customs – Duane Morris Vietnam

July 26, 2019 by Dr. Oliver Massmann

VIETNAM – CUSTOMS REFORM AND WTO TRADE FACILITATION AGREEMENT (“TFA”) – HOW CPTPP AND EVFTA CAN EFFECT CHANGE

Every day I ride a boat along the Saigon River between Districts 1 and 2 when I am in Ho Chi Minh City. Monday through Friday, it is full of container barges moving containers to and from major distribution points. Saturdays and Sundays, however, are basically void of such traffic. I wondered to myself “why?” With the amount of import/export volume funneling through this major artery to trade, how could the weekends shut-down the volume of traffic this much? After reading the law on customs and the various other regulations and laws concerning Vietnamese customs and procedures, it became clear that a substantial portion of customs clearing and private transportation services did not operate on weekends; and if they did, it was sporadic. It would seem logical to assume that since worldwide shipping did not stop transport vessels in the middle of the sea because it was the weekend that major backlogs would occur on Fridays, Saturdays, and Sundays, hindering efficient clearance of goods. Mondays would be very intensive days for customs services and transportation.

The infrastructure for Vietnamese ports is growing and several large projects are already underway to accommodate the increased volume of shipping that is occurring.[1] Ports in Ho Chi Minh City are the main gateway for the region, accounting for 67 percent of the total throughput of all Vietnamese ports.[2] The enhanced infrastructure to absorb extensive increases to shipping volume is necessary and critical for Vietnam’s economic growth sustainability; however, it is the responsibility of customs to expeditiously accept and clear those goods for shipment to their destinations within Vietnam. Many developing (and, by the way, some developed) nations and economies have struggled with customs efficiencies for this new operational environment, and Vietnam is no different. The WTO TFA (Trade Facilitation Agreement; hereafter referred to as “TFA”) which entered into force 22 February 2017 was partly enabled to assist developing nations in streamlining their customs functions to facilitate a smoother, easier, trade process through a provision of assistance and support for capacity building for implementation of Section I [of the TFA].[3] Section I of the TFA includes Article 7 (Release and Clearance of Goods) and Article 9 (Movement of Goods Intended for Import Under Customs Control). How has Vietnam been addressing the concerns raised by these articles of the TFA and how do the CPTPP (Comprehensive and Progressive Trans Pacific Partnership; 2018) and EVFTA (European Union—Vietnam Free Trade; 2019) agreements add-to, or reduce, these concerns?

Article 7 of TFA

This Article provides standards for different factors that affect the release and clearance of goods such as expedited shipments, perishable goods, electronic payments, and pre-arrival processing. Article 7.3 calls for a separation of release of the imported goods from final determination of customs duties, taxes, fees, and charges. The article states that members shall allow importers to obtain release of their goods, under a guarantee, if required, prior to the final determination and payment of customs duties, taxes, fees and charges where the final determination is not done prior to, upon arrival or as rapidly as possible after arrival.[4] This is a wonderful measure for importers (to have their goods released with a very limited delay) and also for customs-efficiency as customs can receive legal guarantees of importers paying the final determination of any incurred fees at a later date. This can have the effect of rapidly clearing goods from customs intake/staging locations to create inventory space for more goods. Any reduction in delay of release of goods is a good thing, and according to a global trade report, full TFA delivery will help…”save 1.5 days of customs clearance for imported goods, down 47% from the present average and nearly 2 days of customs clearance for exported ones, down 91%.”[5] Vietnam’s logistics’ costs account for 16% to 17% currently [2018] of GDP, with 30-40 percent of that cost associated with custom’s clearances.[6]
In response to this concern—and under Article 7.3 of the TFA—Vietnam turned to CPTPP to address it. Under recently published Decree No. 57/2019/ND-CP (26 June 2019) governing Export/Import preferential tariffs under CPTPP, “…Within 1 year from the date of…export declarations, the customs declarant shall submit all documents proving that the goods satisfy the regulations specified…”[7] This mirrors the intent of TFA Article 7.3 and directly compliments it. Now, member states of CPTPP have increased flexibility in submitting any further documentation requested of Vietnam Customs instead of having those goods held and delayed for clearance until they were obtained. This is a great example of Vietnam aggressively pushing their regulatory changes forward to comply with TFA and CPTPP.

Article 9 of TFA

This article attempts to prevent bottleneck issues from occurring (mainly in developing or under-developed countries) at a customs port of entry by requiring member states to allow a customs-declarant to move goods from a customs port of entry to another customs office within the same customs territory (under customs control), and permit that declarant to clear them at the destination rather than at the port of entry. It is a straight-forward and fairly simple sounding statement; however, in practice, it is riddled with complexities.
Vietnam’s law on customs[8] delineates authority for customs responsibilities between 1) General Department of Customs; 2) Customs Departments of Provinces; and 3) Sub-department of Customs Sub-Departments, Customs control teams and equivalent units. Additionally, under Article 16 (5) of same, “The arrangement of manpower and working time must meet the requirements of import, export, exit, entry and transit activities.” Furthermore, Article 23 (4) requires, “Customs authorities…to carry out formalities for goods on public holidays and weekends and overtime hours in order to ensure timely loading and unloading of imported and exported goods…in conformity with practical conditions of customs operating locations [emphasis added]”. On paper, this would indicate a fully-developed system for expediting customs clearances and/or processes for clearing goods through a port of entry to another custom’s operations area for clearance seven days a week (and the customs law does further state that unless a shipment requires a physical inspection for certain agricultural or health reasons, it should be expedited to a different clearance location).

In application, it can vary greatly by whoever is the customs authority in charge of the inspection location. Decree 08/2015/ND-CP (Ministry of Finance) Article 29 (2) states, “Head of the Customs Authority who is in charge of…inspection [places] shall make a decision on any change to the level or form of physical verification and bear responsibility for their decision.” This gives the customs director of a facility broad authority, but thanks to the last clause of the sentence, “…bear responsibility for their decision”, many customs officials will be hesitant to use that discretion in fear of making a “wrong” decision; therefore, they most likely will physically hold and inspect every shipment coming into their zone of control. One facility operating in that fashion can bottleneck an entire section of the country. Additionally, the provincial customs authority or facility director has broad discretion in determining the “practical conditions” to conform to. In Vietnam, it is doubtful a customs facility director will require personnel to facilitate customs procedures during “Tet” (Vietnamese New Year); therefore, for one week little customs activity occurs at that location.

Indeed, many issues that are problematic to the law on customs were supposedly being addressed by Circulars 38 and 39 (issued in 2018). In fact, on 10 July 2019 a $21.7 million USAID Trade Facilitation Program was granted to support the Government of Vietnam to adopt and implement a risk management approach to customs and specialized inspection agencies, which will strengthen the implementation of the World Trade Organization’s Trade Facilitation Agreement [TFA].[9] The General Department of Vietnam Customs (GDVC) organized six consultative workshops to gather feedback and recommendations on amending Circular 38 and Circular 39 – regulation guidance on Vietnam’s Customs Law. The workshops would help identify the challenges and practical compliance-burdens faced by import-export businesses in relation to implementation of the circulars.[10] It is evident that between the many iterations of decrees, circulars, directives, and laws regarding customs and procedures, every agency and business involved in the process is confused.

Decision 15 (12 May 2017) provides a clear example of the confusion customs officials and businesses encountered[11]; chiefly, that it did not specify what is considered the “entry gate” for carrying out customs procedures? Was it the place that goods were imported to, or the port listed on the bill of lading? Businesses (and officials) were receiving conflicting information and backlogs inevitably ensued.[12] Decision 23, recently issued 27 June 2019, addressed this issue and specifically identifies the proper port of entry for each type of transport.[13] CPTPP and EVFTA also affected Decision 23 in that it amended the type of goods requiring specific inspection procedures to comply with CPTPPs input-materials-for-production provision, and also EVFTAs (and CPTPPs) stricter requirements regarding potentially environmentally-hazardous materials.[14]

With the myriad regulations affecting customs, how can either the CPTPP or EVFTA assist Vietnam in resolving the predicament? Statutorily, the EVFTA already has. It mirrors portions of the TFA (such as creating trade facilitation committees), but also goes one step further in requiring Vietnam to comply with Article 2.12, in which Vietnam “…shall administer in a uniform, impartial and reasonable manner all its laws, regulations, judicial decisions and administrative rulings pertaining to…issues affecting…distribution, transportation…warehousing inspection…or other use of goods for customs purposes.” This section of the EVFTA is forcing Vietnam to take a hard look at their current system, and streamline and consolidate all their varying regulations concerning customs administration for efficiency. A quick solution Vietnam can implement now to help alleviate physical storage problems is EVFTA Article 2.15 which allows foreign pharmaceutical companies to establish their own warehouses inside Vietnam.[15] If Vietnam declares those warehouses as “customs operational locations”, that would free-up other customs warehousing space for other inventory.

Private Sector Must Be Engaged

Outside of the regulatory environment, private businesses have a crucial role in relieving bottlenecks. Even if everything flows smoothly and correctly through the government customs process and goods are cleared, it takes private businesses to physically move those goods out to make room for others. If the trucking company hired to move containers does not “work” on weekends, is short-staffed, can’t find anyone to work, drivers call out sick, etc., those containers do not move—they sit there. Many of the transport barges moving along the Saigon River are private contractors. You can see their entire family lives and works on that barge. If that barge does not want to work that day, it is not going to work. While most of the port terminal operations are conducted by State-owned enterprises (SOEs), they still struggle with general employment issues that affect port operations and add to the bottleneck issue as well.

Government can provide a statutory environment for success, but without private enterprise completing the circle, nothing will be resolved. Perhaps an incentive system for non-traditional work days for private contractors can help the situation; better screening of potential employees; requirements specifically spelled-out; any and all solutions need to be examined. The bottom-line is while regulatory efficiency is needed to allow for the legal and operational environment to flow seamlessly, the private sector must close the loop.

Summary

There is a regulatory quagmire surrounding Vietnam’s customs arena. The TFA is intended to assist developing and under-developed nations (primarily) with their trade processes to better facilitate trade on a global level so that all parties benefit. Vietnam’s growing economy and role as a Southeast-Asian trade hub are requiring substantial changes to current regulations and processes. Only a few examples of the many that could be given show that while Vietnam is making strides with reform, they need to accelerate that change. It cannot be haphazardly done, though. It must be structured, reasonable, and determined with both governmental and private sector collaboration. Vietnam followed that exact process for obtaining CPTPP and EVFTA. Those agreements should be the primary guiding documents for Vietnam to reform their customs legislation to, as they will affect Vietnam’s economic growth exponentially. They can provide the framework for statutory solutions to many of the customs issues Vietnam faces; however, without private-sector buy in, those statutory solutions cannot be efficiently implemented. The entire customs-cycle must be embedded into the mindset and carried out at the individual level for there to be a truly systemic change.

Please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyers in our office listing if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

THANK YOU !

August 11, 2017 by Dr. Oliver Massmann

Lawyer in Vietnam Dr. Oliver Massmann UNNECESSARY TAX AND CUSTOMS RELATED BURDENS ON INVESTORS

The Government has implemented principles and measures in order to create favorable economic environment for enterprises through the issuance of Resolution 35/2016/NQ-CP dated 16 May 2016. These principles include, among others:

The State shall ensure the stability, consistency and predictability of relevant policies.
Regulations on business shall be clear, transparent and achievable, and the State shall issue reasonable route maps for removal of unreasonable sub-licenses, fees and charges.
Competent authorities shall be in charge of examining regulations on tax, tax administration and customs and proposing adjustments to simplify process and save time and business costs.

Continue reading “Lawyer in Vietnam Dr. Oliver Massmann UNNECESSARY TAX AND CUSTOMS RELATED BURDENS ON INVESTORS”

June 7, 2017 by Dr. Oliver Massmann

Vietnam – Transport – Logistics – Trade – Customs- Dramatic Changes ahead: The WTO Trade Facilitation Agreement – The IMPACT

Sixty-five million years ago, the last of the dinosaurs went extinct. The event caused dramatic changes to the planet and provided space for new species on earth. A similar event and change is about to happen in Vietnam and all other WTO members. It is the entry into force of the WTO Trade Facilitation Agreement (TFA).

What is the TFA?

The TFA is a document adopted by WTO member countries at the 9^th WTO Ministerial Conference in Bali, Indonesia on 6^th December 2013 after 10-year negotiation.

In order for the TFA to take place, two-thirds of the 164 WTO members have to notify their ratifications to the WTO after forming a National Committee on Trade Facilitation.

In November 2015, Vietnam became the 60^th country to ratify the TFA. On 22^nd February 2017, the TFA officially entered into force after Rwanda, Oman, Chad and Jordan submitted instruments of acceptance of the TFA to the WTO, bringing the total number of acceptances to 112 while only 110 ratifications are needed for the TFA’s entry into force. At the time of writing this article, there have been 118 ratifications received by the WTO.

What is the TFA about?

The TFA aims at expediting the movement, release and clearance of goods across borders, helping to cut trade costs globally and creating a significant boost for global trade and commerce system.

The TFA is a self-contained agreement and includes three separate sections. Section I includes 12 Articles covering a range of specific trade facilitation measures. Section II covers special and differential treatment for developing country members and least developed country members. The final section deals with institutional arrangements (i.e., establishment of a Committee on Trade Facilitation within the WTO and at a national level) and miscellaneous provisions. The TFA will interact with other legal commitments specified in the WTO Agreement and Multilateral Agreements on Trade in goods.

The agreement requires its members to ensure the availability and prompt publication of information about cross-border procedures and practices, mandates that rights of appeal for traders be improved, fees and formalities connected to the import and export of goods be reduced, customs clearance procedures be faster and conditions for freedom of transit of goods be improved, just to name a few. The TFA also contains measures for effective cooperation between customs and other authorities involved in the facilitation of trade and customs compliance issues. Overall, the main purpose of the TFA is to simplify and harmonize customs procedures among all WTO member countries, which will later result in cutting red tape that slows down and impedes international trade, thereby speeding up of the goods flow across borders.

Different from other agreements, the TFA pays particular attention to developing and least developed countries when allowing them to set their own implementation schedule. While developed countries have to immediately implement the agreement, developing countries will only have to implement the TFA provisions that they have designated as Category A commitments. Other categories of commitments are Category B commitments, which will be implemented after a given period; and Category C commitments, which will apply to the countries after they are provided with technical assistance and capacity building support. Based on the latest WTO’s statistics, there have been 46% of 240 notifiable article items notified to the WTO, of which Category A measures account for 40.5%, Category B measures account for 3.3% and the remaining 2.3% is for Category C measures.[1] Vietnam has already submitted to the WTO its Category A commitments on 31 July 2014.

Why is the TFA important?

The impact of the TFA implementation can even be compared with the worldwide tariffs reduction and elimination. According to the WTO, full implementation of the TFA can reduce trade costs by 14.3% on average with many developing countries and least-developed countries forecast to enjoy the highest reduction (15.8-23.1%) (including Vietnam). This could result in up to US$1 trillion of gains around the world annually. In addition, the time needed to import and export goods (thanks to streamlined customs procedures) is much more reduced. Full implementation of the TFA also adds 2.7% a year in global export growth by 2030, and creates more jobs and growth on a global scale (i.e., more than 0.5% to world GDP growth). For developing countries and least-developed countries, their annual exports will increase by 3.5% together with an increase in the diversity of exported goods because of the TFA implementation. In US dollar, “the TFA has the potential to increase merchandise exports of developing countries by up to 730 billion dollars per annum.”

The TFA is vitally important and has the potential to fundamentally reform global customs practices. One could question why. Here are some of the main reasons:

The TFA includes provisions on facilitating rapid movement of goods across borders such as advance rulings, pre-arrival processing, allowing the release of goods prior to final determination of customs duties, taxes, fees and charges.
The TFA helps to ensure the predictability of rules and procedures related to trade and customs by requiring its members to timely publish relevant documents preferably on the Internet and establishing enquiry points to respond to enquiries by interested parties.
The TFA aims at creating harmonized process and standards which traders find it familiar and predictable when doing customs procedures in different countries.
The TFA recognizes the importance of growth and benefits for every member states. Thus, it provides for special and differential treatment for developing and least developed countries to make sure these countries receive sufficient assistance to reap the full benefits of the TFA implementation. In addition, the WTO Trade Facilitation Agreement Facility will support developing and least developed countries in addressing their needs and concerns.

Overall, the agreement demonstrates the commitment of the WTO member states to trade reform, and increased confidence in the multilateral trading system.

Impacts on Vietnam?

The TFA is expected to boost national and business competitiveness as a result of Vietnam’s implementation of its commitments under the agreement.

On 13 October 2016, the Prime Minister issued Decision No. 1969/QD-TTg on approving the “Plan of preparation and implementation of the TFA of the WTO”, and identifying specific responsibilities of each ministry in upcoming years (Decision 1969).

According to Decision 1969, the Ministry of Finance (MOF) is the national agency to implement the TFA. In particular, the MOF is responsible for, among others:

Implementing national outreach plans to provide information on the TFA;
Operating the single-window system;
Classifying Categories A, B, and C provisions;
Seeking technical support and assistance for capacity building;
Formulating roadmap for implementation of Categories B and C provisions; and
Reviewing relevant legal framework for further amendments.

Other ministries are tasked with coordinating with the MOF in the implementation of the TFA: the Ministry of Transport, the Ministry of Health, the Ministry of Science and Technology, the Ministry of Agriculture and Rural Development, etc.

Following the issuance of Decision 1969, Vietnam has formulated plans to implement Categories A, B and C. The Prime Minister also signed the decision to formally establish on the National Steering Committee on ASEAN Single Window and the National Single Window regime on trade facilitation. On 06 February 2017, the Government also issued Resolution No. 19/2017/NQ-CP on improving the business environment and national competitiveness. The Prime Minister once said: “It is not acceptable to take 4 days to complete customs procedures for exports which is 2 times higher than the regional average, and 4 days for imports while the regional average is only 3 days.” Following the Government’s directive and strong momentum for reforming customs procedures caused by the TFA implementation, Vietnam has been reviewing thousands of customs procedures and revising several legal documents to bring them into conformity with its commitments in the TFA.

The Government cannot act otherwise if it hopes to help Vietnamese businesses to be competitive in the global marketplace. These improvements will greatly facilitate trade across borders, thereby reducing the costs in both time and money for Vietnamese businesses. In general, it is expected to reduce the time needed to import goods by over a day and a half and to export goods by almost two days. For Vietnam, the TFA could reduce trade costs by 20% and trade facilitation measures will help businesses in formal international trade. According to Mr. Nguyen Dinh Cung, Director of the Central Institute for Economic Management, one-day reduction in customs clearance time could result in a saving of VND1.6 billion. It is a huge amount given the busy customs activities in Vietnam’s ports.

A lot of work has been done so far to implement the TFA. However, there is still a long way ahead and we have good reasons to expect further dramatic changes to come.

***

If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann PhD under omassmann@duanemorris.com. Dr. Oliver Massmann PhD is the General Director of Duane Morris Vietnam LLC.

Thank you very much!

[1] https://www.tfadatabase.org/notifications/by-measure

May 12, 2015 by Dr. Oliver Massmann

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. Generally Speaking, What Are The VAT, Customs And Related Costs (e.g. Broker Fees) That Arise When A Foreign Principal Has Goods Dropped Shipped Into Your Jurisdiction To The Local Contract Manufacturer? In Particular, Is There Any Non-recoverable VAT? If So, Are There Strategies For Avoiding Or Reducing This VAT Cost? With Respect To Customs, Please Provide The Range For The Customs Rates That May Apply. Also Are There Any Planning Techniques That Taxpayers Typically Employ To Reduce Customs Costs? Please Address The Same Issues In Connection With The Export Of The Finished Goods Outside Of The Country.

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. 71/2014/QH13.

Due to Article 7.3 of the Law on Tax Management, 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 that shall 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 Value Added Tax the following objects are exceptionally not subject to VAT: “Machinery, equipment and supplies which cannot be manufactured domestically and need to be imported for direct use in scientific research and technological development activities; machinery, equipment, spare parts, special-purpose means of transport and supplies which cannot be manufactured domestically and need to be imported for prospecting, exploring and developing oil and gas fields; aircraft, drilling platforms and ships which cannot be manufactured domestically and need to be imported for the formation of enterprises fixed assets or which are hired from foreign parties for production and business activities or for lease.”

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.

4. To The Extent That There Are Significant VAT Or Customs Issues That Arise If The Factory Imports And Owns The Raw Materials And Work-In-Process That Are Contract Manufacturing Specific, Please Let Us Know.

Raw materials and supplies imported for production of goods for export shall be subject to import duties and VAT and shall be entitled to refund of import duties and VAT corresponding to the ratio of exported goods on the basis of the levels of use of raw materials and supplies [Article 114, Circular No. 38/2015/TT-BTC in respect of raw materials and other supplies for production of goods for export].

According to Point c.5) of Circular No. 38/2015/TT-BTC dated 25 March 2015, enterprises that import raw materials for productions [“importing enterprise”] and then sell their products to another enterprise to directly produce or process products for exports [“exporting enterprise”], after the actual export by the exporting enterprise the importing enterprise is entitled to request for refund of import duty tax equivalent with the materials that the exporting enterprise already used.

5. Are There Any Additional Issues Taxpayers Should Be Aware Of In Connection With Locally Procured Raw Materials And/ Or Finished Goods That Are Sold In The Local Market?

Circular No. 128/2013/TT-BTC on guiding imported goods export, import, processing, liquidation and consuming products of foreign invested enterprises dated 10 September 2013 stipulates that:

– In the case of the sale of domestic goods to an export processing enterprise, the seller shall be exempt from export duties.

– In the case of the purchase by an export processing enterprise of domestic goods for export (without conducting any production activity), the export processing enterprise must pay export duties.

– In the case of the purchase by an export processing enterprise of domestic goods for the production of goods for export, the export processing enterprise shall be exempt from export duties upon export.

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 which earn income. A resident establishment of a company overseas can take different forms that are listed as well in the Law on Corporate Income Tax.

This list includes a representative in Vietnam in a case where it has authority to enter into contracts in the name of a company overseas or a representative which is not competent to enter into contracts in the name of a foreign company but regularly delivers goods or provides 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.

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

Also 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 rise 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?

Article 1.4.b of Decree No. 24/2007/ND-CP (as amended and partially superseded by Decree No. 218/2013/ND-CP and Decree No. 12/2015/ND-CP) (“Decree No. 24/2007/ND-CP”) stipulates that a business is considered as resident establishment if it takes the form of a “location of supervisory activities for construction, construction works, or installation and assembly works.

If the principal wants to be safe regarding the avoidance of a PE, he might establish a Representative Office [“RO”] to perform the tasks named above. This is possible as long as the RO is not doing business. Article 13.1.c of Decree 45 on Representative Offices allows to “monitor and activate the implementation of signed contracts of the foreign business entity or foreign tourism enterprise for which it acts as a representative.” This covers the activities named above.

According to Article 37 of the Commercial Law and Article 5 of Decree 45 any foreign business entity or foreign tourism enterprise which has lawful business registration in accordance with the law of the foreign country and has operated for at least 05 (five) years shall be issued with a license to establish a representative office in Vietnam.

5. To What Extent Do The Answers To These PE Questions Change If The Factory’s Sole Activity Is Acting As A Contract Manufacturer For A Single Principal.

This constellation is not directly addressed in Vietnamese Laws. Contract manufacturing for only one single principal might give rise to a PE if tax authorities interpret the business activities of the overseas company according to Article 1.4.b of Decree No. 24/2007/ND-CP [pls. see above under point II.4] as a form of “installation and assembly works”.

6. Assume An Extreme Set Of Facts Where In Addition To The Factors Set Forth Above The Principal Has A High Degree Of Control Over The Operations In The Factory. Assume For Instance That The Principal Hires The Employees And Its Employees In The Factory Have The Power To Stop Production To Correct Problems. At What Point Does The Principal’s Control Over The Factory Activity Give Rise To A PE?

We refer to point II.5 above. These business activities will be even more likely be considered as PE.

7. 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’s basis.

The Ministry of Finance has released a Circular on Transfer Pricing which requires companies to make a full self-assessment of their profits, calculated on an arm’s length’s basis. According to this circular, companies will be required to declare the related party transactions in a prescribed for 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’s terms.

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

III. Local Incentives

In many of your jurisdictions, the government grants tax incentives or holiday for taxpayers that invest in the local economy and manufacture within the country. In many contract manufacturing structures, however, the contract manufacturer receives a cost plus return, and the contract manufacturer generally does not own intangibles.

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 based on Chapter V of Decree No. 24/2007/ND-CP on Corporate Income Tax.

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 is not allowed to 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?

This case is not addressed by the Vietnamese tax law.

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

Chapter V of Decree No. 24/2007/ND-CP provides detailed regulations on all CIT incentives.

Investment projects in certain industries and sectors listed in an appendix to the Investment Law shall be entitled to incentives as well as projects employing average numbers of employees, that are defined in Article 41.

According to the project type and the region of its location the tax rate can be 10, 15, 20 or 50 per cent.

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 bear 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. If There Are Locally Owned Product Intangibles, Is There A Capital Gains Tax On The Sale Of These Intangibles To A Foreign Owner And If So What Is The Rate? Assume The Local Contract Manufacturer Sells The Intangibles For Cash And Then Declares A Dividend Equal To The Amount Of The Sales Proceeds. Any Dividend Withholding Tax? If So, What Is The Rate? If There Is A Capital Gains Tax Or A Dividend Withholding Tax, in Addition To Discounted Cash Flow, What Other Valuation Approaches, If Any, Are Commonly Used? Are There Other Strategies For Reducing These Costs?

The taxation of the sale of intangibles is addressed in Article 32 of Decree No. 133/2008/ND-CP as amended by Decree No. 120/2014/ND-CP on technology transfer. This norm provides that the transferor has the obligation to pay tax on the amount of money generated from the technology transfer.

2. 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.

3. Assume The Local Entity That Historically Manufactured Goods On A Buy/Sell Basis Also Performs R&D And Marketing Activities. In Connection With The Conversion, Should These Activities Be Moved Into Separate Subsidiaries? If So, What Additional Issues Arise In Connection With This Conversion?

Please see point IV.2.

4. 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. Please see point 2.7 for further information on the Circular on Transfer Pricing.

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Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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