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FOREIGN TRADE UNIVERSITY English Faculty o0o RESEARCH REPORT The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry from 2014 to 2017 Instructor M A[.]

FOREIGN TRADE UNIVERSITY

English Faculty -o0o -

RESEARCH REPORT The impact of the Vietnamese government tax incentives in attracting foreign

investment into the industry from 2014 to 2017

Instructor: M.A Phan Kim Thoa

Group 3: Vũ Thị Hà Duyên 1511110185 (Group leader) Trần Thanh Hoa 1414410095

Nguyễn Thị Huyền Trang 1410120153

Lê Xuân Trường 1411110667

Nguyễn Thị Ngọc Trâm 1511110805

Class: TAN432(2-1718).7_LT

Hanoi 4/2018

ABSTRACT 1

INTRODUCTION 2

TECHNICAL SECTIONS 3

I Overview of Foreign Direct Investment 3

1.1 Definition 3

1.1.1 FDI 3

1.1.2 Investment incentives 3

1.2 Classification of FDI 3

1.3 Advantages and disadvantages of FDI 3

1.3.1 The impact of FDI on the home country 3

1.3.2 The impact of FDI on the host country 4

II The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry 2014-2017 5

2.1 Tax incentives policy for FDI in Vietnam (Law on Investment 2014) 5

2.1.1 Corporate income tax (CIT) 5

2.1.2 Personal income tax (PIT) 6

2.1.3 Value added tax (VAT) 6

2.1.4 Import and export taxes (EIT) 6

2.2 The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry 2014-2017 7

2.3 Evaluation of tax incentives policy for FDI in Vietnam 10

2.3.1 Positive aspect 10

2.3.2 Negative aspect 14

III Suggestions of effectively attracting FDI into the industry in Vietnam 15

3.1 For the government 15

3.2 For the domestic enterprises 16 CONCLUSION 17 REFERENCES 18

List of table - figure

Table 2.1 The summary of all the CIT incentives for investment projects in Vietnam

according to Law on Investment 2014 5

Table 2.2 Foreign direct investment projects licensed by province in 2017 10

Table 2.3 Vietnam’s exported value of all products during 2014-2016 ( US Dollar thousand Vietnam) 12

Figure 2.1 FDI inflows into Vietnam during 2014-2017 (US billion) 8

Figure 2.2 Accumulated FDI inflows by sector as at end 2017 (percent) 9

Figure 2.3 Vietnam’s gross domestic product during 2014-2017 ( USD billion) 11

Figure 2.4 The ratio of Vietnam’s FDI to GDP during 2014-2016 ( percent) 12

Foreign investment into Vietnam, generally, has influctuated over years Looking back

30 years ago, Vietnam had changed much in both positive and negative trends thanks toforeign direct investment (FDI) Vietnam’s government also has amended and supplementedincentives policies with an aim to attracting foreign capital inflows which bring about specificeffects on Vietnam’s economy One of the most noteworthy policies is tax incentives that candirectly help the investors make their decisions Tax incentives policy has changed for manyperiods, however, in this research, we focus on the new edition – “Law on Investment 2014”

in Vietnam and analyze its impacts on attracting FDI into the industry in the period of

2014-2017

It is beyond doubt that the reduction of tax burden has encouraged more internationalcorporations to invest Tax incentives have had a direct influence on FDI inflows Hence,Vietnam’s FDI increased from 2014 to 2017 And they have had an indirect influence onVietnam’s GDP, export turnover and industrialization structure Though tax incentives policyhas contributed to drive Vietnam into being a developing country, it also thwarts other aspectsrelated to domestic enterprises This research will dive deeper into these effects In addition,

we give some recommendations concerning the effective attraction of FDI into the industry inVietnam for both the authority and domestic firms It could be said that this research trulyserves to understand more about tax incentives policy and national economy as a consequenceduring this period

Since the opening of the economy, especially since the promulgation of the Law onForeign Investment in Vietnam, foreign direct investment (FDI) inflows into Vietnam havebeen increasing It is expected that in the near future, with bilateral and multilateral Free TradeAgreements (FTAs) signed and implemented, Vietnam will increasingly appeal more andmore FDI According to reports from the United Nations Conference on Trade andDevelopment, foreign investors are increasingly interested in the Asian region, especiallyVietnam with so many potential resources Like other countries in the region, the government

of Vietnam has recently adopted preferential tax policies for special investment projects andsectors funded by FDI

FDI attraction will create a great foundation for economic development, particularlythe industry However, though Vietnam's government has established tax incentives policy toforeign investors, the business environment in Vietnam still has some barriers hindering them.Besides, those policies aimed at attracting foreign investment make it difficult for the domesticcompanies Recognizing the importance of this issue, we would like to select the topic:

“The impact of the Vietnamese government tax incentives in attracting foreigninvestment into the industry from 2014 to 2017”

The research report structure includes 3 main chapters as below:

I Overview of Foreign Direct Investment

II The impact of the Vietnamese government tax incentives in attractingforeign investment into the industry 2014-2017

III Suggestions of effectively attracting FDI into the industry in VietnamThis is a complex issue for the country as a whole and for the team itself Therefore,the content and the presentation skill of the report will be inevitably defective We hope toreceive advices and comments of the teacher to help improve the knowledge for the workprocess later

Tax incentives : Deduction, exclusion, or exemption from a tax liability, offered as

an enticement to engage in a specified activity (such as investment in capital goods) for acertain period

 The typology of FDI was developed to explain the different objectives of FDI :

Resource seeking FDI Market seeking FDI Efficiency seeking ( global sourcing FDI)Strategic asset/ capabilities seeking FDI

1.3 Advantages and disadvantages of FDI

1.3.1 The impact of FDI on the home country

Advantages of FDI

 Active and efficient use of capital.

 Implement transfer policy to maximize profits

 Dominate market of products, compete with domestic enterprises

 Exploiting cheap labor and other advantages

 Take advantage of the incentives from the host country

Disadvantages of FDI

 Difficulties in capital and technology management

 The temporary deficit of the international balance of payments

 Technology can be leaked, imitated or stolen

1.3.2 The impact of FDI on the host country

Advantages of FDI

 Promote economic growth

 Supplementing capital for economic development

 Contribute to technological development

 Improving the quality of labor

 Create jobs and increase income for labors

 Contribute to the economic restructure of the host country

Disadvantages of FDI

 Economic and technological dependence on the investing country

 Pressures on domestic enterprises

 Many FDI enterprises evade taxes, mainly through transfer pricing

 Severe environmental pollution, depletion of natural resources

 Increase the gap between the rich and the poor

II The impact of the Vietnamese government tax incentives in attracting foreign

investment into the industry 2014-2017

2.1 Tax incentives policy for FDI in Vietnam (Law on Investment 2014)

Vietnamese government continues to improve business conditions through reform andhave included tax incentives in recent legislative updates, most notably Vietnam’s Law onInvestment, to lower the cost of doing business within the country Foreign investors,particularly those involved in slightly higher value-add production, should be able to useincentives to offset their temporary costs and to position themselves ahead of their competitors

in the years ahead

2.1.1 Corporate income tax (CIT)

Table 2.1 The summary of all the CIT incentives for investment projects in Vietnam

according to Law on Investment 2014

Investment projects engaging in socialised businesses and

located in areas with difficult or specially difficult

socio-economic conditions

Tax rate of 10% for the whole project life Exemption: 4 years Reduction: 9 yearsInvestment projects engaging in socialised businesses and

located in areas with normal socio-economic conditions

Tax rate of 10% for the whole project life Exemption: 4 years Reduction: 5 years

- Investment projects located in areas with specially difficult

locations, economic zones and high-tech zones; hi-tech;

- Investment projects of manufacturing in large scale

- Investment projects engaged in manufacturing or processing

agricultural products in areas with difficult socio-economic

conditions;

- Investment projects engaged in manufacturing supporting

industry products of prioritised development

Tax rate of 10% for

15 yearsExemption: 4 years Reduction: 9 years

Investment projects of manufacturing or processing agricultural

products located in areas with normal socio-economic conditions

Tax rate of 15% for whole life

- Investment projects located in areas with normal socio- Tax rate of 20% (17%

economic conditions

– Investment projects in steel industry, energy, machinery for

agriculture

from 2016) for 10 years

Exemption: 2 years Reduction: 4 yearsInvestment projects located in industrial zones/ export

processing zones (except for those in with favorable socio

economy conditions)

Exemption: 2 years Reduction: 4 years Nopreferential tax rate is given

Source: Law Investment 2014, Tax Law 2012

2.1.2 Personal income tax (PIT)

Personal Income Tax is applied on a graduated scale depending on the income of eachindividual An Incentive is PIT reduction of 50% for individual working in the economiczones And certain types of income include: Interest earned on deposits; Compensation paidunder life/non-life insurance policies; Income from transfer of properties between variousdirect family members; Income of Vietnamese vessel crew members working for foreignshipping companies or Vietnamese international transportation companies are all except fromPIT

2.1.3 Value added tax (VAT)

There are 25 types of goods and services which are exempted from VAT (certainagricultural products; financial derivatives and credit services; certain insurance services;medical services; teaching and training; printing and publishing of newspapers, magazines,and certain types of books )

From 2014, 5% VAT rate is applied for essential goods and services (such as water,fertilizer, medicine, educational equipment,…)

2.1.4 Import and export taxes (EIT)

In the Law on EIT (2016), there is a relatively long list of incentives in terms of importtax exemption, such as: i) goods imported for projects which are listed as encouraged sectors;machinery & equipment, specialized means of transportation and construction materials toform fixed assets of certain projects if such goods could not be locally produced; (ii) importduty exemption for raw materials, spare parts, accessories, other supplies, samples, machineryand equipment imported for the processing of goods for export and iii) import duty exemption

of raw materials, equipment and components for five years following the commencement ofoperation if the investment projects are carried out in the regions where investment wasespecially encouraged.

2.2 The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry 2014-2017

Tax incentives have been applied consistently to stimulate investment, especially forthe inflows of FDI in Vietnam It can be seen that reductions in tax obligations whileincreasing tax incentives in some investment sectors and locations have created favourableconditions for the enterprises to increase capital accumulation, expand manufacturing andspeed up the economic growth in Vietnam in the past more than two decades of economicreform Benefits of tax incentives can be seen from the specific figures:

Vietnam has become an attractive destination for FDI The reduction in the overall tax burden and the introduction of various forms of tax incentives has contributed to create a morefavourable environment to interest foreign investment According to the Foreign Investment Agency, total newly registered, additional foreign investment capital reached 35.88 billion USD in 2017, 44.4 percent over the previous year Although, within the scope of this research,

it is very hard to measure the extent to which the reduction in CIT in recent years has led to the increase in FDI inflows, the recent surge in FDI inflow in Vietnam has indicated

significant improvement in Vietnam's investment environment As of December 2014,

Vietnam attracted 17,250 FDI projects valued 21.9 billion USD In 2015, Vietnam attracted more than 24.1 billion USD of FDI, marking an increase of more than 10 percent in

comparison with that of 2014 And in 2016, the inflows slightly incresed with 24.4 billion USD

Figure 2.1 FDI inflows into Vietnam during 2014-2017 (US billion)

US$ billion

Source: Worldbank

Over the past two decades, the FDI sector has been playing an increasing role in Vietnam's economy The FDI sector accounted for 23 percent of the country’s investment capital in 2015 Share of output from FDI sector in total nominal GDP increased from 7.4 percent in 1996 to 19.5 percent in 2017, according to General Statistics Office of Vietnam (GSO) Tax exemption and reduction for export activities have helped to push up export turnover through years, especially from the FDI sector The General Statistics Office released

a report, stating that in 2017 Vietnam’s export turnover reached 213.77 billion USD, up 21.1 percent compared to the previous year Vietnam witnessed a trade surplus of 2.7 billion USD

in 2017 (GSO) Explaining the trade surplus, Tran Thanh Hai, deputy director of the Export Department under the Ministry of Industry and Trade, told “The trade surplus this year was boosted by high export growth as well as increasing locally-made materials that

Import-contributes to reduce the imports."

More particularly, certain large FDI projects, which are usually granted with high level

of tax incentives by the Government, such as Samsung’s projects in Bac Ninh and ThaiNguyen, have made strong contribution to Vietnam' exports in recent years In 2017, totalexports by Samsung projects in Vietnam reached more than 40 billion USD, representing ashare of 20 percent of Vietnam's total exports (GSO) In addition, with strong participation of

FDI sector in export activities, export from the higher value-added products has expandedfaster compared to the traditional group’s export expansion

Figure 2.2 Accumulated FDI inflows by sector as at end 2017 (percent)

18.4

6.5

16.7 58.4

Accumulated FDI inflows by Sector as at End - 2017

Source: The Ministry of Planning and Investment

The increase in the size of FDI sector in GDP has helped to shift the structure of theeconomy toward a greater industrial orientation According to statistics (2017), the industrysector accounted for more than a half of accumulated FDI’s inflows Manufacturing made upthe highest proportion with 186.1 billion USD, accounting for 58.4% of total investment.Followed by real estate activities with 53.1 billion USD (16.7% of total investment),electricity production and distribution with 20.8 billion USD (6.5% total investment)

The regional structure of investment has also experienced changes in recent years.Proportion of FDI in Northern mountainous region and Northern central region and Coastalcentral region also increased substantially in recent years, which are among the poorestregions of the country In recent years, provinces in less developed regions have begun toattract a number of very large projects For instance, Samsung decided to invest in a 3.2 billionUSD project in Thai Nguyen in 2016 According to the Ministry of Planning and Investment,the structure of FDI by region has shifted in a more positive direction Poor provinces in theCentral Coastal and Mekong Delta Rivers, such as Thanh Hoa, Ha Tinh, Phu Yen and KienGiang have begun to attract a greater share of FDI