June 2021 – Duane Morris Vietnam

June 29, 2021 by Dr. Oliver Massmann

VIETNAM – INVESTMENT IN THE HEALTHCARE AND MEDICAL DEVICE SECTORS

A. Overview of Vietnam´s healthcare sector

There is no denying that Vietnam truly is an attractive investment destination in South East Asia. It has great potential to develop a qualitative, self-sustaining life science sector. Improvements on the healthcare sector will lead to several benefits. With increasing focus on healthcare, manufacturing, service providers, clinical research organizations and others are being stimulated. As a result, small and medium-sized enterprises (SMEs) are boosted and exports could replace the need for foreign aid by attracting sustainable FDIs and PPPs.

Of particular importance for a positive development is the close cooperation between the major stakeholders from the private and public sector. In this process, certain core goals should be set. Significantly, it is important to ensure swift, sustainable access to medical treatment and to urgently improve the quality of the treatment process. High-quality domestic treatments not only improve patient satisfaction but also improve one’s own economy by counteracting outgoing medical tourism.

Furthermore, it should be ensured that the existing investors remain in Vietnam and new ones are pulled ashore. To do this, investors must be shown that the Vietnamese market does not contain undetected risks, but is stable and predictable. Further, integrate opportunities for collaborations and partnerships to develop local capability.

B. Outpatient: Home care and home-treatment

One major issue regarding Vietnams Healthcare sector is the limited capacity in hospitals. There is a gap between bed capacity and demand of inpatient treatment. The Ministry of Health has its hands full to counteract the overloading of hospitals. Even institutions with larger bed capacity have eventually set up a home care service to enhance the follow-up monitoring of chronic and long-term illnesses for patients that have been released from the hospital.

Patients in Vietnam are financially overburdened with the costs of treatment therefore affordable treatment is needed. This however, has to be reached without the loss of quality. Especially the indirect costs of healthcare, such as travelling, meals during hospitalization and loss of income during treatment put patients and their families under enormous financial pressure. Due to the overload situation at hospitals and the fact that home care service is not fully developed yet, patients tend to take care for themselves with the help of their family. This leads to potential additional health complications due to the lack of professional follow-up. Furthermore, patients will often have to come to the hospital eventually and in some cases, with more severe conditions.

As such, professional homecare programs should be further investigated and developed, with access to the programs should be simple for everyone. This is especially necessary for the chronically ill. Home care and home-treatment can help to reduce public spending on chronic diseases and thus spare the health budget.

C. Implementation

There are two major requirements for putting the homecare structure into practice. First, the creation of a straightforward, transparent legal framework that contain incentives for investors. This encourages multinational companies to invest and transfer their know-how and technology to Vietnam, improving the revenues and quality of the country health care sector. Second, to streamline the administrative process to shorten the process of delivering new, high-quality patient care solutions, and to respond to the growing need for a growing Vietnamese population for rapid and sustainable access.

D. Medical Devices Industry Code of Conduct

Background of the Code of Conduct for medical devices is the various risks associated with the industry, in particular unfair competition between industry players. The Code is intended to facilitate ethical interactions among members of society who develop, manufacture, sell, distribute or distribute medical technology in Vietnam and individuals and organizations that apply, recommend, buy or prescribe medical technologies in Vietnam. The content of the Code of Conduct should focus on 1) strict compliance with laws and regulations in the area; 2) prioritization of people and health and safety of patients and 3) promoting scientific and educational activities to best benefit the patient.

For multinational companies, the compliance area is usually very pronounced and strict. It is therefore particularly important to invest in an ethical business environment, especially when investing in high-risk jurisdictions. The commitment to uphold high ethical standards would certainly bring about long-term benefits for the health sector in Vietnam and attract more investors.

E. Outlook on Major Trade Agreements TPP 11, EUVNFTA and Investment Protection Agreement

In January 2017, US President Donald Trump decided to withdraw from the US’ participation in the TPP. In November 2017, the remaining TPP members met at the APEC meetings and concluded about pushing forward the now called CPTPP (TPP 11) without the USA. On 12 November 2018, Vietnam officially became the seventh member of the CPTPP.

The CPTPP targets to eliminate tariff lines and custom duties among member states on certain goods and commodities to 100%. An increase of trade will have great influence to the health- and medical sector. The agreement is suitable to support Public-Private Partnerships (PPPs), which could lead to a positive impact in development of innovative technologies of medical devices and facilitate the transfer of necessary know-how. Lower or no trade tariffs can lead to lower import costs for the essential components of medical devices. This, in turn, results in lower acquisition costs for the medical practices and hospitals, thus eventually lowering the treatment costs.

The annexes of the CPTPP (TBT chapter) deal with specific challenges of trading regarding pharmaceuticals, medical devices and technology products. The provisions require the Members to define what medical products are and when they are subject to the state laws, and this information have to be published. This requirement helps to ensure timely mitigation measures if a product application is not approved or is deemed deficient. Such increased transparency brings great benefits for all traders of medical devices, employees in the medical industry as well as for patients.

A specific example is before the CPTPP comes into force in Vietnam, Canada faced tariffs of 7% imposed by Vietnam regarding exports of life sciences products such as medicines in doses for retail sale. From 14 January 2019, these tariffs are fully eliminated. As a result, Canada and other countries are exporting more and more products to Vietnam, gradually improving the quality of Vietnam’s medical facilities.

One another notable major trade agreement is the European Union Vietnam Free Trade Agreement (EVFTA), which came into force on 1 August 2020. The EVFTA offers great opportunity to access new markets for both the EU and Vietnam and to bring more capital into Vietnam due easier access and reduction of almost all tariffs of 99%, as well as obligation to provide better conditions for workers. In addition, the EVFTA boosts the development of (almost) all economic sectors in Vietnam. Both agreements promise great benefits for the health and medicine sector.

Both the CPTPP and the EVFTA include a chapter on Government Procurement, which deals with the requirement to treat foreign and domestic bidders equally when a government buys goods or requests for a service worth over the specified threshold. Vietnam undertakes to timely publish information on tender, allow sufficient time for bidders to prepare for and submit bids, maintain confidentiality of tenders. The GPA in both agreements also requires its Parties assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, create an effective regime for complaints and settling disputes, etc. At the moment, Vietnam has implemented online bidding mechanism with easily accessible information for foreign investors.

The EVFTA comes with the EU-Vietnam Investment Protection Agreement (EVIPA) that is being reviewed for ratification by EU Member States. Foreign investors are given high level of protection under the EVIPA. This agreement is a combination of the New York Convention 1958 and the ICSID 1965. The EVIPA, and CPTPP, make it possible for foreign investors to sue the Vietnamese Government for its investment related decisions. The final arbitral award is binding and enforceable without any question from the local courts regarding its validity.

At the moment, Vietnam has reserved the right to fulfill the commitment on Investor-State Dispute Resolution for 5 years from the effective date of the EVIPA. Nevertheless, Duane Morris Vietnam has the legal and technical tools to make such provisions work in favor of investors from now.

For more information on the above, please do not hesitate to contact the author Dr. Oliver Massmann under omassmann@duanemorris.com. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC, Member to the Supervisory Board of PetroVietnam Insurance JSC and the only foreign lawyer presenting in Vietnamese language to members of the NATIONAL ASSEMBLY OF VIETNAM.

June 3, 2021June 3, 2021 by Dr. Oliver Massmann

VIETNAM – LATEST GUIDE TO CONTRACT MANUFACTURING AND TOLLING AGREEMENTS

I. VAT and Customs

In many cases, the principal in the contract manufacturing relationship owns some or all of the raw materials, work-in-process and finished goods throughout the manufacturing process. The principal and many of the suppliers are typically outside of the manufacturing jurisdiction.

1. What Are The VAT, Customs And Related Costs (e.g. Broker Fees) That Arise When A Foreign Principal Has Goods Drop-shipped Into Your Jurisdiction To The Local Contract Manufacturer? In Particular, Is There Any Non-recoverable VAT? Are There Strategies For Avoiding Or Reducing This VAT Cost?

Most regulations on the Vietnamese VAT regime are included in the Law on Value Added Tax No. 13/2008/QH12 of the National Assembly, as amended by Law No. 31/2013/QH13 and Law No. 71/2014/QH13.
Under Article 17.3 of the Law on Tax Management 2019, importers are obliged to pay tax in full and in a timely manner, including the VAT.

This norm includes the concept of drop shipping, which means an arrangement between a seller and the manufacturer or distributor of a product to be sold. According to the arrangement the product will be shipped to the buyer directly by the manufacturer or distributor and not by the seller. This definition can be understood as an alternative form of import. The law does not make any differences on the way that goods are delivered. Therefore drop shipping is not subject to tax exemptions or reductions.

It should be noted that no VAT is raised for goods in transit or transshipment or crossing Vietnamese borders as well as goods temporarily imported and re-exported and goods temporarily exported and re-imported. There are no further special regulations for drop shipping supplies.

2. In Many Cases The Principal Supplies Equipment That The Local Contract Manufacturer Uses In The Manufacturing Process. This Equipment May Remain In The Local Jurisdiction For A Substantial Period Of Time. Any Addition VAT Or Customs Issues That Are Unique To The Capital Equipment That The Principal May Import?

Capital equipment is not subject to the catalogue of VAT exemptions. According to the Law on Amendments to the Law on Value Added Tax 2013, the following objects are exceptionally not subject to VAT: “Machinery, equipment, parts, and materials that cannot be produced at home and need to be imported to serve scientific research, technological development; machinery, equipment, parts, specialized vehicles, and materials that cannot be produced at home and need to be imported to serve petroleum exploration; airplanes, oil rigs, and ships that cannot be produced at home and must be imported to form fixed assets, or need to be hired from foreign partners to serve production, business, or to lease back.”

3. Have There Been Any Recent Developments That Impact The VAT, Customs And Related Costs Applicable To Such Structures?

On 25 March 2015, the Ministry of Finance issued Circular No. 38/2015/TT-BTC, according to which machinery and equipment suitable for investment field, target, and scale of the investment project, satisfying other certain conditions, imported as fixed assets of investment projects in the fields or areas eligible for preferential import tax are exempted from taxes.

In 2016, the Government issued a Draft Decree on the implementation of the law on import and export tax, but to date, it still has not been approved.

Vietnam’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on 14 January 2019 and its ratification of the EU-Vietnam Free Trade Agreement (EVFTA) on 1 August 2020 have eliminated import and export taxes for numerous tariff lines. For instance, nearly 100% of Vietnam’s exports to the EU will be eliminated import tax after the 10-year journey of EVFTA. So far, this is the highest level of commitment a partner gives Vietnam in a trade agreement. This is especially meaningful when the EU has been one of the two largest export markets of the country.

II. Permanent Establishment

1. As Noted Above, The Principal May Own Raw Materials, Work-In-Process And Finished Goods In The Local Jurisdiction. Is There Any Significant Risk That The Principal Could Have A Local PE Due To The Fact That It Has Such Inventory In The Country? Does It Matter Whether The Principal Has A Local Warehouse?

In Vietnam companies overseas conducting business activities through resident establishments in Vietnam are liable to pay corporate income tax.

According to the definition in Article 2.3 of the Law on Corporate Income Tax, Resident establishment means a business establishment through which a company overseas conducts all or a part of its business activities in Vietnam. A resident establishment of a company overseas can take different forms that are listed in the Law on Corporate Income Tax.

This list includes a representative in Vietnam that has authority to enter into contracts in the name of the oversea company or a representative that is not competent to enter into contracts on behalf of the foreign company but regularly engage in delivery of goods or provision of services in Vietnam.

This very broad reference might also include principals with assets as named above. These elements are not likely to form the risk of a permanent establishment in Vietnam but the authorities decide about permanent establishments on a case-by-case basis.

Where a treaty on avoidance of double taxation to which the Socialist Republic of Vietnam is a signatory contains different provisions relating to resident establishments, such treaty shall prevail over local laws as determined therein.

2. Does The Answer Change If The Principal Also Owns Capital Equipment That It Has Provided To The Local Contract Manufacturer?

The ownership of capital by the principal does not necessarily bear the risk of a permanent establishment.

3. In Many Cases The Local Contract Manufacturer Purchases The Raw Materials (Either In Its Own Name Or As A Purchasing Agent Acting On Behalf Of The Principal) Because It Knows The Production Schedule Better Than The Principal. In Addition, In Some Cases The Contract Manufacturer May Have More Leverage With The Suppliers. Please Address Any Additional PE Issues That May Arise If The Contract Manufacturer Also Acts As A Purchasing Agent On Behalf Of The Principal.

The Law on Corporate Income Tax provides that the business conducted by a company overseas can be regarded as a resident establishment if the company has an agent that has authority to enter into contracts in the name of the company overseas. Given this the situation above might likely give rise to a PE.

4. In Certain Cases, The Principal Will Have Its Own Employees Or Agents In The Factory To Supervise The Contract Manufacturer, Provide Quality Assurance And Sometimes Technical Information. To What Extent Would Independent Or Dependent Agents (That Do Not Have Contract Concluding Authority) Providing Such Services, Combined With The Other Facts Set Forth Above, Result In A PE For The Principal. To The Extent That Actual Employees Or Staff May Result In A PE, Can The Principal Avoid The PE By Forming A Local Subsidiary To Employee The Staff? If So, Can The Subsidiary Be Compensated On A Cost Plus Basis?

Considering the aforementioned definition of a resident establishment under Law on Corporate Income Tax, if the principal wants to avoid having a PE issue, he/she might establish a Representative Office [“RO”] to perform the tasks named above. This is possible as long as the RO is not doing business.

According Commercial Law and its guiding decrees, any foreign business entity that has lawful business registration in accordance with the law of the foreign country and has operated for at least 01 (one) year shall be issued with a license to establish a representative office in Vietnam.

5. To The Extent That A PE May Arise In Any Of The General Fact Patters Described Above, Comment On Whether Additional Income Would Be Attributable To The PE. Can The Principal Argue That It Has Paid An Arm’s Length Gee Such That There Is No Additional Income That Such Be Taxed In The Jurisdiction? If So, What Transfer Pricing Methodologies Would Typically Be Used To Determine The Amount Of Income Attributable To The PE?

If there are no special rules in tax agreements, the principal can calculate on an arm’s length basis.

The Ministry of Finance has released a Circular on Transfer Pricing that requires companies to make a full self-assessment of their profits, calculated on an arm’s length basis. According to this Circular, companies will be required to declare the related party transactions in a prescribed form and submit it within 90 days from the year end. Furthermore, the Circular provides an obligation for companies to maintain transfer-pricing documentation to set out the evidence that they have taken place on arm’s length terms.

If companies fail to comply with these terms they risk double taxation and penalties.

III. Local Incentives

1. Is The Taxpayer’s Ability To Obtain A Tax Incentive Or Holiday Diminished By Operating Under A Risk-Stripped Structure Where The Local Entity Receives Cost Plus Remuneration?

Exemptions from and reductions of Corporate Income Tax are listed in Law on Corporate Income Tax 2008, Circular 78/2014/TT-BTC, Circular 151/2014/TT-BTC and Circular 96/2015/TT-BTC.

Tax incentives are provided in cases of encouraged investments. This term covers enterprises located in special export processing zones, enterprises that export a certain percentage of the manufactured goods or enterprises with a certain number of Vietnamese employees or laborers.

The contract manufacturer may carry forward their losses of a financial year to offset against future profits for a maximum of 5 years after the year incurring loss. The enterprise can freely choose how to allocate the loss to the later 5 years. When the 5 years period has lapsed but the loss has not been fully carried forward, the loss cannot be carried forward to the next year.

2. Is The Taxpayer’s Ability To Obtain A Tax Incentive Diminished By The Lack Of Locally Owned Intangible Property?

Vietnam tax law does not address this issue.

3. Are There Any Other Aspects In Contract Manufacturing Structures That May Impact A Taxpayer’s Ability To Obtain A Tax Incentive Or Holiday?

Law on Investment 2021 and its guiding decree No. 31/2021/ND-CP include an extensive list of projects entitled to tax incentives. Dependent on the project’s location, business lines, number of employees, etc., the tax reduction can range between 10 and 50%.

IV. Conversion And Transfer Pricing Issues

In many cases, U.S. and European multinationals initially establish their local manufacturing operations in Asia as buy/sell entities because they have a local income tax holiday or exemption of some kind for a period of years. The local entity may even own intangibles and bears risk. When the local holiday or exemption ends (or the CFO decides the tax rate is too high), the parent may wish to convert the local entity into a contract manufacturer for a principal in a low-tax jurisdiction to reduce the income earned locally.

1. In Some Jurisdictions, The Local Authorities May Find That The Local Entity Owns Some Goodwill Or Going Concern Value As A Result Of Its Historic Operations. The Authorities May Assert Capital Gains Tax And Possibly Dividend Withholding Tax On Value Of The Goodwill Or Going Concern Value On The Theory That The New Principal Is Somehow Acquiring The Goodwill Or Going Concern Value In Connection With The Conversion. Is This An Issue In Your Jurisdiction? If So, What Planning Steps Can Be Taken To Minimize This Cost?

This issue is not relevant in Vietnam.

2. In Many Cases, The Local Contract Manufacturer Is A Wholly-Owned Subsidiary Of The Principal. In Such Cases, The Principal May Wish To Compensate The Contract Manufacturer On A Cost Plus Basis, With The Uplift Being A Percentage Of The Manufacturing Costs (And Not The Value Of The End Product). Is This Approach Viable In Your Jurisdiction and What Issues/Exposures Arise In Connection With The Use Of Cost Plus Transfer Pricing?

Transfer pricing rules in Vietnam require that the enterprise pays and Vietnam receives a reasonable rate of return on its activities as if the parties were unrelated [the arm’s length principle]. Vietnamese tax law does not provide special rules regarding cost plus transfer pricing.