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INVESTMENT INCENTIVES IN VIETNAM:
An opportune time to change
Investment incentives are policy instruments used to try and attract
investment and/or achieve specific economic development objectives.
There are many different types of investment incentives including
corporate income tax (CIT) exemption or reduction, import duty
exemption or reduction, tax credits, investment allowances, and so
on. Investment incentives are widely used throughout the world,
particularly by developing countries. Like some other countries in
Asia, Vietnam offers generous incentives to attract investment;
however, the existing incentives regime has weaknesses and
limitations. As Vietnam is preparing for WTO accession and is
currently in the process of drafting key new business laws (the
Comprehensive Investment Law and the Unified Enterprise Law), now is
a good time to review the existing investment incentives scheme, and
introduce changes that are aligned with international best practice.
This bulletin summarizes the key issues, and presents views from
policymakers, experts, and businesses on what changes in the
incentives regime should be considered.
Existing
investment incentives regime is too complex
In Vietnam there are many
different categories of incentives, and they are spread across
different laws and regulations. This makes it hard to administer
them, and difficult for companies to understand them. In some cases
incentives are being used to try and attain multiple–and sometimes
conflicting–objectives, such as attracting investment, creating
jobs, promoting regional development, addressing gender issues and
encouraging technology transfer. The degree of complexity is
compounded by the fact that some provinces enact additional
incentives of their own to compete for investment. This kind of
competition can result in "a race to the bottom" at the national
level.1
Effectiveness of current system is low
The current incentives
regime in Vietnam does not appear to effectively encourage
investment. This is due in large part to the high redundancy rate of
tax incentives - that is, a situation where a high proportion of
investors that received incentives would have invested without being
provided with a tax incentive. A high redundancy rate translates
into high costs through tax revenues unnecessarily foregone. In one
recent study conducted by VNCI on the usage of investment incentives
by Vietnamese companies, over 80% of domestic firms receiving tax
incentives claimed that the incentive had not had an impact on their
investment decision. This translates into an effective public
subsidy of around 70%, e.g. VND 70,000 in tax foregone for every VND
100,000 investment derived from a tax incentive.2 Looking
beyond the public finance costs of fiscal incentives, a broader
study found that the overall cost of tax incentives alone– excluding
other incentives in Vietnam is around 0.7 percent of GDP.3
Any incentives regime should be designed and implemented in a way
that ensures the benefits exceed the costs. In this respect, the
effectiveness of Vietnam's incentives regime is not clear; there
have been no comprehensive assessments made to date. As a
consequence of its complexity, the impact of the current regime is
limited, and some incentives may be canceling each other out. For
example, tax incentives aimed at addressing specific social issues,
such as job creation or diversification, may not be effective when
companies restructure their labor force to meet these requirements,
but then become less competitive as a result. The same VNCI study
found that very few domestic investors are investing in preferred
locations and sectors, and most investors receiving fiscal
incentives are large rather than small businesses.4
Flaws in
the administration of incentives still exist
The VNCI study also found
that the administration of the incentives regime in Vietnam still
has a number of flaws.5 These include: i) subjectivity in
its enactment by tax officials, arising from a lack of regulatory
clarity; ii) many companies being unsure of their eligibility
status; iii) companies using the incentives to gain unmerited tax
windfalls; and iv) the potential for rent seeking, arising from a
lack of transparency. These problems stem in part from the fact that
incentives are not granted automatically when the conditions are
satisfied. Rather, companies must apply for investment incentives
and get approval from the authorities. There are also concerns over
provinces granting incentives of their own that are outside the
range stipulated by the central government.
Equitable treatment principles and WTO commitments need to be
addressed
Currently, domestic and
foreign investors are regulated by two separate laws, and are
therefore sometimes treated differently. For example, foreign
investors pay, on average, a lower CIT rate than domestic investors,
but in some cases have to pay higher prices for utilities like
electricity and water. There are also biases in favor of SOEs in
terms of access to finance from government resources and access to
large investment projects. Similarly, investment incentives tend to
be biased in favor of new investment projects compared with the
expansion of existing investments. A big gap also exists in the
provision of incentives for companies operating inside and outside
industrial and export processing zones. A number of investment
incentive policies appear incompatible with WTO accession
requirements, such as local content and sourcing requirements,
export performance requirements etc., and therefore will need to be
changed.
Investment incentives regime should be redesigned rather than
amended
An effective investment
incentives regime is cost-effective, efficient and ultimately
results in more investment. This requires that it is: i) selective;
ii) rule-based, with no room for subjectivity at the implementation
level; iii) clearly and simply designed; and iv) equitably and
transparently implemented. Most importantly the incentive regime
should reward actual rather than expected investment through the
introduction of simple performance based schemes.6 The
current investment incentives regime in Vietnam falls short in most
of these respects. In drafting the new Comprehensive Investment Law,
Vietnam should consider designing a brand new incentives scheme that
has these characteristics and is consistent with international best
practice, rather than making further amendments to the existing one.
Finally, it is important to note that incentives alone are not
sufficient to attract investment. Good infrastructure, market
accessibility, macro-economic stability, clarity of property rights,
transparency and certainty in the business environment, good legal
framework and responsive local authorities are among the factors
viewed by many investors to be much more important determinants of
investment activity.
(1) Foreign Investment Advisory
Service (FIAS), Using Tax Incentives to Attract Foreign Direct
Investment, Public Policy Journal, World Bank, February 2003.
(2) Vietnam Competitiveness Initiative (VNCI), An Empirical Study of
Corporate Income Tax Investment Incentives for Domestic Companies in
Vietnam, October 2004. <www.vnci.org>
(3) Kevin Fletcher. Tax incentives in Cambodia, Lao PDR, and
Vietnam. Paper prepared for the IMF conference on Foreign Direct
Investment, Hanoi, August 16-17, 2002.
(4) See VNCI, ibid.
(5) See VNCI, ibid.
(6) FIAS/MPDF, Investment Incentives and investor protection in
Vietnam: Opportunities for Introducing Investment-Friendly Change,
November 2004. <www.mpdf.org> |
