR infringement continues to be widespread and
enforcement of administrative orders and court
decisions finding IPR infringement remains
problematic. Vietnam is a member of the World
Intellectual Property Organization (WIPO) and is a
signatory to the Paris Convention for Industrial
Property. It has acceded to the Patent Cooperation
Treaty and the Madrid Agreement. In June 2004,
Vietnam decided to join the Berne Convention on
Copyright Protection for Literary and Artistic Works.
On October 26, 2004, Vietnam became the 156th full-
fledged member of the Convention, which is the
country's first multilateral copyright agreement. The
U.S.-Vietnam Bilateral Copyright agreement obligates
Vietnam to provide U.S. copyrights protection on a
national treatment basis in accordance with the terms
of the Berne Convention. Under the terms of the BTA,
Vietnam was obligated to make its system for
protecting intellectual property rights (IPR),
including enforcement, consistent with the WTO TRIPS
agreement by December 10, 2003. Although
considerable progress has been made over the past
several years, with new regulations expanding legal
protection to areas previously not covered, such as
business secrets and new plant varieties, much
remains to be done. New legislation this year
included more detailed regulations on plant varieties
and administration sanctions against counterfeits.
The Government has instructed the Ministry of Science
and Technology (MOST) and the Ministry of Culture and
Information (MOCI) to draft a separate Law on
Intellectual Property Rights, which is planned to
submit to the National Assembly for approval in 2005.
Vietnam's laws offer some protection for foreign
patent holders, but there are infringements.
Potential investors should contact the U.S. Embassy
in Hanoi or the Consulate General in Ho Chi Minh City
for the latest information regarding the ongoing
changes to IPR protection in Vietnam. The National
Office of Intellectual Property (NOIP), under
Ministry of Science and Technology, administers
Vietnam's patent and trademark registration system.
The Vietnam Office of Literary and Artistic
Copyright, under the control and supervision of the
Ministry of Culture and Information, oversees
artistic copyright. Significant progress has been
made putting in place the laws protect copyrights
including those belonging to foreigners but
enforcement is almost non-existent. Since joining
the Berne Convention, MOCI tightened copyright
regulations on foreign musical and theatrical works.
All organizers must obtain permission in writing from
the copyright holders before performing their works.
Enforcement of IPR remains weak and violations of IPR
are rampant. While Vietnam recently has conducted
considerable administrative and law enforcement
actions against IPR violations, IPR enforcement
remains the exception rather than the rule. For some
types of products, such as PC software, music and
video CDs, VCDs and DVDs, as well as brand trademark
violations, such as logos on t-shirts and other
consumer items, IPR enforcement is virtually non-
existent. Industry estimates of piracy rates for
software, music and video, run as high as 99 percent.
Local police authorities often are slow to act on
administrative orders finding infringement and court
decisions. Violators sometimes negotiate with
plaintiffs, demanding payoffs to stop producing
pirated material. However, there is the beginning of
some progress with increased awareness of the need
for effective IPR enforcement to foster investment,
both foreign and domestic, in sectors such as
software development and the arts. In addition,
Vietnamese authorities are becoming increasingly
concerned that the proliferation of pirated products
also undermines their ability to prevent the
distribution of pornography and other illegal
content.
A-8. TRANSPARENCY OF THE REGULATORY SYSTEM
-------------------------------------------
As Vietnam undergoes a transition to a more market-
oriented economy, the legal system changes
frequently, and at times, significantly. Vietnamese
officials have limited experience drafting
legislation, and new laws and regulations sometimes
are contradictory or unclear. Not all officials,
especially those at the provincial and local levels,
are fully up-to-date on all the new laws and
regulations that affect their area of responsibility.
Nor are all laws and regulations readily available to
business and the public. Different officials,
sometimes within the same agency, may interpret laws
differently. There is a shortage of practicing
lawyers, law school graduate judges, and law
professors. Substantial foreign assistance is being
devoted to assist Vietnam to establish a legal
structure compatible with international standards.
Although the Vietnamese government has begun to
streamline and rationalize the investment licensing
process over the past year, MPI and other national,
provincial, and local government agencies retain a
great deal of discretionary authority. U.S. and
other investors frequently encounter the need for
further negotiation and administrative processes
after the licensing process has been completed. A
general lack of transparency in law and regulation
make it difficult not only to exercise rights, but
even to be aware of what rules apply to an
investment. In recent years, Vietnam has improved
its process for making and publicizing laws, but
beyond major national laws and regulations, much
rule-making affecting foreign investors still occurs
at the ministerial, sub-ministerial and local levels,
without any regular process for public notification
and little possibility for advance warning of changes
in rules or for public input during the rule-making
process. In 2002 the GVN amended the Law on the
Promulgation of Legal Normative Documents to require
that all legal documents and agreements to
international conventions be published in the
Official Gazette. As of July 2003, the Official
Gazette has been published on a daily basis. The
number of laws and regulations published in the
Official Gazette each year has increased from just
4,200 in 2002 to 16, 510 in 2004.
Under the BTA, Vietnam is obligated to publish
promptly all existing and future laws, regulations
and administrative procedures which might affect any
matter covered under the agreement including
investment and trade in goods and services. The BTA
further commits Vietnam to enforce only laws,
regulations or administrative practices that have
been so published and to publicize such laws
sufficiently in advance of their effectiveness to
ensure U.S. investors have adequate time to adjust
their operations accordingly. Vietnam has committed
to provide a process by which the U.S. Government and
U.S. nationals have the ability to provide their
views to the GVN on any such laws, regulations or
administrative practices while they are still being
formulated. Finally, U.S. nationals have the right
to appeal administrative action relating to matters
relating to the agreement. In December 2002, the
National Assembly passed the "Law on Legal Normative
Documents". Although this Law meets some of its BTA
commitments, the GVN is not yet in full compliance
with these obligations, in particular regarding prior
notice and consultation on proposed regulatory and
legal changes.
A-9. EFFICIENT CAPITAL MARKETS/PORTFOLIO INVESTMENT
--------------------------------------------- -------
Vietnam' financial system is in the early stages of
reform and is not yet an efficient allocator of
financial resources. At least 50 percent of personal
savings are held as cash, gold, or other assets
outside the banking system. However, as part of its
World Bank/IMF program, the GVN adopted a
comprehensive banking reform program that relies on
market-based action which is intended to ensure the
stability of the banking system, and in the medium-
to-long term, promote better mobilization of domestic
resources by improving allocation of those resources
to commercially viable activities, and expand banking
services throughout Vietnam. Raising capital for
development is one of Vietnam's main economic
priorities.
Foreign investors generally meet their foreign
currency credit needs offshore or with foreign bank
branches, although availability of foreign currency
to convert dong assets to cover dollar liabilities
can be, at times, uncertain. Foreign banks are
severely limited in their right to take dong deposits
and frequently encounter difficulties meeting
customer's dong cash and credit needs. However,
under the BTA, U.S. banks now enjoy a more liberal
policy on dong deposits. In response to strong
lobbying from non-US foreign banks to get the same
treatment as US banks, in April 2004 the State Bank
of Vietnam issued Decision 327 raising the ratio of
dong deposit for foreign banks coming from the
European Union, giving them the same competitive edge
as US banks. This ratio, however, does not change for
other non- European Union or non-US foreign banks.
The State Bank and the Ministry of Finance have
conducted sales of state bonds denominated in local
currency, but Vietnam only has an informal secondary
market for such instruments.
The banking industry in Vietnam is characterized by
its small size in terms of deposits and loans and by
the relatively large number of banks, both foreign
and domestic. However, four state-owned commercial
banks (SOCB) the Vietnam Bank of Foreign Trade
(Vietcombank), the Vietnam Industrial and Commercial
Bank (Incombank), the Bank for Agriculture and Rural
Development, and the Vietnam Investment Bank still
dominate domestic banking activity, providing an
estimated 75 percent of all lending. Most SOCBs and
joint stock banks (i.e., private sector banks with
numerous shareholders) are under-capitalized,
particularly when non-performing loans are taken into
account. State-directed lending under non-commercial
criteria also weakens banks in Vietnam. Furthermore,
banks in Vietnam, including the four state-owned
banks, hold a large number of non-performing loans,
mainly to SOEs. As transparent auditing and
financial reporting is problematic, it is difficult
to know the exact proportion of non-performing loans.
Sources vary widely, with estimates of bad loans
ranging from 4 percent to 30 percent.
In 1997, the government introduced a new accounting
standard, the 'Vietnamese accounting system.' The
Ministry of Finance continues to refine and amend
this standard to bring it into consistency with
international accounting standards. After a multi-
year grace period, foreign banks and companies are
now required to comply fully with its parameters. A
number of major international accounting firms have
opened offices in Vietnam and, unlike foreign law
firms (which are subjected to restrictions including
advising clients on Vietnamese law and hiring
Vietnamese lawyers), can provide advice on accounting
and business issues directly to foreign clients in
Vietnam. Nonetheless, a continued lack of financial
transparency and compliance with internationally
accepted standards among Vietnamese firms continues
to pose problems for the government's plan to expand
stock and securities markets to raise capital
internally.
Despite these challenges and after years of
discussion and planning, Vietnam opened a stock
market in July 2000. A total of 25 joint stock
companies, primarily former SOE's now under a
restructuring/equitisation program, have listed on
the exchange. None of them play major roles in the
economy. Under current market regulations, share
prices of a listed company cannot increase or
decrease by more than five percent per trading
session. To date, with its small trading volume,
and restrictive rules on both listing and investor
participation, the nascent market has yet to become a
real source for financing or intermediation.
Formerly, foreign organizations and individuals can
only hold a maximum of 30 percent of total shares
issued by a listed company. As part of its efforts
to encourage foreign investment and to promote the
development of the infant stock market, the
Government issued Decision 146 in July 2003
abolishing the equity limit of a single foreign
investor (institutional or individual) in a listed
Vietnamese company. MPI maintains a list of sectors
and business lines in which foreigners may purchase
shares in Vietnamese private enterprises in an effort
to encourage private domestic enterprises to list and
foreign investors to buy shares. In April 2002, the
latest version of this list was issued. It includes
selected commercial activities in five broad areas:
agriculture, forestry and aquaculture; industry and
processing; hotels and restaurants; transport,
warehousing and communications; and science,
technology, health care and education.
In March 2003, the Government issued Decision 36/QD-
BKH revising the regulations on foreign shareholding
in Vietnamese companies that are not listed on the
Vietnam stock market. The new Decision governs
purchase of shares and capital contributions by the
following foreign investors:
?Foreign economic and financial organizations
established pursuant to foreign law and
conducting business overseas or in Vietnam;
?Non-resident foreigners in Vietnam;
?Foreigners who reside, earn their living and
live long-term in Vietnam;
?Overseas Vietnamese
se
An important reform is that Prime Minister's approval
is no longer required for the sale of shares to
foreign investors. However the maximum level of
capital contribution and purchase of shares by any
one or more foreign investor in Vietnamese companies
is still capped at 30 percent of the charter capital
of the Vietnamese companies. The Ministry of Finance
recently has been assigned by the Government to
review and revise this restriction toward raising the
30% cap on foreign equity in Vietnamese companies.
A handful of regional and Vietnam-specific investment
funds were set up to invest in Vietnam following the
lifting of the U.S. trade embargo in 1994, but their
results have mostly been poor. After promising
beginnings in 1995, by 1998 shares in some of the
funds were trading at an average discount of nearly
50 percent, and some were forced significantly to
write down the value of their portfolios, while most
failed to fully invest the funds raised for Vietnam
due to a dearth of attractive opportunities. The
continuing lack of a developed stock market means
such funds do not have access to portfolio investment
and must seek out private equity opportunities.
A-10. POLITICAL VIOLENCE
---------------------------
Vietnam is undertaking an ambitious course of
transition both domestically and internationally, but
remains essentially stable under the continued
leadership of the Communist Party of Vietnam (CPV).
As the country proceeds with its transition from a
centrally-directed economy to a more genuinely
market-based economy, a process which began in the
late 1980's, the GVN and the CPV have, at the same
time, reduced official interference in private lives
of citizens and have permitted a broad expansion of
personal liberties. But the GVN remains a one-Party
state that brooks no overt criticism of the GVN or
CPV and continues to restrict freedoms of religion,
speech, assembly, and press, while denying true
choice of political system or leaders. There are no
signs of active opposition to the GVN or CPV,
however, and most Vietnamese appear satisfied with
the economic and social improvements of the last 16
years. There have nonetheless been isolated
protests, such as large demonstrations by ethnic
minorities in the Central Highlands in 2004 and
smaller gatherings at the semi-annual meetings of the
National Assembly by a variety of disaffected
individuals.
A-11 CORRUPTION
---------------
U.S. and other foreign firms as well as domestic
private sector firms, have identified corruption in
Vietnam in all phases of business operations as an
obstacle to their business activities. In 2004,
Vietnam scored a 2.6 out of a possible high score of
10 points on Transparency International's Corruption
Perception Index. This placed Vietnam's rank at 102
out of 146 countries, behind neighbors Malaysia and
Thailand but above Indonesia. In large part due to a
lack of transparency, accountability, and media
freedom, widespread official corruption and
inefficient bureaucracy remain serious problems that
even the CPV and GVN admit they must address squarely
and soon. Competition among government agencies for
control over business and investments has created
confused overlapping of jurisdictions and
bureaucratic procedures and approvals that in turn
create opportunities for corruption. Low pay for
government officials and woefully inadequate systems
for holding officials accountable for their actions
compound the problems. Implementation the GVN's
Public Administration Reform, developed in with the
assistance of the World Bank, and the country's
obligations under the transparency provisions of the
BTA promise some improvement in the situation. But
it appears unlikely that they will be successful in
this effort to eliminate corruption the near term.
B. BILATERAL INVESTMENT AGREEMENTS
Vietnam has 46 bilateral investment agreements with
the following countries and territories: Algeria,
Argentina, Armenia, Australia, Austria, Belarus,
Belgium and Luxembourg, Bulgaria, Burma, Chile,
China, Cuba, Czech Republic, Cambodia, Denmark,
Egypt, Finland, France, Germany, Hungary, Iceland,
India, Indonesia, Italy, Japan, Laos, Latvia,
Lithuania, Malaysia, Mongolia, Netherlands, North
Korea, Philippines, Poland, Romania, Russia,
Singapore, South Korea, Sweden, Switzerland, Taiwan,
Tajikistan, Thailand, Ukraine, United Kingdom, and
Uzbekistan. Vietnam has not concluded a Bilateral
Investment Treaty (BIT) with the U.S., but the BTA
contains an investment chapter that closely resembles
U.S. BITs and contains most of the principal
obligations common to such agreements. Vietnam also
does not have bilateral taxation treaty with the U.S.
C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
In March 19, 1998, OPIC signed a new bilateral
agreement with Vietnam, providing protections and
guaranties necessary for OPIC to operate in Vietnam
for the first time in more than twenty years.
Subsequently, on November 19, 2000, President Clinton
delivered remarks to the Vietnamese business
community. At the core of his remarks was the
announcement that OPIC was creating a special US$ 200
million line of credit to support private sector
projects in Vietnam. As of December 2004, OPIC had
signed one active insurance contract and one lending
contract in Vietnam. OPIC is reviewing several
applications to support other potential projects.
Vietnam joined the Multilateral Investment Guarantee
Agency (MIGA) in 1995.
D. LABOR
One of Vietnam's principal attractions for foreign
investors has been its large, relatively well-
educated (the GVN reports a literacy rate of over 90
percent) and inexpensive labor force. Now estimated
at 43 million, the labor pool continues to increase
by 1-1.5 million workers annually due to the post-war
population explosion.
Despite its attractions, labor in Vietnam poses some
problems for foreign investors. There is a shortage
of managerial talent and skilled workers, resulting
in higher salaries for those employees. Another
factor raising the cost of skilled and managerial
workers is Vietnam's sharply progressive personal
income tax system that results in labor costs 2-3
times higher than in other Asian countries for
relatively high-paid local staff. In March 2004 the
Standing Committee of the National Assembly
promulgated Ordinance 14 on Amendments to the
Ordinance on Income Tax of High Income Earners.
Under this legislation, the tax burden on Vietnamese
employees was reduced effective 1 July 2004. Key
changes included the broadening of tax brackets and
removal of the top marginal income tax rate of 50
percent.
Under two 1999 directives, foreign organizations,
including FIEs, must recruit and hire staff through
state-owned employment bureaus, a requirement many
investors find onerous. Under amendments to the
Labor Law that entered into force on January 1, 2003,
FIEs and foreign business cooperation parties are now
allowed to directly recruit Vietnamese workers and
foreigners. However, the requirement to use such
employment service agencies will continue to apply to
branches and representative offices of foreign
companies, foreign non-governmental organizations and
foreign diplomatic missions.
Employers are required by law to establish labor
unions within six months of establishment of the
company. All labor unions must be members of the
Vietnam General Confederation of Labor, an
organization under the Communist Party-affiliated
Fatherland Front. There were, 96 labor strikes in
2004, according to latest statistics. Strikes took
place in SOEs, FIEs, and domestic private companies,
with the majority occurring at FIEs. There were no
known strikes at U.S.-invested companies. Most of
the strikes involved labor-management disputes over
health, safety, or other working conditions, work
hours, or late payment of wages, and were settled
quickly.
Vietnam is a member of the International Labor
Organization (ILO). As of May 2003, it had ratified
three of the eight core labor conventions: 100 (Equal
Remuneration); 111 (Non-discrimination in
Employment); and 182 (Worst Forms of Child Labor).
Vietnam ratified the first two conventions on October
7, 1997 and the last on December 19, 2000. Vietnam
has not ratified ILO Conventions on freedom of
association, protection of the right to organize and
collective bargaining. However, under the
Declaration on Fundamental Principles and Rights to
Work, all ILO members, including Vietnam, have
pledged to respect and promote all the core ILO labor
standards, including those on association, right to
organize and collective bargaining. A number of
technical assistance projects in the field of labor
sponsored by foreign donors are underway in Vietnam,
including work by the ILO supported by the U.S.
Department of Labor. Vietnam intends to ratify
Conventions 29 and 105 on forced labor in 2005.
E. FOREIGN TRADE ZONES/FREE PORTS
Companies may choose to produce within an export-
processing zone (EPZ) to take advantage of exemptions
from customs duties for equipment, raw materials, and
commodities imported into the zones, and for finished
goods and products exported from the zones, subject
to specific provisions regulating EPZs. All of the
production within an EPZ must be exported.
Industrial zones (IZs) have been developed to offer
tax advantages for establishing factories within the
zones. Companies can produce within an IZ for the
domestic market or for export. The companies pay no
duties when importing raw materials, if the end
products are exported.
From the establishment of its first EPZ in 1991
through December 2004, Vietnam established a total of
112 IZs and EPZs. As of December 2004, there were
1,542 foreign invested enterprises licensed in the
zones with a total registered capital of US$ 13.4
billion, of which over US$ 7.4 billion has been
implemented. Many foreign investors commented that
it is faster and more convenient to implement their
projects in the industrial zones than outside the
zones as the land use is already planned and they do
not have to be involved in site clearance,
compensation works and the construction of necessary
infrastructure, which are time consuming and
sometimes difficult. Foreign investment in the
industrial zones currently concentrates on light
industry projects, such as food processing and
textile and garments. The number of heavy industry
projects is still modest.
The operation of customs warehouses was approved in
1994. There are bonded warehouses in Can Tho, Hai
Phong, Ho Chi Minh City, Hanoi, Quang Ninh, Binh
Duong, Dong Nai, An Giang and Vung Tau. Entities
permitted to lease customs bonded warehouses are
foreign enterprises, individuals, and overseas
Vietnamese; Vietnamese import-export license
companies; and FIEs licensed to perform import-export
activities. Most goods pending import and domestic
goods pending export can be deposited in bonded
warehouses under the supervision of the provincial
customs office. Exceptions include goods prohibited
from import or export, Vietnamese-made goods with
fraudulent trademarks or labels, goods of unknown
origin, and goods dangerous or harmful to the public
or environment. The lease contract must be
registered with the customs bond unit at least 24
hours prior to the arrival of goods at the port.
Documents required are a notarized copy of
authorization of the holder to receive the goods, a
notarized copy of the warehouse lease contract, the
bill of lading, a certificate of origin, a packing
list, and customs declaration forms. Owners of the
goods pay import or export tax when the goods are
removed from the bonded warehouse.
Customs warehouse keepers can provide transportation
services and act as distributors for the goods
deposited. Additional services relating to customs
declaration, appraisal, insurance, reprocessing or
packaging require the approval of the provincial
customs office. In practice the level of service
needs improvement. The time involved for clearance
and delivery can be lengthy and unpredictable.
F. FOREIGN DIRECT INVESTMENT STATISTICS
Year Avg. capital Number Licensed
Implemented per project of
Capital capital
(Mil US$) projects (Bill US$) (Bill US$)
1992 10.5193 2.027 0.478
1993 9.5272 2.588 0.871
1994 10.3 362 3.746 1.936
1995 16.4 404 6.607 2.363
1996 23.5367 8.640 2.923
1997 14.0333 4.659 3.137
1998 15.0260 3.897 2.364
1999 5.2298 1.568 2.179
2000 5.8 344 2.014 2.228
2001 5.3461 2.521 2.300
2002 1.97697 1.376 N/A
2003 2.55752 1.914 2.685
2004 3.07 723 2.222 2.900
Note: Authorities have been steadily adjusting the
1.914 2.685
2004 3.07 723
2.222 2.900
Note: Authorities have been steadily adjusting the
final figures for investment inflows for recent years
upwards. It is not clear whether these adjustments
reflect additional information that has become
available to investment authorities or if they
reflect an attempt to make the investment downturn in
the wake of the Asian financial crisis appear less
severe.
The licensed capital statistics for 1997 and 1998 may
be overstated. A Singapore-invested resort complex
in 1997 worth US$ 700 million is unlikely to be
completed in the foreseeable future, and the Russian
partner has recently pulled out of a joint venture
petroleum refinery project licensed in 1998 worth US$
1.3 billion. Absent these projects, the decline in
newly licensed FDI after 1996 would appear to have
been even sharper.
Cumulative FDI (as of 12/27/2004):
-- Licensed projects: 5,109 (US$ 45.766 billion)
-- Disbursed capital: US$ 26.773 billion (58
percent of licensed capital)
Note: GVN authorities routinely revise or revoke
investment licenses that have not been utilized and
other investment licenses contain automatic
expiration clauses that take effect if a project or
certain phases of a project are not implemented by a
certain date. Statistics on the number of licensed
projects and the value of licensed projects are then
adjusted accordingly.
Foreign direct investment in selected sectors
(Cumulative, as of 12/27/2004):
Sector Number of Licensed
Implemented
projects capital capital
(Billion US$)(Billion
US$)
1. General Industry 3,103 20.8511.99
2. Oil & gas 27 1.90 4.43
3. Construction 293 3.88 2.04
4. Real estate development 104 3.64 1.61
5. Hotels & Tourism 166 3.61 2.20
6. Trans./Comm. 143 2.57 0.92
7. Agriculture & forestry 591 3.13 1.55
8. Fisheries 105 0.29 0.15
9. Finance & banking 56 0.74 0.63
56 0.74 0.63
10. Culture, Health & Edu. 179 0.67 0.34
Foreign direct investment by country (Jan to Dec 27,
2004):
CountryNumber ofLicensed
projects Capital
(Million US$)
1. Taiwan156 453
2. South Korea159 340
3. Japan 61 224
4. Hong Kong 38 198
5.British Virgin
Islands 25 177
6. Canada 12 155
7. Singapore 47 124
8. Malaysia 24 84
9. China 67 79
10. United States 30 75
Foreign Direct Investment by country:
(Cumulative, as of 12/27/2004)
Country Number of Licensed
Implemented
projects capital capital
(Billion US$) (Billion
US$)
1. Singapore 334 7.983.38
2. Taiwan 1,2597.263.15
3. Japan 4905.394.25
4. South Korea 8404.752.89
5. Hong Kong 3263.231.94
6. Brit.Virg.Isl. 2122.431.14
59 7.26 3.15
3. Japan 490
5.39 4.25
4. South Korea 840
4.75 2.89
5. Hong Kong 326
3.23 1.94
6. Brit.Virg.Isl. 212
2.43 1.14
7. France 1422.151.06
8. Netherlands 531.841.97
9. Thailand 1161.380.76
10. Malaysia 1631.320.81
11. United States 2151.280.73
12. United Kingdom 621.220.60
13. Switzerland 280.660.52
There is little data available on Vietnam's direct
investment abroad. According to the Ministry of
Planning and Investment, as of December 2004,
Vietnamese businesses had invested in 113 projects
worth about US$ 226 million in Russia, Singapore,
Laos, Japan, Hong Kong, Cambodia, Tajikistan, the
Middle East, the United States, Uzbekistan, and
Taiwan. These investments were concentrated in the
following sectors: transport, communications,
construction, food processing, oil and gas, hotel,
restaurant, and agriculture sectors. Vietnamese
businesses have two investment projects worth US$
260,000 in the United States. One Vietnamese
government-owned telecommunications firm established
an office in California. There are no Vietnamese
lished
an office in California. There are no Vietnamese
government regulations on investment overseas.
Note: Statistics, including those on investment, are
often difficult to come by and are generally based on
definitions that differ from internationally accepted
standards. Those published in government statistical
surveys are generally incomplete and often
inconsistent from publication to publication and over
time. It is the policy of the Ministry of Planning
and Investment to respond only to written requests
for statistics or information on how they are
compiled and calculated, a process that is cumbersome
and very time consuming. Additional statistical data
is often released in the local press but is difficult
to confirm and update year-to-year, because it is not
also provided in a database, which is readily
available to the public.
End text.
MARINE