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 OUTLINE ABSTRACT INTRODUCTION .2 TECHNICAL SECTIONS I Overview of Foreign Direct Investment 1.1 Definition 1.1.1 FDI 1.1.2 Investment incentives 1.2 Classification of FDI 1.3 Advantages and disadvantages of FDI 1.3.1 The impact of FDI on the home country 1.3.2 The impact of FDI on the host country 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) 2.1.2 Personal income tax (PIT) .6 2.1.3 Value added tax (VAT) 2.1.4 Import and export taxes (EIT) 2.2 The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry 2014-2017 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 ii 3.2 For the domestic enterprises .16 CONCLUSION 17 REFERENCES 18 iii 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) Figure 2.2 Accumulated FDI inflows by sector as at end 2017 (percent) 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 iv v ABSTRACT 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 to foreign direct investment (FDI) Vietnam’s government also has amended and supplemented incentives policies with an aim to attracting foreign capital inflows which bring about specific effects on Vietnam’s economy One of the most noteworthy policies is tax incentives that can directly help the investors make their decisions Tax incentives policy has changed for many periods, 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 20142017 It is beyond doubt that the reduction of tax burden has encouraged more international corporations 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 on Vietnam’s GDP, export turnover and industrialization structure Though tax incentives policy has contributed to drive Vietnam into being a developing country, it also thwarts other aspects related 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 in Vietnam for both the authority and domestic firms It could be said that this research truly serves to understand more about tax incentives policy and national economy as a consequence during this period INTRODUCTION Since the opening of the economy, especially since the promulgation of the Law on Foreign Investment in Vietnam, foreign direct investment (FDI) inflows into Vietnam have been increasing It is expected that in the near future, with bilateral and multilateral Free Trade Agreements (FTAs) signed and implemented, Vietnam will increasingly appeal more and more FDI According to reports from the United Nations Conference on Trade and Development, foreign investors are increasingly interested in the Asian region, especially Vietnam 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 and sectors funded by FDI FDI attraction will create a great foundation for economic development, particularly the industry However, though Vietnam's government has established tax incentives policy to foreign 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 domestic companies Recognizing the importance of this issue, we would like to select the topic: “The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry from 2014 to 2017” The research report structure includes main chapters as below: I Overview of Foreign Direct Investment II The impact of the Vietnamese government tax incentives in attracting foreign investment into the industry 2014-2017 III Suggestions of effectively attracting FDI into the industry in Vietnam This 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 to receive advices and comments of the teacher to help improve the knowledge for the work process later TECHNICAL SECTIONS I Overview of Foreign Direct Investment 1.1 Definition 1.1.1 FDI Foreign direct investment (FDI) : the establishment of a plant or distribution network abroad Investors can acquire part or all of the equity of an existing foreign corporation either to control or share control over sales, production, and research and development 1.1.2 Investment incentives Investment incentives: benefits such as cash grants, tax credits, accelerated depreciation, and low interest-bearing loans, which are sponsored by national or local authorities to attract foreign invesment 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 a certain period 1.2 Classification of FDI Horizontal FDI: arises when a firm duplicates its home country –based activities at the same value chain stage in a host country through FDI Platform FDI: Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country Vertical FDI: takes place when a firm through FDI moves upstream or mdownstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country 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 and have included tax incentives in recent legislative updates, most notably Vietnam’s Law on Investment, 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 use incentives 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 Condition Investment projects engaging in socialised businesses and CIT incentive Tax rate of 10% for located in areas with difficult or specially difficult socio- the whole project life economic conditions Exemption: years Investment projects engaging in socialised businesses and Reduction: years Tax rate of 10% for located in areas with normal socio-economic conditions the whole project life Exemption: years - Investment projects located in areas with specially difficult Reduction: years Tax rate of 10% for locations, economic zones and high-tech zones; hi-tech; 15 years - Exemption: years Investment projects of manufacturing in large scale - Investment projects engaged in manufacturing or processing Reduction: years agricultural products in areas with difficult socio-economic conditions; - Investment projects engaged in manufacturing supporting industry products of prioritised development Investment projects of manufacturing or processing agricultural Tax rate of 15% for products located in areas with normal socio-economic conditions - Investment projects located in areas with normal socio- whole life Tax rate of 20% (17% economic conditions from 2016) for 10 – Investment projects in steel industry, energy, machinery for years agriculture Exemption: years Investment projects located in industrial zones/ export Reduction: years Exemption: years processing zones (except for those in with favorable socio Reduction: years No economy conditions) preferential 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 each individual An Incentive is PIT reduction of 50% for individual working in the economic zones And certain types of income include: Interest earned on deposits; Compensation paid under life/non-life insurance policies; Income from transfer of properties between various direct family members; Income of Vietnamese vessel crew members working for foreign shipping companies or Vietnamese international transportation companies are all except from PIT 2.1.3 Value added tax (VAT) There are 25 types of goods and services which are exempted from VAT (certain agricultural 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 import tax exemption, such as: i) goods imported for projects which are listed as encouraged sectors; machinery & equipment, specialized means of transportation and construction materials to form fixed assets of certain projects if such goods could not be locally produced; (ii) import duty exemption for raw materials, spare parts, accessories, other supplies, samples, machinery and 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 of operation if the investment projects are carried out in the regions where investment was especially 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 for the inflows of FDI in Vietnam It can be seen that reductions in tax obligations while increasing tax incentives in some investment sectors and locations have created favourable conditions for the enterprises to increase capital accumulation, expand manufacturing and speed up the economic growth in Vietnam in the past more than two decades of economic reform 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 more favourable 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) FDI inflows into Vietnam 40 35.88 35 30 25 21.9 24.4 24.1 US$ billion 20 15 10 2014 2015 2016 2017 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 ImportExport 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 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 Thai Nguyen, have made strong contribution to Vietnam' exports in recent years In 2017, total exports by Samsung projects in Vietnam reached more than 40 billion USD, representing a share 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 expanded faster compared to the traditional group’s export expansion Figure 2.2 Accumulated FDI inflows by sector as at end 2017 (percent) Accumulated FDI inflows by Sector as at End - 2017 others 18.4 6.5 Electricity, gas, stream and air conditioning supply Real estate activities 58.4 16.7 Manufacturing Source: The Ministry of Planning and Investment The increase in the size of FDI sector in GDP has helped to shift the structure of the economy toward a greater industrial orientation According to statistics (2017), the industry sector accounted for more than a half of accumulated FDI’s inflows Manufacturing made up the 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 Coastal central region also increased substantially in recent years, which are among the poorest regions of the country In recent years, provinces in less developed regions have begun to attract a number of very large projects For instance, Samsung decided to invest in a 3.2 billion USD 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 the Central Coastal and Mekong Delta Rivers, such as Thanh Hoa, Ha Tinh, Phu Yen and Kien Giang have begun to attract a greater share of FDI Table 2.2 Foreign direct investment projects licensed by province in 2017 Number of WHOLE COUNTRY Red River Delta Ha Noi Vinh Phuc Bac Ninh Quang Ninh Hai Duong Hai Phong Hung Yen Ho Chi Minh City Ha Nam Nam Dinh Ninh Binh Northern midlands and mountain areas Coastal central region Mekong River Delta Total registered capital (Mill projects 2613 878 462 31 188 11 29 54 43 853 32 14 97 184 175 USD)(*) 26890.5 10439 3390 396.1 924.9 591.1 470.7 3043.2 403.2 3896.9 727.2 331.4 99.2 1559.6 1885.2 2335.4 Source: General Statistics Office of Vietnam 2.3 Evaluation of tax incentives policy for FDI in Vietnam 2.3.1 Positive aspect It is undoubted that the FDI sector has a significant and important contribution to Vietnam economy That a developing country like Vietnam has taken advantages of FDI enterprises is an expecting result of tax incentives policy Vietnam has endlessly witnessed an economic growth during 2014-2017 2.3.1.1 Gross domestic product 10 Figure 2.3 Vietnam’s gross domestic product during 2014-2017 ( USD billion) Vietnam GDP ( USD billion) 250 224.6 200 186.2 205.28 193.24 150 100 50 2014 2015 2016 2017 Vietnam GDP Source: tradingeconomics.com According to official statistics, Vietnam’s GDP increased stably from 186.2 USD billion in 2014 to 224.6 USD billion in 2017 ( about 20.6 percent) It is said that when investing in a country, MNCs or TNCs are supposed to bring along capital, technology, management skills and its global network It gives rise to the development of host country’s economy 11 Figure 2.4 The ratio of Vietnam’s FDI to GDP during 2014-2016 ( percent) Vietnam's FDI: % Nominal GDP 6.14 6.1 4.94 2014 2015 2016 Vietnam's FDI Source: ceicdata.com In 2014, the contribution of the FDI sector to GDP was about 4.94 percent This figure increased to 6.1 percent in 2015 and 6.14 percent in 2016 Though it was not a two-number or more, it was an upward trend These numbers have proved that tax incentives policy indirectly has a positive influence on Vietnam economy 2.3.1.2 Export FDI is believed to stimulate export activity and as part of international trade or trade liberalization, FDI corporations in Vietnam are granted the rights to engage in export and import It helps enterprises business more effectively by reducing unneccessary costs, expanding scales and gaining more profits Table 2.3 Vietnam’s exported value of all products during 2014-2016 ( US Dollar thousand Vietnam) Exported value of all products 2014 2015 2016 150,217,139 162,016,742 219,796,281 Source: trademap.org 12 According to above statistics, exported value of all products increased considerably It is undeniable that FDI has contributed to Vietnam’s export in the industry and is the main driving force behind the rapid export growth of Vietnam Electrical machinery and equipment accounted for mostly in comparison to other products (respectively 24,3% in 2014, 29,3% in 2015, 36,2% in 2016) And the General Department of Customs (GDC) report also said the manufacturing sector will grow significantly with the opening of new FDI factories Besides, The largest importer of Vietnamese goods for many years is The United States Meanwhile, The European Union came the second, followed by China Thereby, it could be said that tax policy works quite effectively to tempt more FDI enterprises into Vietnam 2.3.1.3 Job creation FDI firms have contributed substantially to create employment for the local country with its establishment of production facility or subsidiaries That FDI firms hire labour force in Vietnam leads to a drop in unemployment over a period of time Particularly, local factories create jobs for low level workers in rural areas, simultaneously, FDI corporations can recruit high educated labour for management positions Therefore, the standard of labour force in Vietnam is improved and workers have chances to gain experience and knowledge from developed countries Not to mention, employment wage of FDI enterprises is inclined to be higher than that of domestic enterprises As a result, their quality of life becomes better 2.3.1.4 Spillover effects FDI firms gain benefits from the host country and vice versa Domestic firms can raise their production efficiency by techonology They can imitate and innovate the production process by improving the allocation of resources in the industry The presence of MNCs or TNCs urges domestic corporations to look for new and advanced technologies if they not want to be laggards Domestic firms also have learned management skills and knowledge from FDI Additionally, the government has reduced many kinds of taxes with an aim to attracting FDI for many years FDI enterprises benefit from a reduction of corporate income tax, excise taxes and tariff For that reason, Vietnam has been a destination for foreign investors recently The competition between the domestic and FDI firms has become more 13 severe Domestic enterprises, therefore, have to continually catch up with FDI enterprises and look for their own advantages concerning human capital, patents, technologies, reputation and so on it is, somehow, admitted that FDI firms are the leverage of domestic firms 2.3.2 Negative aspect Tax incentives policy, besides, brings about the increase of FDI enterprises in Vietnam, it also gives disadvantages in some aspects as below: Firstly, GDP growth and export value increased steadily during 2014-2017 but the proportion of domestic enterprises was less contributive FDI firms have played a chief role in important industries such as: electrical equipment, charcoal, cement and so on Meanwhile, domestic firms had slowly followed by It means Vietnam has still relied much on FDI enterprises Secondly, that foreign investment fell into Vietnam market gave rise to a decrease in traditional jobs Many rural lands were withdrawn for prodution facility of FDI enterprises and it constrained the development of conventional jobs Moreover, some FDI firms have had a tendency to exploit cheap labour force in Vietnam instead of training Thirdly, many FDI enterprises have exploited ineffectively the natural resources and caused environment pollution The consequences of pollution may be unimaginable in the future if Vietnam government has no severe control to FDI firms Fourthly, tax incentives policy makes a loss in national budget FDI firms are the beneficiaries of this loss Not to mention, some FDI firms have negative behaviors like avoiding financial obligations and creating unfair competition with domestic enterprises Through above evaluation, it is noted that tax incentives policy has both positive and negative effects on foreign direct investment into Vietnam It impacts directly on attracting FDI enterprises and indirectly on these listed aspects 14 III Suggestions of effectively attracting FDI into the industry in Vietnam In the globalization age, foreign direct investment (FDI) has played an important role in the socio-economic development of the country However, the practice also shows that the attraction and use of FDI are facing the limitations, requiring new solutions to bring good results in this area in the future 3.1 For the government In the coming time, the 4.0 revolution will have a great impact on all laws, economy and particularly, the industry Therefore, priority should be given to attract FDI in a number of high-tech industries, such as information technology, electronics, Internet (IoT), artificial intelligence (AI), virtual reality (VR), virtual reality interaction (AR), cloud computing, large data analysis (SMA), mechanical manufacturing, automation, biotechnology, new materials, education and training high quality human resources, research and development, community health care In addition, it is necessary to attach greater importance to the investment of the world's leading economic groups (MNCs, TNCs) in the high tech industry sector so as to create new products of high added value, high quality and competitiveness in the world market In order to attract quality projects that meet the objectives and requirements mentioned above, we need to implement well the following solutions: First of all, the government must improve the legal system, policies related to the investment requirements, a framework for transparency, facilitation for both domestic and foreign investors and competitiveness with other countries in the region At the same time, the authority should enhance institutions and policies to interest hi-tech projects and prevent poor quality projects Second, the government should continue to improve the infrastructure and human resources quality by mobilizing all resources to implement the breakthrough strategy on building synchronous infrastructure Accordingly, the Ministry of Planning and Investment (MPI) will coordinate with ministries, sectors and localities to propose comprehensive solutions to ensure the implementation of these plans such as: infrastructure investment, electricity supply, raw materials, human resources 15