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.

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.

VIETNAM – NEW REGULATIONS ON SECURED TRANSACTIONS COMING INTO FORCE

The new decree No. 21/2021/ND-CP (“Decree 21”) guiding the implementation of the Civil Code on securing the performance of obligations will come into force on 15 May 2021, replacing the current Decree No. 163/2006/ND-CP (amended by Decree No. 12/2012/ND-CP).

Notable new provisions in Decree 21

1. The definition of securing party now include the obligor in a duplex contract for the measure of lien.

2. Security property to be formed in the future:
The secured party establishes the right to part or all of the security property being a future property from the time part or all of such security property is formed. Previously, this right is only formed when the securing party formed rights over such property.
In addition, under Decree 163, if the secured party fails to register the security property, the secured party still has the right to dispose the property when it is due. However, Decree 21 sets out that the collateral only gave antagonistic effect against third parties when (i) the contract for secured transaction acquired legal validity and (ii) the secured asset is registered as required by law or the secured party takes control over the asset. Control means the direct management, control or domination of the security property by the secured party or the management of the security property by another person as agreed or as prescribed by law, but the secured party still controls and dominates this property.

3. Effect of the contract for secured transaction: takes effect upon parties’ conclusion or after it is notarized or authenticated as required by the Civil Code or relevant laws or upon request. Where the collateral is withdrawn as agreed, the content of the security contract related to the withdrawn property shall no longer be effective. If the security property is supplemented or replaced, such changes must comply with the provisions of the Civil Code and other relevant laws.

4. Collateral being the right to claim debts, receivables, and other right to request payment: To secure the right to collect debts, receivables or other right to demand payment does not require the consent of the obligor but the secured party must notify them prior to the performance of the obligations under the agreement or in accordance with law.

5. Investments in collateral: Where the securing party exercises the right to invest in order to increase the value of the collateral, the additional investment value portion belongs to the collateral. The secured party must approve investment in a collateral if (i) a third party invests in collateral or (b) the securing party invests in the collateral giving rise to new assets that are not collateral as agreed in the contract.

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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.

VIETNAM – DIRECT POWER PURCHASE AGREEMENT MECHANISM IS UNDERWAY

Recently, the Ministry of Industry and Trade has published the Draft Circular on the pilot implementation of the direct power purchase between renewable power project developers (RE GENCO or GENCO) and consumers (“the Draft”).

The pilot is to be implemented nationwide with a total capacity of selected projects of 1,000 MW at max. The nominal capacity of each project must be 30 MW. Consumers can directly negotiate, purchase electricity with GENCO under a Fixed-term Contract. The two parties shall agree upon electricity price and output in the Contract for future trading cycles. GENCO and the consumer must also calculate and carry out payment for the contract output under the Contract for the difference between the contract price and the market price (i.e. reference price).

Under the Draft, renewable energy generators are defined as:
• organizations, individuals owing a grid-connected solar or wind power plant;
• installed capacity of the plant is more than 30 MW (conversion rate for solar plants: 01 MWp equals 0.8 MW);
• project already included in the power development plan that has been approved by competent authority;
• have a binding principle agreement with consumers to sell electricity; and
• are selected for the pilot implementation of DPPA by competent authority.

Electricity consumers are:
• organizations, individuals purchasing electricity for industrial production at a voltage level of 22 KV or higher;
• have a binding principle agreement with the RE GENCO to purchase electricity; and
• are selected for the pilot implementation of DPPA by competent authority.

Selection criteria of the pilot implementation participants:
For electricity generators:
• have a committed COD deadline of the whole power plant of no more than 270 working days since the date of announcement on the plant being selected to participate in the pilot implementation; or
• have written document of financial institutions on the financing for the power plant.

For consumers:
• have renewable energy usage commitments or is a manufacturing enterprise in the
supply chain of corporations or enterprises that have renewable energy usage commitments; or
• have the annual contracted proportion of electricity purchased
from GENCO to the total electricity consumption in the same year provided by
PC in the first 3 years of the DPPA program participation of at least 80%.

GENCO must submit a bid to the System and Market Operator (“SMO”) for the direct purchase and payment of electricity with the energy buyer. The bid must include, among others, a bid price of zero (VND/kWh) for the range of capacity open for bidding. The capacity stated in the bid is the declared capacity of GENCO. On the operation day, GENCO may amend and submit bid for the following day or for the remaining trading cycles of the day to SMO at least 30 minutes before the beginning of trading cycle making use of the new bid content.

Applicable power purchase agreement template:
• Between developer and EVN: the published contract templates in Decree 18/2020/TT-BCT for solar energy project and in Circular 02/2019/TT-BCT for wind energy project
• Between developer and consumer: to be drafted by the parties
• Between consumer and EVN: to be drafted by EVN, taking into consideration consumers’ opinion.

The direct power purchase agreement mechanism can bring about numerous benefits, namely enabling the imposition of take-or-pay obligation on off-takers in order to guarantee developer’s revenue stream, fixed electricity purchase price that is not subject to change in or delay on the implementation of national legislations, flexibility in monthly exchange rate calculation and increasing consumer’s environmental commitments. Developers and consumers must incorporate international standards regarding step-in right, dispute settlement, and termination to make the direct power purchase agreement bankable. A bankable DPPA put developers in advantage when seeking financial supports for the project from banks and other credit institutions. Duane Morris will keep our readers updated of any new revisions to or decision regarding the Direct Power Purchase Agreement mechanism.

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.

VIETNAM – INTERNATIONAL AGREEMENTS RESULT IN NEW DOMESTIC REGULATION ON MARKET ACCESS FOR FOREIGN INVESTORS

The new Law on Investment took effect on 1 January 2021 (“Investment Law”) has been praised to play an important role in attracting foreign capital as it sets out clearly the rights and obligations of investors, reduce administrative procedures as well as sets forth more investment incentives compared to its precedents. Recently, at the end of March 2021, the Government’s issuance of Decree No. 31/2021/ND-CP guiding the implementation of Investment Law has been an event of interest (“Decree 31”). With its emphasis on transparent Market Access conditions for foreign investors, Decree 31 can be seen as an effort by Vietnam in implementing its commitments under international agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Vietnam Free Trade Agreement (EVFTA).

Important provisions foreign investors should note

1/ Business investment conditions will be published on the National Business Registration Portal.

At the date of writing, the Ministry of Planning and Investment is working on the review and collection of conditions for publication on the Portal. Conditions for business investment to be announced include:

– The sectors and business lines that are subject to conditional business investment;
– The basis for application of business investment conditions; and
– Specific requirements that entities must fulfill in order to conduct business activities.

Before this, there has been no centralized system where investors could learn the requirements for conducting business activities in Vietnam. The publication of such conditions will help investors save time and costs, and is a sign of the Vietnamese Government going digital.

2/ Market access principles take into account Vietnam’s commitment under international agreements.

– Foreign investors belonging to countries or territories that are not WTO members conducting investment activities in Vietnam are entitled to the same market access conditions prescribed for investors from WTO member countries, unless otherwise provided for by Vietnamese law or international treaties between Vietnam and that country or territory.

– A foreign investor subject to an international treaty on investment that provides more favorable market access conditions compared to Vietnam laws can apply the market access conditions under that treaty.

– A foreign investor subject to the application of numerous international treaties on investment with different provisions on market access conditions may pick and choose a treaty applicable to themselves and exercise their rights and obligations in accordance with the entire treaty, even if the treaty is newly signed or amended or supplemented after the date of entry into force.

3/ Restrictions on foreign investors’ ownership ratio are in par with international treaties on investment.

– Where various foreign investors contribute capital, buy shares, buy capital contributions to economic organizations and are subject to application of one or more international treaties on investment, the total ownership ratio of all foreign investors in that economic organization must not exceed the maximum rate provided for by an international treaty that provides for the ownership ratio of foreign investors for a specific sector or for such investors

– In case an economic organization has many business lines that are subject to different provisions under international on the foreign investor’s ownership rate, the foreign investor’s ownership rate of such economic organizations must not exceed the lowest foreign ownership limit of all treaties.

4/ Decree 31 introduces new projects allowed for investment incentives.

Projects with investment capital of VND 6,000 billion or more can apply for investment incentives when the following conditions are fully satisfied:

a) Make a minimum disbursement of VND 6,000 billion within 3 years from the date of issuance of the Investment Registration Certificate, Decision on approval of investment policy and Decision on approval of investor (for projects not subject to issuance of Investment Registration Certificate); and

b) Having minimum total revenue of VND 10,000 billion per year within 03 years since the year of first revenue or employing 3,000 regular employees on average annually within 03 years from the year of first revenue.

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.

VIETNAM – THE WORLD BANK GROUP IS ASKING DUANE MORRIS ABOUT PUBLIC PROCUREMENT

Case Study Assumptions
Case Study Assumptions

1. What is the entity that conducts procurement for the authority that owns the majority of roads comparable to the one described above?
Directorate for Roads of Vietnam within the Ministry of Transport

2. How many open, unrestricted and competitive public calls for tenders for roadwork contracts were completed in the last 5 years by the Procuring Entity you selected in Q.1?
More than 51

3. Please provide a list of the laws, regulations and other binding materials (including guidelines and manuals) that regulate public procurement in Vietnam. Please include legislation or other binding materials promulgated at the national/federal level as well as any additional legislation that is applicable to the Procuring Entity you selected in Q.1.
Circular No. 04/2017/TT-BKHDT of 2017
Circular No. 05/2020/TT-BKHDT of 2020
Law on Bidding No. 43/2013/QH13 of 2013
Decree No. 63/2014/ND-CP of 2013
Law on Investment in the form of Public-Private Partnership of 2020
Decree No.25/2020/ND-CP of 2020
Commercial Law No. 36/2005/QH11 of 2005
Decree No. 37/2015/ND-CP of 2015
Circular No. 03/2015/TT-BKHDT of 2015
– Decree 50/2021/ND-CP of 2021
Circular 11/2019/TT-BKHDT of 2020
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
EU-Vietnam Free Trade Agreement of 2020

4. Please list any mandatory standard tender documents and/or standard contract terms that the Procuring Entity must use for a contract like the one described in Section 1.
Contract terms must specify:
a/ Applied legal bases;
b/ Language used in the contract;
c/ Content and volume of work;
d/ Quality, technical requirements of work; pre-acceptance test and handover conditions;
dd/ Contract performance duration and schedule;
e/ Contract price, advance payment, currency used in payment, and payment for the contract;
g/ Contract performance security, contract advance guarantee;
h/ Adjustment of the construction contract;
i/ Rights and obligations of the parties to the construction contract;
k/ Liability for violations of the contract, rewards and fines for violations of the contract; l/ Suspension and termination of the contract;
m/ Settlement of disputes over the contract;
n/ Risks and force majeure events; o/ Settlement and liquidation of the contract;
p/ Other contents.
All standards are listed in Bidding Law and Article 141 Construction Law.

5. Are you aware of any change (in practice or in laws/regulations/procedures) related to public procurement between May 2, 2020 and May 1, 2021? For example: amendments to applicable public procurement laws, enactment and/or implementation of new regulations, implementation or improvement of e-procurement platforms, changes to the bid security and performance guarantee framework, etc.
Yes. The implementation of the EU- Vietnam Free Trade Agreement from 1 August 2020

6. Are you aware of any regulatory or administrative measures (in practice or in laws/regulations/procedures/contract management) related to public procurement that has been implemented between May 2, 2020 and May 1, 2021 to respond to the COVID-19 pandemic?
Digitization of interactions between officials and private sector

7. If one or several electronic procurement portal(s) (i.e., an official website(s) specifically and exclusively dedicated to public procurement) are in operation, please mark which platform would most commonly be used by the Procuring Entity.
http://muasamcong.mpi.gov.vn

8. Out of all road works contracts with the Procuring Entity, how many are procured through the portal you listed in Q.7?
More than 75%

9. Which of the following information about road works contracts procured by the Procuring Entity is made publicly available in machine-readable format? (i.e, data format that can be processed by a computer, such as XSL, CSV, JSON, XML, etc.)
Estimated cost – as calculated by the Procuring Entity at the time of advertising.

II. PHASES OF THE PROCUREMENT PROCESS

Phase 1: Budgeting and Needs Assessment

1. According to the legal framework, when the Procuring Entity prepares to advertise a new procurement opportunity for a contract like the one described in Section 1, which of the following are used to estimate the contract value and projected length of works?
Market analysis, standardized unit cost, project-spcific technical drawings, feasibility study, similar projects from prvious years
Legal basis: 58/2016/TT-BTC

2. In practice, is the estimated contract value/budget published in the tender notice/tender documents?
Yes

3. Is the Procuring Entity required to have already allocated budget to a specific project before tendering?
Yes, there is a specific budget allocation

4. How often does the Procuring Entity award a contract without having all the necessary funds?
Occasionally (between 25-50%)

Phase 2: from Advertisement to Bid Submission

5. According to the legal framework, would open tendering (i.e. the process in which any business can submit a bid) be the default method of procurement in Vietnam for a contract like the one described in Section 1?
Yes, according to Article 20 of Law on Bidding No. 43/2013/QH13 of 2013.

6. According to the legal framework, can the Procuring Entity require bidders to participate in a prequalification process specific to that contract before being able to submit their economic offer?
Yes, according to Articles 22 and 44 of Decree No. 63 of 2014.
a. How often would this happen for a contract like the one described in Section 1? Rarely (10-25%)
b. In practice, how many days would be necessary for BidCo to receive a decision on its prequalification from the moment it submitted all the necessary documents? 30 days
c. In your experience, as of May 1, 2021, has Covid-19 impacted the frequency of prequalification and the time you indicated above? Yes – Longer processing time of dossier – case on case basis.
d. According to the legal framework, must the contractor be registered with the Procuring Entity in order to bid for a contract like the one described in Section 1? Yes, according to Article 5.1(d), Bidding Law

7. In practice, what is the most common method of procurement for a contract like the one described in Section 1?
Open tendering is the default by law and also the most common in practice

8. Does the legal framework define the situations in which each procurement method should be used?
Yes, according to Articles 21-27 of Law on Bidding No. 43/2013/QH13 of 2013.

9. Does the legal framework prohibit dividing contracts to circumvent thresholds for open tendering?
Yes, according to Article 89.6.k of Law on Bidding No. 43/2013/QH13 of 2013.
a. In practice, how often does this happen? Often (between 50-90%)

10. Which of the following materials need to be made publicly available by the Procuring Entity?
Procurement plans, Model procurement documents and materials/standard contract conditions, Tender notices,
Tender documents and technical specifications, Notices of award/bidding results

11. According to the legal framework, is there a minimum time limit between the advertisement of the tender notice and the submission deadline for an open tendering procedure like the one described in Section 1?
Yes, Article 6, Decree No. 25/2020/ND-CP
a. In practice, how many days would pass between the advertisement of the tender notice and the submission deadline for a contract like the one described in Section 1? 30-40 days
b. How often does the Procuring Entity modify the tender documents for any reason after advertisement, but before the submission deadline? Rarely (between 10-25%)
c. In practice, by how many days would the timeframe you indicated in Q.21.a be extended due to these modifications? 0 days

12. Does the legal framework establish the minimum content of the tender notice and tender documents?
Yes, according to Articles 218-219 of Commercial Law No. 36/2005/Qh11; and Circular No. 03/2015/TT-BKHDT of 2015.

13. Which aspects of subcontracting is regulated by the applicable legal framework?
Features, disclosure, liability, according to Article 4 of Law on Bidding No. 43/2013/QH13 of 2013; and Article 128 of Decree No. 63/2014/ND-CP of 2014.

14. According to the legal framework, if the intent to subcontract was not disclosed in the bid, what is the contractor who decides to subcontract after the contract is signed required to do?
Inform the procuring entity and seek its approval

15. According to the legal framework, how clarification requests from potential bidders should be addressed?
The procuring entity will answer, but it is not always required to communicate the answer to all other bidders.

16. According to the legal framework, is BidCo required to provide a form of bid guarantee?
Yes, according to Article 11.1 of Law on Bidding No. 43/2013/QH13 of 2013.
a. If bid guarantee is not required by law, would it usually be requested in practice by the Procuring Entity for a contract like the one described in Section 1? Yes

17. In practice, which instrument would BidCo most commonly use as a bid guarantee?
Bank guarantee/Letter of credit, Bid security declaration

Phase 3: from Bid Opening to Contract Signing

18. Does the legal framework establish a timeframe for the Procuring Entity to proceed to bid opening once the deadline for bid submission has been reached?
Yes, according to Article 14.4(a) of Decree No. 63/2014/ND-CP
a. In practice, how many days after the deadline for bid submission does the Procuring Entity proceed to bid opening? 0 day

19. In practice, in a case comparable to the case study scenario, how many days would pass between bid opening and public notice of award (i.e. the moment in which all tenderers, participants and relevant parties are notified of the award decision), considering that no complaints/challenges/protests have been filed?
60 days

a. In your experience, as of May 1, 2021, has Covid-19 impacted the process and time to award a contract that you indicated in Q.29? No
b. In practice, between bid opening and public notice of award, how often does the Procuring Entity ask questions/additions to bidders on the documents they submitted? Occasionally (between 25-50%)
c. In practice, by how many days would the timeframe you indicated in Q.29 be extended due to questions/additions asked by the Procuring Entity? 45 days

20. Is there a standstill (or pause) period between public notice of award and contract signing to allow unsuccessful bidders to challenge the award decision?
No, standstill is only triggered by objection.

21. In practice, in a case comparable to the case study scenario, how many days would pass on average between public notice of award and contract signing?
30-40 days
a. In your experience, as of May 1, 2021, has Covid-19 impacted the process and time to sign the contract that you indicated in Q.31?
No

22. In practice, how many days would pass on average between contract signing, receipt of a notice to proceed with the works, and the commencement of the works? 30 days

23. Selection committee – Which of the following characteristics are regulated by the applicable legal framework?
The number of members of the committee
The education requirements of members of the committee
The professional requirements of members of the committee
The process to appoint the members of the committee
Legal basis: Article 116 of Decree No.63/2014/ND-CP

24. Are employees of the Procuring Entity required to follow a mandatory code of conduct or ethics that includes topics like screening procedures, conflict of interest, training requirements, etc.?
No

25. According to the legal framework, which award criterion would be used for a contract like the one described in Section 1?
At the discretion of the Procuring Entity, according to Articles 39.1, 39.2 and 39.3 of Law on Bidding No. 43/2013/QH13 of 2013.

26. In practice, how often is the award decision based solely on price and not on best value for money?
Very often (> 90%)

27. Does the legal framework establish criteria to identify abnormally low bids?
No

28. Does the legal framework define what constitutes a non-substantial error?
Yes – Article 4.18 and 4.19 and 42 of Law on Bidding No. 43/2013/QH13 of 2013; and Article 17 of Decree 63/2014/ND-CP of 2014.
a. In practice, how often does the Procuring Entity require bidders to amend their offers (because of mistakes, arithmetic errors, etc.)? Rarely (10-25%)
b. In practice, in these cases would the bidder be given the opportunity to rectify such error before disqualification? Yes – Article 17 of Decree No. 63/2014/ND-CP

29. According to the legal framework, when a bidder is excluded because it did not meet the selection criteria, is it provided with an explanation of the reasons for the exclusion in writing?
Yes, the bidder must always be provided with an explanation in writing
Legal basis: 63/2014/ND-CP

30. According to the legal framework, when a bidder loses, is it provided with an explanation of the reasons for the loss in writing?
Yes, the bidder must always be provided with an explanation in writing
Legal basis: 63/2014/ND-CP

Phase 4: Contract Management

31. According to the legal framework, is BidCo required to provide a performance guarantee deposit that ensures a source of compensation in case of failure to perform its contractual obligations?
Yes, according to Articles 66 and 72 of Law on Bidding No. 43/2013/QH13 of 2013.
a. If a performance guarantee is not required by law, would it usually be requested in practice by the Procuring Entity for a contract like the one described in Section 1? Yes

32. In practice, which instrument would BidCo most commonly use as a performance guarantee?
Cash/Certified check
Certificate of deposit
Bank Guarantee/Letter of Credit

33. In practice, how long does it usually take for the Procuring Entity to return the performance guarantee in full once the works have been completed and accepted by the Procuring Entity?
Within 20 days

34. Which aspects of contract management are regulated by the applicable legal framework?
Renegotiations. Legal basis: Article 67 Law on Bidding, Article 93 Decree 63/2014/ND-CP

35.How often would a contract like the one described in Section 1 be renegotiated?
Rarely (10-25%)

36. If the contract described in Section 1 were more complex (i.e., lengthier and/or more costly execution, more complex scope or object, etc.), how often would it be renegotiated?
Occasionally (between 25-50%)

37. According to the legal framework, is there a maximum percentage of price/quantity increase for changing (variation) orders?
No

38. According to the legal framework, is there a percentage of price increase above which the procuring entity is not allowed to renegotiate and is always required to re-tender?
No

39. In practice, are the results of contract renegotiations made publicly available?
No

40. In practice, how many days would pass on average from the moment one of the parties requests/initiates a renegotiation of the contract until a new contract amendment is signed?
30 – Dependent on the negotiation process
a. In your experience, as of May 1, 2021, has Covid-19 impacted the frequency of contract renegotiations and the time to authorize them? No

41. How often do bidders submit unrealistically low bids to win the contract, confident of having a possibility to renegotiate at a later stage?
Often (between 50-90%)

42. How often are “emergencies” used as a reason to renegotiate?
Very rarely (< 10% of cases)

43. How often would a changing (variation) order/price adjustment (i.e. a modification below a certain threshold or clearly defined in the terms of the contract) take place in a contract like the one described in Section 1?
Occasionally (between 25-50%)

a. In practice, how many days would pass on average from the moment that the modification becomes necessary until a changing (variation) order/price adjustment is issued? 30 days – case by case basis

44. How often would additional works related to the initial contract (i.e. works by the original contractor that have become necessary and that were not included in the initial procurement) be awarded to the same contractor through direct award?
Occasionally (between 25-50%)

a. In practice, how many days would pass on average from the moment additional works become necessary until they are awarded to the same original contractor? 30 days

Phase 5: Payment, Delays and Quality Assessment

45. According to the legal framework, is there a limit to how much the Procuring Entity can pay upfront for the contractor to hire workers, buy materials, and start operations in a contract like the one described in Section 1?
No
a. In practice, how much would usually be paid upfront for a contract like the one described in Section 1? 10-50%
b. In practice, if an advance payment is usually issued, does the contractor have to provide a guarantee for receiving this payment? Yes
c. In practice, how many calendar days will be necessary for BidCo to receive the advance payment once the request has been submitted to the Procuring Entity? 10-20 days

46. During the execution of the contract, does the legal framework establish a timeframe within which the Procuring Entity must process the payment once an invoice is received?
Yes, according to Article 19 of Decree No. 37/2015/ND-CP of 2015.
a. In practice, how many calendar days will be necessary on average for BidCo to receive payment once the invoice has been delivered to the relevant authority? 30 days
b. In practice, how many people would need to authorize payment within the procuring entity before payment is made? 2
c. In practice, how often will BidCo receive payment within the timeframe established by the legal framework?
Often (between 50-90%)
d. According to the legal framework, is the company entitled to claim interest on late payments if the Procuring Entity does not pay within the legally-established timeframe?
Yes, according to Article 94 of Decree No. 63/2014/ND-CP of 2014.
e. How often would such interest on late payment be paid to the company? Often (between 50-90%)
f. In practice, for a contract like the one described in Section 1, how many days would pass on average between the moment BidCo notifies the Procuring Entity that the works are completed and a formal agreement between them stipulating that the works are indeed finished and comply with the contract specifications (i.e. a certificate of completion of works)? 60 days
g. In your experience, as of May 1, 2021, has Covid-19 impacted the time to certify the completion of works? Yes, on-site visits are subject to quanrantine regulations by provincial authorities
h. How often do disagreements between the Procuring Entity and BidCo on the completed works delay the process of reaching a formal agreement that the works are finished? Occasionally (between 25-50%)
i. In practice, by how many days would the aforementioned time be extended to resolve this disagreement and obtain a certificate of completion of works from the Procuring Entity? 90 days

47. Assuming that BidCo delivers works complying with the quality standards agreed-upon in the contract, within budget and on time, what strategies, if any, does the Procuring Entity use to delay or avoid payment?
Bureaucracy/ Paperworks inspection
a. How often would BidCo resort to informal payments to facilitate payment? Very rarely (< 10% of cases)
b. In practice, how often is a portion of the payment retained to guarantee the works for a predetermined amount of time? Occasionally (between 25-50%)

INSPECTIONS AND WARRANTIES

1. Does the Procuring Entity have guidelines or protocols regulating inspections on the quality of the works?
Yes
Legal basis: Decree 06/2021/

2. According to the legal framework, is BidCo required to provide a guarantee upon completion of the works?
Yes
Legal basis: Decree 06/2021/ND- CP

3. If a post-completion guarantee is not required by law would it usually be requested in practice by the Procuring Entity for a contract like the one described in Section 1?
Yes

4. In practice, which instrument of post-completion guarantee would the Procuring Entity most commonly request?
Retention of the whole performance guarantee

5. In practice, how long after completion of the works is BidCo required to maintain the instrument you indicated above?
12-18 months
Formal Challenges throughout the Procurement Process
According to the legal framework, who has legal standing to challenge the contract award?
Bidders
Organizations/Individuals with legitimate interests (i.e. neighbors)
Organizations that protect public goods (i.e. environment NGO)

Research – COVID-19 Recovery

In order to continue public procurement services and the implementation of contracts without interruption, has the economy introduced (or already had put in place) any measures?
Full tender file digitized, but not on the cloud
Full contract management documents digitized, but not on the cloud
Different payment deadlines for SMEs
Mobile payment system
***
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.

VIETNAM – THE GOVERNMENT RELEASED NEW GUIDANCE FOR PPP PROJECT INVESTORS

On 8 July 2020, Vietnam welcomed its first ever Law on Investment in the form of Public-Private Partnership (“PPP Law”), incorporating recommendations suggested by Duane Morris. Recently on 29 March 2021, the Government issued Decree No. 35/2021/ND-CP guiding the implementation of Law on Investment in the form of Public-Private Partnership 2020 (“Decree 35”). Below are key provisions investors should know when contemplating engaging in this investment method.

1. Investment capital of PPP projects
Decree 35 specifies in details the required minimum total capital for each of the sectors eligible for PPP investment:
Transportation: at least VND 1500 billion (approximately USD 65 million)
Power grid, power plant: at least VND 1500 billion, with the exception of renewable energy – at least VND 500 billion (approximately USD 21 million)
Irrigation, water supply and drainage, treatment of wastewater and waste: at least VND 200 billion (approximately USD 8 million)
Healthcare: at least VND 100 billion (approximately USD 4 million)
Education, training: at least VND 100 billion
Information technology infrastructure: at least VND 200 billion

2. PPP projects appraisal council
For each project, there will be two appraisal councils: the interdisciplinary appraisal council and the grassroot-level appraisal council.
An interdisciplinary appraisal council is to be established by the Prime Minister at the proposal of the Ministry of Planning and Investment (“MPI”). The Chairman of the appraisal council shall be the Minister of the MPI, while the Deputy Chairman and other key positions are to be held by representatives from relevant ministries and government agencies.
A grass root-level appraisal council is to be established by Ministers, heads of government agencies or Chairman of the provincial people’s committee at the proposal of the standing agency of the appraisal council. The standing agency shall be the Department of Planning and Investment or a government unit responsible for PPP project management.
For projects self-proposed by investors, the investors are in charge of appraising the project.

3. Surveying interests in PPP projects
During the preparation of the Feasibility Study Report, the competent authority shall organize a survey of the interest of investors and lenders, except for projects approved by the Prime Minister for direct appointment of investor. The survey notice shall be published on the Government Procurement Portal as well as relevant government websites so that investor could register for their interest online. The competent agency could then organize a conference or roadshow to introduce the project and discuss on project contents with investors. The result of the survey will serve as a basis to determine prequalification and selection of domestic and international investors.

4. Modes of investor selection
Open bidding: International open bidding is applicable if there are at least one investor established under foreign law has registered interest in the project. Domestic open bidding is applicable when all registered investors were incorporated under Vietnam laws.
In case domestic open bidding applies but the project needs to promote the use of advanced technologies and techniques as well as good international management experience then the bidding documents can state investor’s wish for a partnership with foreign investors or for using foreign contractors to participate in bidding. The domestic investor must be the head of the partnership and the language used in investor selection must be Vietnamese.
Competitive negotiation: Used when there are less than 03 investors meeting the project implementation requirements or when the project apply new and advanced technology.
Investor appointment: Applicable to projects that need to meet the requirements of national security or projects that require immediate substitution of investors to ensure continuity in the project implementation process.

5. Deposit for project execution
For projects with total invested capital of less than VND 300 billion: deposit amount ranges from 1,5% to 3%.
For projects with total invested capital of at least VND 300 billion: deposit amount ranges from 1% to 1,5%.

6. The following standard project documents are published:
a) Pre-Feasibility Study Report, Decision on Investment Policy of PPP project
The Pre-Feasibility Study Report must contain the following information:
_ Needs of project investment
_ Basic information about the Project: project objective, capacity, location, demand for land, water surface and other resources (if any), compensation plan
_ Preliminary explanation on technical design
_ Primary assessment of the socio-economic efficiency, environment impact of the Project
_ Project financial plan: Capital structure including investor capital, PPP project enterprise capital (equity, loan and other legal sources of capital), state capital in PPP project (if any); Prices and charges for public products and services (for projects with direct collection from users)
b) Feasibility Study Report, Approval of PPP Project
c) Guidelines for creation of PPP Project Contract
Among other things, the PPP Contact must include details on the Special Purpose Vehicle and Means of raising capital and bond issuance.
Regarding the Special Purpose Vehicle, the contract must state the obligations of the investors to contribute equity capital according to the agreed schedule as well as rights and obligations of an investor when transferring capital and consequently their own rights and obligations under a PPP project contract.
In respect of capital increment, the contract must include application of capital mobilization through the issuance of bond or other legal capital. Conditions, principles, time and method of issuing bonds of the project enterprise along with value of capital raised through the issuance of bonds and other legal capital must also be specified.

***

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.

Vietnam – Power Development Master Plan 8 – what you must know:

In late March 2021, the very first draft of the Prime Minister’s Decision on the Approval of National Power Development Planning VIII (“Draft PM Decision”) has been published through unofficial sources (i.e. not through MOIT’s website). This means the final draft PM Decision may be amended and updated, nevertheless this is very likely issued by a contact of MOIT.

The Draft PM Decision states clearly that priority is given to the development of renewable energy sources for electricity production. In particular, the Draft aims to increase the rate of electricity produced from renewable energy sources (not including hydroelectric sources greater than 30 MW, storage hydroelectricity) to about 32% in 2030 and 43% in 2045.

By 2030, it is estimated that the total capacity of all power plants will be about 138,000 MW, of which: large, medium and pumped hydropower accounts for 15.2%; coal thermal power 27.1%; thermo-gas (including LNG) 19.9%; renewable energy sources (including small hydroelectricity, wind power, solar power, biomass power, …) accounts for 32.5%; electricity import is about 4.1%
Electricity produced and imported to reach 551 billion kWh, of which: large, medium and storage hydropower accounts for 13.5%; coal thermal power is about 41.15%; gas thermal power (including LNG) 22.58%; renewable energy sources (including wind power, solar power, biomass power …) 18.73%; electricity import 3.83%.

While the PDP 8 is being finalized, the Draft PM instructs investors and relevant government agencies to continue the implementation of renewable energy projects (wind power, solar power) that were approved in the Revised Power Development Planning 7 and other specialized electricity planning.

Notable provisions of the Draft:

Investment Capital:
The total investment capital required to implement the PDP 8 from 2021-2030 is about USD 128.3 billion, of which USD 95.4 billion to be used for power source development while USD 32.9 billion to be invested in grid construction and management. The total investment capital is calculated to reach USD 192.3 billion by 2045.

Wind power:
Raise the total capacity of onshore wind power projects to about 18,010 MW-23,080 MW in 2030 and about 60,610-76,680 MW by 2045.

For offshore wind power projects, the target capacity is 5000 MW or more by 2030 and 21,000-36,000 MW by 2045.

Total electricity produced from wind power projects is expected to account for 7.9% in 2025, about 8.1% in 2030 and about 19.2% in 2045.

Solar energy:
Encourage the development of solar power sources, including onshore, water surface as well as rooftop systems.

The total power capacity to be about 17,240 MW in 2025, roughly 18,140 MW in 2030 and 40,090 MW by 2040. Electricity produced from solar power is expected to reach around 7.3%. In 2025, about 5.3% in 2030 and 8.9% in 2045.

Hydropower sources:
The total capacity of small hydropower sources is targeted to reach 4,800 MW in 2025, about 5,000 MW in 2030 and nearly 6,000 MW in 2045.

Thermal power:
For thermal power plants using domestically exploited gas and liquefied natural gas (LNG):

By 2030, the total capacity will reach 27,000 MW, production to hit 124 billion kWh, accounting for nearly 23% of the total electricity output.

In 2045, the total capacity to reach 51,000 MW while production achieves 253 billion kWh, accounting for nearly 26% of the total electricity output.

The Government also promote the development of port storage systems, infrastructure for LNG import in regions across the country to fuel power projects using LNG.

List of projects of national importance and prioritized for development under the Draft PM Decision:

List of projects of national importance and prioritized for development under the Draft PM Decision

For more information, please do not hesitate to contact 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.

EU-VIETNAM FREE TRADE AGREEMENT AND INVESTMENT PROTECTION AGREEMENT – UNMATCHED LEVELS OF MARKET ACCESS AND LEGAL CERTAINTY – WHAT YOU MUST KNOW

On 8 June 2020, Vietnam’s National Assembly ratified the EU-Vietnam Free Trade Agreement (EVFTA) and Investment Protection Agreement (EVIPA) following almost 10 years of negotiations. On 12 February 2020, the European Parliament gave it consent to the ratification of the EVFTA and EVIPA. On 30 March 2020, the Council of Europe ratified the EVFTA . Finally, on 1 August 2020, the landmark agreement entered into force. Regarding the EVIPA, the Vietnamese Government has provided the EU Delegation with a diplomatic note providing notification of the National Assembly’s ratification of the EVIPA, pending endorsement of the Member States’ parliaments.

The implementation of the EVFTA has, to date, shown many positive results. This is particularly meaningful for both Vietnam and the EU in this period when world economies are suffering from the consequences ofCOVID-19. For instance, the total value of Vietnam’s exports to the EU market reached US$ 27,65 billion in December 2020, a dramatic increase of 55.3 per cent compared to December 2019.[1] In addition, the Ministry of Industry and Trade announced that it has granted approximately 24,000 sets of Certificate of Origin with a turnover of nearly US$ 1 billion eligible for EU tariff preferences within less than 3 months of the EVFTA coming into force . As of mid-January 2021, exports to the European Union accounts for USD 12.90 billion for the following products: mobile phones and accessories, computers, electronic products and components, textiles, other machinery, equipment, tools and spare parts, footwear of all types, wood and wooden products, and fishery products.

I. LEGAL ENVIRONMENT

1. General market access for goods and services

The EVFTA is the most comprehensive and ambitious trade and investment agreement that the EU has ever concluded with a developing country in Asia. It is the second agreement in the ASEAN region, after Singapore, and it helps to intensify bilateral relations between Vietnam and the EU. Vietnam now has access to a market of around 448 million people and an average GDP of US$13,918 billion (with the exception of 2020 due to Covid-19’s impacts on the economy).[2] Meanwhile, exporters and investors from the EU also have further opportunities to access one of the largest and fastest-growing countries in the region. According to a report released in early 2020 covering 130 cities worldwide,[3] Hanoi and Ho Chi Minh City are ranked among the top-10 most dynamic cities due to their low costs, rapid consumer market expansion, strong population growth, and transition towards activities attracting significant amounts of Foreign Direct Investment (FDI). According to the World Bank, Vietnam has one of the fastest-growing economies in the world — 7.1 per cent GDP growth in 2018, and 7.0 per cent in 2019, 2.91% for 2020.[4] Even though this is the lowest GDP growth level of the country in the last 10 years due to impacts by the novel corona virus, it is still among the world’s highest, especially comparing to neighbouring countries such as Singapore that saw a GDP growth of approximately minus 6.
In addition, Vietnam has the fastest-growing middle class in the region. Vietnam’s middle class accounts for 13 per cent of the total population and this figure is expected to become 26 per cent by 2026.[5] Vietnam’s super-rich population[6] is also growing faster than anywhere else, and there is no doubt that it will continue to rise over the next ten years.

Market access for goods

Nearly all customs duties – over 99 per cent of the tariff lines – will be eliminated in the next 10 years. The small remaining number will be partially liberalised through duty-free quotas. As Vietnam is a developing country, it has liberalised around 65 per cent of the value of EU exports, representing around half of the tariff lines, at entry into force. The remaining duties will be eliminated over the next decade. This is an unprecedented, far-reaching tariff elimination for a country like Vietnam, proving its aspiration for deeper integration and trading relations with the EU.

Meanwhile, the EU agreed to eliminate duties for 84 per cent of the tariff lines and 71 per cent of its trade value for goods imported from Vietnam from 1 August 2020. Within seven years from the effective date of implementation, more than 99 per cent of the tariff lines will have been eliminated for Vietnam. This is a wider reduction compared with the 95 per cent of the tariff lines that the former TPP countries offer to Vietnamese imports. In the ASEAN region, Vietnam is the top country in exporting goods to the EU. However, the market share of Vietnam’s products in the EU is still small. Because of the EVFTA, the sectors that will benefit most are the main export sectors that used to be subject to high tariffs from the EU including textiles, footwear, and agricultural products. The EU is also a good point for Vietnam to reach other further markets.

Vietnam benefits more from the EVFTA compared with other such agreements, since Vietnam and the EU are considered two supporting and complementary markets. In other words, Vietnam exports goods that the EU cannot or does not produce itself (i.e. fishery products, tropical fruits, etc.) Meanwhile, the products imported from the EU are also those Vietnam does not produce domestically, including machinery, aircraft, and high-quality pharmaceutical products.

With better market access for goods from the EU, Vietnamese enterprises can source EU materials, technology, and equipment at a better quality and price. This, in turn, improves their own product quality and eases Vietnam’s burden of over-reliance on its other main trading partners.

The EVFTA is considered as a template for the EU to further conclude FTAs with different countries in ASEAN with the ultimate aim of concluding a region-to-region FTA once there is a sufficient critical mass of agreements with individual ASEAN countries.[7] This process could take about 10-15 years. Thus, Vietnam should take advantage of this window of opportunity, before FTAs with others in the region are concluded and take effect, to become a regional hub.

Market access for EU service providers: Although Vietnam’s WTO commitments are used as a basis for the services commitments in the EVFTA, Vietnam has not only opened additional (sub)sectors for EU service providers, but also made commitments deeper than those outlined in the WTO, offering the EU the best possible access to Vietnam’s market. (Sub)sectors that are not committed under the WTO, but under which Vietnam has made commitments, include Interdisciplinary Research & Development (R&D) services; nursing services, physiotherapists and para-medical personnel; packaging services; trade fairs and exhibitions services and building-cleaning services.
When these reach international standards, Vietnam will have the chance to export high-quality services, resulting in not only an increase in export value but also export efficiency, thus helping to improve the trade balance.

Government procurement

Vietnam has one of the highest ratios of public investment-to-GDP in the world (39 per cent annually from 1995).[8] However, until now, Vietnam has not agreed to its Government procurement being covered by the Government Procurement Agreement (GPA) of the WTO.[9] Now, for the first time, Vietnam has undertaken to do so in the EVFTA.

The FTA commitments on Government Procurement mainly deal with the requirement to treat EU bidders, or domestic bidders with EU investment capital, equally with Vietnamese bidders when the Government purchases goods or requests a service worth over the specified threshold. Vietnam undertakes to follow the general principles of National Treatment and Non-discrimination. It will publish information on intended procurement and post-award information in Bao Dau Thau (Public Procurement Newspaper)[10] and information on the procurement system at muasamcong.mpi.gov.vn and the official gazette in a timely manner. It will also allow sufficient time for suppliers to prepare and submit requests for participation in responsive tenders and maintain the confidentiality of bidders The FTA also requires its parties to assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation, and create an effective regime for complaints and settling disputes.[11] These rules require parties to ensure that their bidding procedures match the commitments and protect their own interests, thus helping Vietnam to solve its problem of bids being won by cheap but low-quality service providers.

Government procurement of goods or services, or any combination thereof, that satisfy the following criteria falls within the scope of the EVFTA Government Procurement rules:

Table: Government Procurement Rules under the EVFTA

Table – Government Procurement Rules under the EVFTA


Investment Dispute Settlement

This is now covered in the EVIPA. In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the Investment Tribunal for settlement. To ensure the fairness and independence of the dispute settlement, a permanent Tribunal will be comprised of nine members: three nationals each appointed from the EU and Vietnam, together with three nationals appointed from third countries. Cases will be heard by a three-member Tribunal selected by the Chairman of the Tribunal in a random manner. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable. The EVIPA also allows a sole Tribunal member where the claimant is a small or medium-sized enterprise or the compensation of damaged claims is relatively low. This is a flexible approach considering that Vietnam is still a developing country.

In case either of the disputing parties disagrees with the decision of the Tribunal, it can appeal to the Appeal Tribunal. While this is different from the common arbitration proceeding, it is quite similar to the two-level dispute settlement mechanism in the WTO (Panel and Appellate Body). We believe that this mechanism could save time and costs for the whole proceedings.

The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EVIPA (please refer to further comments in the Legal Sector Committee’s chapter on Judicial and Arbitral Recourse).

Conclusion

The EVFTA has created sustainable growth and mutual benefits in various sectors and is, by all means, an effective tool to balance trade relations between the EU and Vietnam. Vietnam is making continuous efforts and progress to meet the high standards set out in the EVFTA, and is currently offering greater opportunities for foreign businesses entering Vietnam’s market. It is now time for foreign investors to implement their business and investment plans and grasp these amazing opportunities.

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.

VIETNAM – INVESTORS MUST BID TO DEVELOP SOLAR POWER PROJECTS SOON

In late January 2021, the Ministry of Industry and Trade issued the draft Decision of the Prime Minister guiding the selection of investors implementing solar power projects under the bidding mechanism (“the Draft”). Since Decision 13/2020/QD-TTg applies to grid-connected projects with Commercial Operation Date (“COD”) by 31 December 2020 only, it is expected that the Draft will soon be finalized and become effective so solar energy developers as well as relevant government authorities can have guidelines for projects with COD from 2021 onward.

According to the Draft, the Decision would be applicable to projects with grids connected directly to the national power network. Every 02 years, the Ministry of Industry and Trade (“MOIT”) shall issue a Price Framework for electricity generation in order to determine the ceiling price for bids to select investors of solar power projects with COD in the next 02 years.

Some notable points in the Draft

1. Applicable solar power purchase price: is the price for the connection point proposed by the winning bidder/investor in the bidding dossier (excluding value added tax).

2. Adjustment to investment schedule: if the investor is permitted to adjust the investment schedule and the project’s COD occurs after the commitment date stated in the bidding documents, the applicable electricity price of project is the electricity selling price specified in point (1) above with a cumulative reduction rate of 4% for every 90 days of delay in investment schedule. Project delay time must not exceed 12 months.

3. Bidding procedure: People’s Committees of localities to publish the bidding dossiers. Investors to submit a Bid which includes Technical Proposal and Power Price Proposal. Bid opening will be conducted twice, with Technical Proposal will be opened right after the deadline for submission of bids and investors who satisfy technical requirements will have their Power Price Proposals examined for evaluation.

4. Bidding guarantee: Investors must apply the bid security measure, which is equal to 0.5% of the total project investment, before the bid is closed.

5. Plan for development of renewable energy sources for a period of 05 years: MOIT to coordinate with Vietnam Electricity (“EVN”) and the People’s Committees of localities to organize and approve the plan for development of renewable energy sources for a period of 05 years as well as every two years (“the Plan”). The Plan shall be used as a basis for the selection of investors, regulation of local solar power projects and construction of power transmission systems etc.
Within 6 months since the 2-year Plan is approved, the People’s Committees of the provinces must complete the plan to select investors to develop solar power projects in their localities for the coming 2 years.

Once the Draft comes into effect, the Feed-in tariff (FiT) mechanism will no longer apply to solar energy projects. MOIT has proposed that the same strategy to be executed for wind power projects after 2023. The employment of bidding method will enable for the selection of capable developers through transparent procedures in order to eliminate the quiet prevalent issue of projects running behind schedule for years.

The Vietnam Government has continuously promote the development of renewable energy sources as a feasible and effective solution to counter the country’s ongoing power shortage issue because renewable energy projects can be constructed quickly and promptly for operation in the period of 2021-2023, while taking advantage of the country’s natural potential without relying on imported fuels and is eco-friendly. In other words, there are a lot of rooms for investors looking to participate in renewable energy development in Vietnam.

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.

Vietnam – Power – Direct Contracting with off-takers other than EVN and Nuclear Power – Interview Dr Oliver Massmann with Energy impact center

Question#1: Can power producers contract directly with off-takers?

Answer#1:

Yes, they can contract directly with authorized off-takers. Please kindly note that at this stage, EVN and its subsidiaries are still main and key authorized wholesale off-takers.

However, there is an exception for authorized off-takers in term of Rooftop Solar System (which refers to solar system in which solar panels are installed on the roof of the construction with no more than 1 MW in power and directly or indirectly connected to power grid with up to 35kV of the off-takers). In brief, authorized off-takers in this case may be other qualified enterprises (i.e., not EVN and its subsidiaries) which purchasing power directly from the Rooftop Solar System producers.

According to the roadmap provided under Decision No. 63/2013/QD-TTg of the Prime Minister dated 8 November 2013, the Vietnam electricity market would be liberalized as follows:

(i) Phase 1: Competitive power generation market (end of the year 2014);

(ii) Phase 2: Pilot competitive power wholesale market (2015-2016) and fully competitive power wholesale market (2017-2021); and

(iii) Phase 3: Pilot competitive retail market (2021-2023) and fully competitive power retail market (after 2023).

In order to implement fully the competitive retail market, other enterprises (in addition to EVN and its subsidiaries) would be allowed to become authorized wholesale off-takers for resale.

Question#2: Can an Independent Power Producer operate a nuclear facility?

Answer#2: Yes, in theory it is possible.

However, please kindly note that a nuclear facility project is a national important level project pursuant to Vietnamese law, which is subject to in principle approval from the National Assembly of Vietnam (“NA”). In addition, considering the investment scale and social-economic impact of a nuclear facility, to our best knowledge, EVN should be the only investor acceptable to the NA. However, frankly, we strongly believe that a Public Private Partnership form (such as BOT IPP) should be considered by Vietnam as an alternative, feasible and practical mechanism suited for running/ owning nuclear power plants in Vietnam. In fact, EVN’s financial capability and nuclear power experience are limited considering EVN and its subsidiaries’ equity and financial sources are not very likely sufficient for many other required and planned power/ grid projects in Vietnam.

FYI, two nuclear power plants in Ninh Thuan (capacity of 4,600 MW) had been approved by the NA on 25 November 2009. EVN was planned to be the sole investor of these two nuclear projects at that time. However, this in principle approval was abolished on 22 November 2016 under Resolution No. 31/2016/QH14 of the NA due to concerns over security, experience, financial capability and environment impact.

On 22 February 2021, the Ministry of Industry and Trade (“MOIT”) has made available to the public the long-awaited draft Power Development Planning VIII (“PDPVIII”). According to the draft PDPVIII, nuclear power projects would only be considered by Vietnam after 2030 until 2045.

Question#3: Can an Independent Power Producer own a nuclear facility?

Answer#3: Yes, in theory it is possible.

Please see our answer#2.

If you have any questions, please kindly let us know.

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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.