Luận văn thạc sĩ luật học: Improving Vietnamese legislation on foreign direct investment incentives in accession to World Trade Organization

19 2.2.4.1 Bilateral Agreements on the Promotion and Protection of Investments 20 2.2.4.2 Vietnam-United States Bilateral trade Agreement-Program on Investment relation Development 20 2.

HANOILAW UNIVERSITY LUND UNIVERSITY

11 Background 4 1.2 Purpose 6 1.3 Limitation 6 1.4 Previous Research on Vietnamese legislation on encouraging FDI 7 1.5 Material and Method 7 1.6 Disposition 8 2.1 Background on FDI 9 2.1.1 General definitions of FDI 9 2.1.2 Contribution of FDI to Vietnam’s socio-economic development 11 2.2 FDI Incentives 14 2.2.1 Definition of FDI incentives 14 2.2.2 Main types of FDI incentives 15 2.2.3 Signification of FDI incentives 18 2.2.4 Encouraging FDI in the bilateral-multilateral agreements which

Vietnam has signed or participated 19 2.2.4.1 Bilateral Agreements on the Promotion and Protection of

Investments 20

2.2.4.2 Vietnam-United States Bilateral trade Agreement-Program on

Investment relation Development 20 2.2.4.3 A framework Agreement on ASEAN investment area 22 2.2.4.4 Asia — Pacific Economic Cooperation (APEC) 24 2.2.4.5 Asia-Europe Meeting (ASEM) 24 2.3 FDI incentives issue in WTO’s context 25 3.1 The WTO Agreement on Trade Related Investment measures 29 3.2 Vietnamese legislation on FDI incentives 32 3.2.1 Introduction 32 3.2.2 The fiscal incentives 33 3.2.2.1 Preferential provision on Corporate Income Tax 33

3.2.2.2 Preferential provisions on Import-Export Tax 393.2.2.3 Preferential provisions on Value Added Tax (VAT) 413.2.2.4 The provision on Foreign Exchange Incentives 413.2.3 Financial incentives 423.2.4 Other FDI incentives 423.2.4.1 Preferential provision on exemption from and reduction of land rent 423.2.4.2 The provisions on land-used rights

3.2.4.4 Preferential provisions for enterprises manufacture good-export

and perform local content requirement 45

4.1 Indispensability to improve the Vietnamese legal framework on FDI incentives in accession to WTO 47 4.2 Some principal orientations to improve Vietnamese legislation on FDI incentives 51 4.3 Some solutions to improve Vietnamese legislation on FDI

incentives in accession to WTO 51 4.3.1 To continue economic and investment restructuring, and

strengthen foreign investment inducement 51 4.3.2 Building a legal foundation for both domestic and foreign

enterprises, creating a level competition environment for

enterprises from ail economic sectors 52 4.3.3 Eliminated investment measures which are inconsistent with

the TRIMS Agreement 55 4.3.4 To continue develop a uniform system of markets, improve

macro-management tools in the direction of trade and

investment liberalization 56 4.3.5 To improve investment procedures and enhance the efficiency

of State management of foreign investment 57

4.3.6 To improve the dispute settlement mechanism, strengthen

measures to ensure foreign investment activities 58 4.3.7 To improve investment procedures and enhance the efficiency

of State management of foreign investment 58

4.3.8 Transparency and providing information completely and timely

for foreign investors 59

In 1986, as a result of 10 years of economic stagnation and decline,

the Vietnamese Government committed itself a new policy of reform, the

core of which is the liberalization and deregulation of the economy, with a

strategic shift towards private sector development and agricultural reform.Vietnam also recognizes that foreign direct investment (FDI) can play role

in its national economic development It is true that FDI in Vietnam has

already contributed to helping sustain the growing pace of economic

development and the industrialization program by importing infrastructure

improvements, increases in export trade and the opening up is new markets’.

At the same time when Vietnam began to shift from a centrally planned to amarket economy, its first Foreign Investment Law was introduced inNovember 1987.Up to now, it has been revised fourth time in 1990s, 1992s,

1996s and 2000s Vietnam always pays attention to FDI incentives policy in

order to make the investment environment more attractiveness and

competitiveness

Besides, in recent years, Vietnam has signed and participated many

multilateral-bilateral investments To implementing the commitments inthese international agreements require Vietnam reform legislation in general

and legislation on FDI incentives in particular

Moreover, in the international economic integration trend, Vietnamrecognized the substantial role and significance of the WTO in the

development of the global economic as well as the economic growth of

individual countries Vietnam has decided to apply for WTO member and inthe WTO accession Vietnam must continue improving legislation on FDI

incentives to conform to the WTO requirements This thesis concerns

research and analyse the Vietnamese provision on FDI incentives and theFDI incentives in WTO context Therefore, it finds out some solutions toimproving Vietnamese legislation on FDI incentives in the accession to

WTO

' Truong Trieu Duong Trade and investment in Vietnam towards deeper intearation into

the region and the world International Law Conference on ASEAN legal Systems and

Regional Integration (page 2) See http://www.asia-europe-institute.org.

In preparing my work, I feel greatly indebted to my supervisor

Christina Moell I would wish to register my special immeasurable thanks

and appreciation to her She is so kindly and always sent me her warmly

encouragement, guided me with valuable instructions and comments

My thanks are due to my Vietnamese supervisor Bui Ngoc who always extended his cooperation and kind guidance, whenever I need

Cuong-I want to send a lot of appreciation to all my teachers who imparted

me valuable knowledge and broadened my vision

I would like to thanks the Staff at library of faculty of law of LundUniversity who help me enthusiastically look for the material resources for

Lastly, I would like to thank my family Thanks to my family s’encouragements, specially my small daughter, I have come over aildifficulties to finish my thesis

Association of South - East Asian nation.

Asia — Europe Meeting

Asian free Trade AreaASEAN Investment Area

ASEAN-Pacific Economic Cooperation

Business Corporate Income Tax-operation Contracts

General Agreement on Trade in services

General Agreement on Tariff and Trade

Foreign direct investment

Washington Convention on the settlement of disputes

Industrial zones and exports processing zones

Trade Facilitation Action Plan

Investment Promotion Action Plan

International Monetary FundMultilateral Agreement on Investment

Multilateral Investment Agreement

Trans National Corporations

United Nation Conference Trade and Development

Value-added tax

World Trade OrganizationWorking Party

1 Introduction

1.1 Background

Nowadays, the capital flows often move not only from the developed

countries to developing countries but also between the developed countries

The liberal movement of foreign direct investment (FDI) is an integral part

of an open effective and competitive international commercial andeconomic system FDI is also an essential element of the broader agenda ofmultilateral regional and bilateral trade and investment liberalization and an

important driver of development and growth for the world’s developing

countries” FDI can play an important a significant role in developmentprocess of host economies In addition to capital inflow, FDI can be a

vehicle for obtaining foreign technology, knowledge, managerial skill and

other important inputs, integrating into international marketing, andimproving the international competitiveness of firms and the economicperformance of countries In general, developing countries and economic intransition differ from developed countries with regard to the role and impact

of FDI in their economies.’ Recognition the FDI role, each nation has ownthe policy to make attractive environment more and more There are manyelements participate in to create an attractive investment environment such

as infrastructure, labour market, trade policy, material resources, legislation.One of the most important elements, which have deep impact in the foreigninvestor’s decisions are FDI incentives Most developed countries offerlocation incentive packages to both domestic and foreign investor.Developing countries also offer tax breaks and location packages to attractforeign investor’.

In the WTO context, there are some agreements that touch on foreigninvestment such as General Agreement on Trade in Services (GATS),Agreement Subsidies and countervailing measure (SCM), Agreement Traderelated Investment measures (TRIMS) The two Uruguay agreements thatare germane to investment incentives are SCMS and the TRIMS Althoughthe SCMS is widely considered to have strengthened previous GATT rulesconcerning subsidies, its relevance to investment has been generallyoverlooked, yet rule on subsidies can affect as well as trade The relevance

to investment in TRIMS agreement is obvious, but is has been widelydismissed as inconsequential because it seem not to involve any

? Australian chamber of commerce and industry :/nvestment in the WTO: filling the gap(page 2) See http://www.acci.asn.au/text-fills/issues

papers/trade/WTO%20Filling%20filling%20the%Gap%20.March%202004_IDE 47.pdf

” UNTACD (2003), The development dimension of FDI: policy and rule-making

perspectives (Page 9) New York and Geneva 2003 United Nations Publication Sale NoE.03.11.H.D22.

* UNTACD (2003) The development dimension of FDI: policy and rule-making

perspectives, (Page 9)

commitments that were not already embodied in earlier GATT provisionsconcerning trade, yet the TRIMS agreement is pertinent to incentivesbecause they are often linked to performance requirement’ Thus, TRIMS

Agreement is a first step trying in WTO for encouraging FDI The mainprinciple of the WTO Agreements concerning is the non-discriminationbetween foreign investors and domestic investors

In Vietnam, the renovation process of its economic (called Doi Moi)

started in 1986 It was only one year after the implementation of Doi Moi

policy the Sate of Viet Nam issued the Law on Foreign Investment This isthe first Law to be built on the basis of a policy on door opening andintegration into the world and regional economic Up to now, it has been

revised four times in 1990, 1992, 1996 and 2000 The introduction of thisLaw on Foreign direct investment was a landmark in the development ofVietnam’s foreign economic relations Like many developing countries,

Vietnamese Law on FDI provides FDI incentives in order to attract FDI

The flexible and attractive regulations of the Law, along with the legal

system policies concerned have created a favourable environment forVietnam to induce and use efficiently foreign investment capital The FDIsector has quickly developed, become a dynamic force making importantcontribution to the economy The fact shows that, the FDI has contributed

important role to Vietnam’s socio-economic development It has supplied

and important source of capital for economic development process,contributing to mobilizing and enhancing the efficiency of the availabledomestic sources It also creates favourable conditions for Vietnam toabsorb advanced technology for enhancing the technological capacity of theeconomic The policies to encourage foreign investment into labour-intensive industries have had remarkable contributions to jobs creation,training skill, and improvement of the living conditions of the employments

Moreover, FDI have contributed to expanding external relation, creating

conditions for Vietnam to actively integrate into the regional and world

economic

In keep with the building and gradually improving the legal systemand policy on encouraging FDI, Vietnam in recent years have signed orparticipated in to various multilateral and bilateral agreements on foreigninvestment which has been considered an inseparable part in Vietnam’scomprehensive for FDI encouragement For example, bilateral agreement

on investment encouraging and protection, the Vietnam-US bilateral TradeAgreement, Agreement Establish ASEAN Investment Area But comparewith other countries in areas, the FDI flows into Vietnam is lower rate thanother countries, special Thailand China, Malaysia, Indonesia On the otherhand, almost countries in region always promoted their FDI incentivespolicy to attractive FDI Thus, it requires Vietnam to improve legislation onFDI incentives in the competitive attractive FDI context for purposesencouraging foreign investor invest into Vietnam

Moreover, Vietnam recognized the substantial role and significant ofthe WTO in the development of the global economy as well as the economic

° ThomasL.Brewer and Stephen Young Investment Incentives and the InternationalAgenda The world economy 1997 (page 180).

See http://www.blackwell-synergy.com/links/doc/10.111/1467-9701.0065/abs.

growth of individual countries Vietnam has decided to apply for WTO

membership with a view to expanding its economic, trade and investmentties with other member, reflecting a firm resolve to continue the process ofintegration of Vietnam’s economy in to the world trading system Vietnam

is committed to upholding the principles of the WTO as the basis for its

trade policies, and is revising its legislation to adapt gradually to the rules

and principles of the WTO The Vietnam’s accession to WTO gives many

opportunities but also difficulties and challenges One of the most important

problems is that Vietnam must improve Vietnamese legislation on FDIincentives in order to adapt WTO Agreement requirements

For all of reasons that are mention about, I decided chose the topic:

“Improving Vietnamese legislation on foreign direct investmentincentives in accession to WTO” for my thesis

1.2 Purpose

The purpose of thesis is to find the answer of this mainly question:

how to improve Vietnamese legislation on FDI incentives in accession toWTO The thesis mention background on FDI incentives such as: definition

of FDI, role of FDI, definition of FDI incentives, main types of FDIincentives, why use them? It mainly concerns research the WTOprovisions on FDI incentives, the principle of non-discrimination, subsidies

and performance requirements It also research Vietnamese legislations on

FDI incentives Through analyse the provisions on tax incentives,exemption from and reduction price of land rent, financial incentives andother incentives, this thesis makes evaluation about the reality, advantageand disadvantage which have exit in those provisions Bases on analyse andevaluate, the thesis find out some possible solution to improve Vietnameselegislation on encouraging FDI in accession to WTO

1.3 Limitation

This thesis researched and evaluated Vietnamese legislation on FDIincentive through analyse provisions on fiscal incentives, financialincentives and other incentives Therefore, the doctrines of generalinvestment, Vietnamese legislation on encouraging foreign indirectinvestment or encouraging domestic investment will not be examined.Issues that are interesting but not immediate concern of this discussion, such

as form of investment, time investment, capital and organization ofenterprises will be left out The discussion directed towards materialproblems related to Vietnamese legislations on encouraging foreign directinvestment Procedural matter will not be discussed

In the WTO context, there are many Agreements This thesis only

mentions about the Agreements that touch on foreign investments such asGATS, Subsidies and Countervailing, and TRIMS This thesis concernsanalyse the TRIMS Agreement, describes situation of negotiation andimplementation of TRIMS by Vietnam and find out some possible solutions

to improve Vietnamese legislation on FDI incentives adapt WTO

requirements It may also mention about some various multilateral and

bilateral agreements on foreign investment that State of Vietnam has signed

or participated in to such as the bilateral agreement on investmentencouraging and protection, the Vietnam-US bilateral Trade Agreement,Agreement ASEAN Investment Area Other Agreement of Association ofSoutheast Asian nations (ASEAN), Asia-Pacific Economic Cooperation(APEC) or Asian Europe Meeting (ASEM) will not be discussion

1.4 Previous Research on Vietnamese

legislation on encouraging FDI

Encouraging foreign investment is not completely a new

phenomena, however not many studies have been made on this topic The

author Bui Giang Nam (2000) has studied “Encouraging and protect

Foreign direct investment in Vietnam” This research is limited only in

Vietnamese legislation The author Duong Nguyet Nga (2002) approachedforeign direct investment in aspect “Law on Foreign direct investment in

Vietnam with the establish ASEAN investment area’ The research of Do

Nhat Hoang (2003) has given background to foreign direct investment in hisdissertation “Origin and development of foreign direct investment inVietnamese legislation” The author Nguyen Khac Dinh (2003) researchedforeign direct investment by his dissertation: “Improving Vietnameselegislation on foreign investment in the investment unification trend’.This study is only concerning analyse the relationship between foreigndirect investment and domestic investment The author Do Thi Ngoc (2003)has different approach in foreign investment when she mentions above “ Thesettle of foreign investment disputes in Vietnam” But, there have not gotthe research direct concerning about Vietnamese legislation on encouragingforeign direct investment in accession to WTO

1.5 Material and Method

Encouraging FDI policy is an important part of Vietnameselegislation The resources used consist of the Constitution — highest law,mostly Law on Foreign investment in Vietnam and its implementationdocument (such as decrees, circulars) Many articles are also used fromWebsite of Ministry Planning and Investment (www.mpi.gov.vn), TheWebsite of Ministry of Finance (www.mof.gov.vn): The Website ofMinistry of Trade (www.mot.gov.vn); The Website of World TradeOrganization (www.WTO.org); and some Website connect such aswww.unctad.com: www.goolge.com.vn; www.oecd.org; www.usvtc.org

Some articles used from Vietnamese law journals, journal of World TradeOrganization

From the FDI incentives issue, this thesis seeks to examine the status

of foreign direct investment The object of examination is how Vietnameselegislation on FDI incentives conforms to WTO requirements

Consequently, a regulation-oriented approach has been chosen as model of

method It means that the Vietnamese legislation on FDI incentives and the

WTO agreements on foreign investment will be examined individually

through a descriptive and above all analyse method throughout the main

chapters of this thesis

Additionally, this thesis also used analyses and synthetic methods inorder to present the main point Finally, this thesis aims to evaluate howimprove Vietnamese legislation on FDI incentives in order to suitable with

WTO requirements So, a comparative method will be used not with the

main purpose to highlight difference and similarities but in order to advance

the discussion and underline the problem of the subject as well as itssolutions

1.6 Disposition

In order to answer the main question how to improve Vietnameselegislation on FDI incentives in accession to WTO, this thesis has beendivided following main chapter:

The Chapter 2 will give an overview on FDI incentives, the

definition of FDI, role of FDI, the definition of FDI incentives, main typesFDI incentives, why use them and give the picture of foreign investmentissues in WTO context

The chapter 3 aims to examine and concerns analysis the TRIMSagreement of WTO and the FDI incentives policy in Vietnamese legislation

The chapter 4 will evaluate the implementation of TRIMS byVietnam, mention above the opportunities and challenges for Vietnameselegislation in accession to WTO The thesis also finds out some solutions toimprove Vietnamese legislation on FDI incentives in order to suitable withWTO requirements on foreign investment sector

Finally, a conclusion will sum up relevant observations made andwill present and overall analyse of Vietnamese legislation on FDIincentives

2 Overview on foreign direct

investment incentives.

2.1 Background on FDI

2.1.1 General definitions of FDI.

Nowadays, FDI is as the motor key to improve the nation’s

economic rapid growth Conceptually, the key feature that distinguished

FDI from other capital flows is the intention to exercises control over a firm

The most common definition of FDI is related to the compilation Balance

on payment accounts and has been originally provide by IMF FDI is

normally defined as ownership together with some form of control of abusiness or part of a business in another country: FDI is made to acquire alasting interest in a enterprise operating in an economy other than that of

an investor, the investor’s purpose being to have an effective choice in the

management of the enterprise’ Direct investment comprises not only theinitial transaction establishing the relationship between the investor and theenterprise but also all subsequent transactions between them

The OECD endorsed this definition in 1996, It is based on the ideas

of lasting interest and influence on management FDI reflects the objective

of obtaining a lasting interest by a resident entity in one economy direct

investor in an entity resident in an economy other than that of the investor(“direct investment enterprise”) The lasting interest implies the existenceenterprise Direct investment involves both the initial transaction betweenthe two entities and all subsequent capital transactions between them and

among affiliated enterprise both incorporated and unincorporated In theincorporated or unincorporated, a direct investor owns 10 percent or more ofthe ordinary share or voting power The 10 percent ownership threshold hasbecome the practical guideline for determining the existence of a directinvestment relationship An effective voice in the management, asevidenced by an ownership of at least 10 per cent, implies that the directinvestor is able to influence or participate in the management of anenterprise The required quantum of control may vary depend on whetherownership in the enterprise is concentrated or diffused ’.

FDI may be undertaken by individuals as well as business entities and hasthree components: equity capital, reinvested earnings and intra — companyloans

® International Monetary Fund (IMF) 1977, Balance of payments Manual 408 (4th ed.1977)

Washington, DC:IMF ( page 136).

7 Compare OECD 1996, Benchmark definition of foreign direct investement (page 7-8) (3th

edition 1996) www.occd.org/dataoecd, 10/16/2090 148 pdf

-Equity capital is the foreign direct investor’s purchase of shares of and

enterprise in a country other its own

-Reinvested earnings comprise the direct investor’s share (in proportion to

direct equity participation) of earning not distributed as dividends byaffiliates or earnings not remitted to the direct investor Such retained profits

by affiliates are reinvested

-Intra — company loans or intra - company debt transactions refer to short —

or long term borrowing and lending of funds between direct investors

(parent enterprises) and affiliate enterpriseŠ So the key determinant 1s that

the foreign investor has a degree of management control over the business

In the WTO context, there were some agreement touch on foreigninvestment but it is only GATS Agreement mentioned about FDI definition

as a Commercial Presence The insertion of the commercial presence in

GATS, as a complement to the movement of persons (movement of naturepersons and products (cross-border supply), has been widely acknowledged

as a success, especially because the multilateral liberalization of investmentfor non-sectors has proved to be a knotty topic to unravel within the WTOnegotiation and also at OECD level In the GATS, Commercial presence is

defined as “any type of business or professional establishment, including

through the constitution, acquisition or maintenance of a juridical person, or

the creation or maintenance of a branch or a representative office within theterritory of a Member for the purpose of supplying a service”

It is necessary to distinguish FDI and foreign portfolio investment

Portfolio investment is the supply of capital (money) from a lender (for

example a bank) to a Borrower (for example a manufacturing company or

railway company) in an agreement that requires borrower to pay back the

loan, plus interest (the rate of return to the lender) over a number of years

Both of them are the forms of international investment but the relatively

long — term nature of FDI is often distinguished from portfolio investment

where a foreign investor purchases securities or debt investment but withoutthe desire to control or manage the domestic frm °.

At the out set of the process of attracting foreign investment,Vietnam applied a caution regulation on admittance of foreign investmentresource As defined under the Law on foreign investment in Vietnam,foreign direct investment means the bringing of capital into Vietnam in theforms of money or any asset by foreign investors for the purpose of carrying

on investment activities in accordance with the provisions of this Law’.The Law on foreign investment provision related to the legal forms offoreign owned enterprises further provision that the foreign ownedenterprises shall be established in the forms of a limited liability companyand shall be a legal entity in accordance not be able a legal entity inaccordance with the law of Vietnam Subsequently, it can be interpreted that

° UNCTAD, World Investment report (2003) FDI policies for Development: National and

International Perspectives (page 231-232).

? See Art.XXVIII of GATS Agreement

'0 IMF, Balance of payments Manual 408 (4th ed.1977) page 6 (In contract, portfolio

investors are primarily concerned about the safety of their capital, the like hovd of anappreciation in its value, and the return that it is bringing them They will evaluate theprospects separately and may often shift their capital with chargesin these prospets”)

!! Law on foreign investment in Vietnam 2000 Art 2

10

foreign investor shall not be able to set up their business presence in

Vietnam in Vietnam under the form of a joint stock company, and as

characterised by its limited liability under the Vietnam law, the foreignowned enterprises shall not be able to issue its shares and bonds to thepublic So, the definition of FDI, according to Vietnamese law on foreigndoes not include foreign investment in to the stock markets However, underall signer Agreement on the Promotion and protection of Investment and the

Vietnam-US bilateral Trade Agreement, Vietnam has accepted broaderscope of the protected investments, including shares, stock, and other forms

of equity participation, and bonds, debentures, and other forms of debt

interest in a company

For all mention about, we can conclude that: FDI is one of an

important forms of international investment therefore the foreign investorbrings capital in to the host country to establish enterprise and exercises

direct control, management over this enterprise

2.1.2 Contribution of FDI to Vietnam’s economic development

socio-On the whole, the Vietnam’s policy on foreign investmentinducement, for the past 15 years, has brought in important achievements,activity contributing to the fulfilment of the socio-economic objectives, andcreating important initial foundations for national industrialization andmodernization

Firstly, the FDI has supplied an important source of capital for

development investment, contributing to mobilizing and enhancing the

efficiency of the available domestic sources With a rising ratio of

implemented capital year after year, FDI has provided an important source

of capital for development in Vietnam Specifically, FDI accounted for 25%

of the total capital in Vietnam in the 1991-1995 period, 24% in the

1996-2000 period and 1.8 times higher than of the 1991-1995 period For 2 yearsonly, 2001 and 2002, FDI accounted for 18.5% of the total social capital fordevelopment investment” Through FDI capital, many of the domesticresources have been mobilized and used efficiently, and at the same time,the State has been able to actively allocate capital for socio-economicinfrastructure development and invest in regions that have faced with socio-economic difficulties

The ratio of FDI contribution to GDP was on a gradual rise yearafter year, from 3.5% in 1993 to 13.3% in 2000, and over 13% year in 2001

and 2002

In the 1996-2000 period, the FDI sector remitted to State budged1.49 billion USD, up by 4.5 times as compared with the previous 5 year, and

accounted for, on average, 6-7% of the total State budget revenue (this

figure would be 20%, if oil and gas revenue was included) For 2001 and

2002 only, the contribution of the FDI sector to State budget went up by

2 See http:/'www.usvtc.org/Trade%20 statitics/foreign -direct-investment-to-vie.htm Data

on this site have been complied by U.S-VN Trade council from FDI statistic of the

Vietnam’s Ministry of Planing and Investment.

i]

115% and 116%, respectively, as compared with the same period However,

this contribution ratio of the FDI sector is still not high, since in the first

year of their operation, most of FDI enterprises enjoyed preferences (tax

reduction or exemption)".

The performance of the FDI sector has had an active impact on themajor balances of the national economic Along with the developmentprocess, contribution of the FDI sector to the State budget has beenincreasing, which in turn created favourable conditions for the State to

balance budget, reduce budget deficit, and improve the current account

balance, and balance of payment

Secondly, policies to encourage export-oriented foreign investmentshave created favourable conditions for Vietnam to access and expand itsmarkets in the world and enhance its competitive edge

In the recent year, the export value of the FDI sector (excluding oiland gas) has been rapidly increasing, from 1.12 billion USD in the 1991-

1995 period to 10.6 billion USD in the 1996-2000 period, that is 8 times

higher, and accounting for 3.36 billion USD in 2001, and 4.5 billion USD in

2001, accounting for over 25% of the total export value of the country,

Noteworthy is that the export value of the FDI sector occupied a

considerable ratio to Vietnam’s, regarding the export of some key items

(42% of footwear export, 25% of garments and textile, and 84% of

electronics, computer and supplies) In addition to this, the export

performance of the FDI sector has contributed to expanding the domesticmarket, strengthening the development of the services sector, especially

hostelry, tourism, foreign exchange services, and creating a bridge fordomestic enterprises to engage in direct, on-spot export activities The

operation of foreign invested enterprises in Vietnam has also createdmodern business and management skills/models and at the same time

promoted Vietnam enterprises to renovate their management skills, and

upgrade their technologies for the sake of competitiveness enhancement

Thirdly, Vietnam's policies to encourage foreign investment into

areas of preferences, regions of socio-economic difficulties and industrial

zone have had remarkable contribution to economic restructuring in the

direction of industrialization and modernization

Facts shower that, in the early years, FDI projects mainly focused onreal estate business (building of hotels and offers for lease ), they were, inthe 1996-2000 period, shifted to production industries with a more rationalstructure, focusing mainly on production, export-oriented processing andinfrastructure development industries

Specifically, there was a strong shift of FDI capital in the servicessector, with an increasing ratio in the structure of foreign investment inVietnam State showed that the number of FDI projects in real estate in the1996-2000 period went down by 52%, while that of FDI projects ininfrastructure building (telecommunications, technical services ) rose by

1.4 times, as compared with the previous 5 years In production, FDI project

have, till present, occupied 35% of the total industrial output with an

average growth rate of over 20% per year, contributing to bring the national

3 See http.) www.usvtc.ore/Trade%o20 statitics/foreign -direct-investment-to-vie.htm

12

industrial growth rate to 11-13% per year Also, the FDI sector has created

numerous new industries and products, and occupied a high proportion in

the total output of some major industrial items Up to present, the FDI sector

has made 100% output of crude oil, automobiles, refrigerators,

air-conditioners, computers and office equipment; 60% of laminated steeloutput, 28% of cement, 35% of electronics, and 76% of accurate medicaltools In the light industry, the FDI sector accounted for 55% of the totalfibre output, 30% of cloth of various types, 49% of footwear, 18% ofgarment, and 25% of foodstuffs and drinks

In particular, the policy to encourage foreign investments in to

industrial zones and export processing zones (hereafter referred as IZs) has

an important contribution to the distribution of economic regions, enhancing

export capacity, improving investment efficiency and, at the same time,

creating conditions for narrowing the labour utilization Up to present, 76 IZs

have been established in Vietnam, 18 of which were built from FDI capital

Fourthly, policy to encourage foreign investments in technological

transfer has created favourable conditions for Vietnam to absorb advanced

technologies for enhancing the technological capacity of the economy

In the recent period, many new and modern technologies have been

imported into Vietnam’ through FDI _ project, especially in

telecommunications, oil and gas, chemical, electronics, computer,automobiles and motorbikes These technologies have created animportant turning point in the development of some cutting-edge economicareas for the country In general, technologies used in FDI projects were of

similar or higher technological level than advanced technologies used in

Vietnam, and were used widely in all regional countries The problem of

environment protection has also been paid much attention by FDI

enterprises

Fifthly, the policy to encourage foreign investments into

labour-intensive industries have had remarkable contributions to jobs creation,

hunger eradication and poverty reduction, improvement of the living

conditions of the population and creating favourable conditions for human

resource development in Vietnam By the end of 2002, the FDI sector

created 665 thousand direct jobs, and thousand of indirect jobs that providerelevant services The speed of labour attraction into this sector increasedyear after year, for example, from 69 thousand employees in 2001 (up by

19%) to 175 thousand employees in 2002 (up by 39%)'* Employees of the

FDI sector in the past 2 years were mainly involved in processing industries

A considerable ratio of employees working in the FDI sector has beentrained to improve their management, scientific and technological skills sothat they can gradually substitute foreign experts, or enhance theirprofessional skills and working attitudes in responding to the new workingmechanism Foreign investments have also helped improve the income of aconsiderable number of employees and enhanced the purchasing power ofthe population

See http://www.usvte.org/Trade%.20 statitics/foreign -direct-investment-to-vie.htm

Lastly, foreign investments have contributed to expanding external

relation, creating conditions for Vietnam to actively integrate into regional

and world economy

Today, business corporations and groups from 74 countries and

territories, of these there are 80 multi-national corporations (TNCs) among

500 largest TNCs in the word, have invested in major/ important industries

of Vietnam, such as oil and gas, telecommunications, automobiles,electronics, information technology, chemicals, beverages, banking and

insurance Foreign investments in general and the participation of these

corporations in Vietnam in particular have contributed to dismantling trade

barriers and expanding external economic relation to enhance the position

and strength of Vietnam in the process of economic integration

FDI is a sensitive field and FDI flows much more depend on the

host country’s attractive policy Even some recent years ago, FDI flows

come in to Vietnam sometime reduce because of many different causes but

it can negative the contribution of FD] in Vietnam’s economic Therefore,

door open economic for attractive FDI capital, science-technology,

managerial skills are effective measures for development economic in

industrialization and modernization process in Vietnam

2.2 FDI Incentives

In today’s competitive global economic world, the establishment of

attractive and competitive environment for FDI has become a necessity.Thus, attractive FDI has become a policy priority in many countries bothdevelop and developing Many countries introduced different incentives —

based measures to set the conditions right to harness and promote their

comparative and competitive advantages Restrictions on FDI have becomeincreasingly and the investment liberalisations regime with many provisions

on FDI incentives was established For government, this has enhanced thesignificance of incentives as a tool policy in the global competition to attractFDI and benefit more from it’.

2.2.1 Definition of FDI incentives

There are not many investments international agreements contain thedefinition of FDI incentives The definition of an incentive can be verybroad, covering virtually any assistance by a country to investors or it can

be narrower, covering only specific types of assistance to investor The

UNCTAD (1996) on Incentives and FDI has given a definition of FDIincentives which was accepted in popular: “Incentives are any measurable

economic advantage afforded to specific enterprise or categories ofenterprise by (or at the direction of) a government, in order to encouragethem to be have in a certain increase the rate of return of a particular FDIundertaking, or to reduce (or redistribute) it costs or risks They do not

include broader non-discriminatory policies, such as infrastructure, general

! UNCTAD (2004) Incentives NewYork and Geneva 2004.United Nation PublicationSales No.E.04.II.D6 page 9

14

legal regime for FDI, the general regulatory and fiscal regime for business

operations, the free repatriation of profits or national treatment While

these policies certainly bear on the location decision of TNCs, they are not

FDI incentives”'6

Incentives to attract FDI in to the host state are often linked toperformance requirements by host states In other words, they act as an

economic carrot to sweeten the imposition of the stick'’ On the one hand,

the host countries give measurable economic advantage afforded to

investors On the other hand, they also give performance requirements

Performance requirements may cover all aspects of investment They can be

imposed at the point of FDI entry and subsequent expansion or, as is

increasingly the case, as a condition for the provision of some kind of

advantage In UNCTAD parlance, performance requirements are one kind

of so called “ host country operational measures” with the main other

measures being various restrictions ° They may be local content

requirement, trade — balancing requirements, Foreign exchange restrictions

related to the foreign — exchange inflows attributable to an enterprise,

transfer technology requirement, employment requirements However, in

the liberalization trade and investment trends, the performance requirements

treat as the obstruction of FDI flow It requires countries must reduce and

eliminate such performance requirements in order to suit with the WTOagreements on Trade Related Investment Measures and the competitiveattractive FDI context in the world

2.2.2 Main types of FDI incentives

According to UNCTAD (1996) more than 100 countries providedvarious FDI incentives already in the mid-1990s and dozens more have

introduced such incentives since then-few countries compete for foreign

investment without any form of subsidies However, there is no uniformdefinition of what constitutes an FDI incentive In general, FDI incentivescan be distinguished three main types: fiscal incentives, financial incentivesand others incentives

Fiscal incentives continue to be the most widely used type of FDIincentives in the 1990s According to UNCTAD (1996) out of 103 countriesreviewed, comparable data were available on 93 countries The range offiscal incentives offered to foreign investors in these countries seem to haveincreased in all regions since the mid — 1980s".

'® UNCTAD (1996) Incentives and FDI, NewYork and Geneva, 1996 United Nation

publication Sales No E96.II.A.6 (page 3)

'7 Jugen Kurtz.(Lecturer Law School The University of Melbourne.Australia) 4 general

Investment Agreement in the WTO? Lessons from chapter of Nafta and OEDC Multilateral

Agreement on Investment (page 16).

See http://www.ideas.repec.org/p/erp/jeanmo/p0006.htm

'8 UNCTAD(2003) FDI and performance requirements: new evidence from selected

countries NewYork and Geneva United Nations publication Sales No.E.II.D.32 (page 2)' UNCTAD (1996) Incentives and FDI, NewYork and Geneva 1996 United Nationspublication Sale No.E.96.II.A.6 (page 18)

The overall objective of offering fiscal incentives for FDI is to

reduce the tax burden for a foreign investor There are a little bit different

between fiscal incentives and tax incentives Fiscal incentives include notonly tax incentives but also some incentives, which relate to the entire taxregime applying to a TNC in a host country Tax incentives schemes can be

classified in different ways, depending on the tax base, like profit base,labour base, sales base, import-export base, invested capital base, value -

added base or other based incentives

Main types of Fiscal Incentives for FDIProfit-base: Reduction of the standard corporate income-tax rate, tax

holidays, allowing losses incurred during the holiday period to be written

off against profits earned late (or earlier)

Labour-base: Accelerated depreciation; investment and _ reinvestment

allowance

Sales-based: Corporate income tax reductions or credits based on total sales

Value-added based: Corporate Income Tax reductions of credits based on

the net local content of output; granting income-tax credits base on net value

earned

Based on other particular expenses: Corporate Income Tax reductions based

on, for example, expenditures relating to marketing and promotion

activities

Import-based: Exemption from import duties on capital goods, equipment orraw materials, parts and inputs relates to the production process

Export-based: -Output-related, e.g., exemptions from export duties;

preferential tax treatment of income from exports; income-tax reduction for

special foreign-exchange earning activities or for manufactured exports; taxcredits on domestic sales in return for export performance

- Input-related, e.g., duty drawbacks, tax credits for duties

paid on imported material or suppliers; income-tax credits on net local

content of exports; reduction of overseas expenditures and capitalallowance”?.

In addition, some incentives relate to the entire tax regime applying

to a TNC in a host country This form of incentives relate generally tospecial regimes applying to important projects The various types of taxincentives in a host country can have a different effect on the overallcorporate tax paid by a parent company, depending on the country’s tax

laws and any tax treaties between the home and host countries In general,

the FDI purposes most frequently favoured with incentives are: priorityindustries, regional development, exports or innovation and research anddevelopment, training, employment and environmental protection, throughthis feature less prominently”' The underlying purpose of fiscal incentives

is to reduce the effective tax rate applicable to a foreign investment.However, fiscal incentives alone — and, more specifically, tax holidays arenot necessarily the most important factors influencing the effective tax rate

2 UNCTAD (1996) Incentives and FDI, NewYork and Geneva 1996 United Nationspublication Sale No.E.96.II.A.6 (page 4)

“1 Judid Gergely (2003) Trend in FDI incentives ECSA - Italy (page 8)

http//www.unipv.it/cdepv/ause/up15.wp.pdf.

i6

Financial incentives involve provision of funds directly to forms to

finance new foreign investment or certain operations, or to defray capital oroperation costs The most common types include government grants,subsidized credit, government equity participation and insurance at

preferential rates

According to UNCTAD (1996) in the 1990s, financial incentives

were available to foreign investor in at least 59 countries out of 83 reviewed.For the developed countries, financial incentives continue to be particularly

important, with the bulk of these incentives being aimed at industrial and

regional development In some developed countries (e.g the Unites States)

most financial incentives are granted by state, province or city authorities

and the amounts involved, if standardized by number of employees, are

very high indeed Financial incentives appear to be less prominent in

recent years, mainly as subsidized loans, and loan guarantees and

government grants.

Beside the fiscal incentives and financial incentives, the host

countries also used some types of incentives in order to encouraging FDI.They are designed to increase the profitability of a foreign affiliate by non —financial means as subsidized dedicated infrastructure, certain subsidizedservices, market preferences and preferential treatment on foreign exchange.They have often been provided as part of a package of measures available

for enterprises investing in export — processing zones, enterprise zones or

science parks

Typically, countries offer streamlined bureaucratic control, fiscal

exemptions, prepared industrial sites and ready facilities In addition,institutional arrangements for the provision of information, consultancy andmanagement services, as well as training and other technical assistance atsubsidized prices or no cost are increasingly becoming a common form of

incentive in many countries, often focused on small firms, technology

transfer and regional problem areas

Developing and developed countries both use certain incentives totry to attract FDI but the types and frequency of in used differs somewhat.55% of developing countries but only 20% of OECD countries use taxexemption or tax holidays for FDI And 45% of developing countries butonly 5% of OECD countries use lower tax rates for FDI Accelerateddepreciation is used by 30% of the countries in each group The types ofincentives used more frequently by OECD countries are reduced local taxesand subsidized loans Moran (1998) suggest that developing countries do

not have the resources to be able to compete with the large subsidies offered

by developed countries and resort instead to tax holiday and the like”? Asageneral rule, developed countries make use more of financial incentives thanfiscal ones, because fiscal incentives are less flexible and involve more

difficult parliamentary procedures to introduce them However, this pattern

is reversed in developing countries, presumably because these countries lackthe resources needed to provide financial incentives”.

?? Timothy.J.Goodspeed.Taxation and FDI in Developed and developing countries.http//isp.gsv.edu/academics/conferences/conf 2004/goodspeed.pdf (page 10)

23 Judid Gergely (2003) Trend in FDI incentives ECSA - Italy (page 14).http//www.unipv.it/cdepv/ause/up15.wp.pdf.

Le

THU VIÊN

252.

In Vietnam, attracting FDI has been an integral part of the

Vietnamese reform process since the late 1980s It was in 1988, as the

importance of FDI in the world economy was increasing, that Vietnamintroduced its first Law on Foreign Investment in Vietnam The Law wasgenerous and attractive by FDI incentives provisions given for foreigninvestor However, the weak legal framework, the American trade and

investment embargo, and the lengthy process of approving foreign

investment projects prevented a significant rise in commitments until the

mid-1990s Since 1987 to present, the Law on foreign investment in

Vietnam has been revised four times in 1990s, 1992s, 1996s, and 2000s In

the Law on foreign investment, the State of Vietnam emphasized that “TheState of the Socialist Republic of Vietnam encouraging foreign investor to

invest in Vietnam on the basis of respect for the independence and

sovereignty of Vietnam, observance of its law, equity and mutual benefit ”**.

In general, like many other countries, Vietnam’s FDI incentives

included fiscal incentives, financial incentives and other incentives The

fiscal incentives are preferred because these can be easily granted without

incurring any financial cost at the time of their provision The used of tax

incentives for promoting FDI was one of the major strategies Like almostdeveloping countries, because of lack the funds to grants direct subsidies, sofinancial incentives are only used in some special circumstances Moreover,Vietnam continues improving investment environment such as improving

infrastructure, training employment, trade policy, FDI legislation in order to

attractive FDI more and more

2.2.3 Signification of FDI incentives

Views on the importance of FDI incentives have begun to change

during the past decade Until recently, these were a strong consensus in the

literature that FDI is mainly attracted by strong economic fundamentals Themost important are market size and income level, with skills, infrastructureand other resources that facilitate efficient specialization of production,trade policies, and political and macroeconomic stability as other centraldeterminants This hierarchy of host country characteristics largely assumedthat FDI was market seeking, and investment incentives were seen asrelatively minor determinants of FDI decisions While they might tilt theinvestment decision in favour of one of several otherwise similar investmentlocations, the effects were considered only marginal Globalisation haschanged this picture and made incentives a more important determinant ofinternational investment decisions” Many countries have increased theirincentives with the intention of diverting investment away from competinghost countries FDI incentives have a signification important directlyeffective on Foreign Investor’s decision It also becomes an indispensablypart of attractive investment environment There is overwhelming evidence

to suggest that incentives are a relatively minor factor in the location

4 Law of Foreign Investment in Vietnam (2000).Article |

25 Ari Kokko (2003) Globalization and FDI policies (page 31) See http:.;wb/nov18.worldbank.org/eutvp/web.nsf/paper+by+ Ari+Koklo/file/Ar+KOKRO.PDF

i8

decision of foreign investor relative to other location advantages such as

market size and growth, production costs, skill level, political and economic

stability and the regulatory framework The expanded used of incentives

reflects more intense competition, especially between similar andgeographically proximate location”” If one country offers incentives and

another does not, then all other things being equal, foreign investor could be

influenced in their location choices between countries ˆ” Several studied

with respect to incentives find that fiscal incentives do affect location

decisions, especially for export oriented FDI, although other incentivesseem to play a secondary role“Š.

For Vietnam, FDI incentives are important signification in attractive

FDI, contribution to make Vietnam become one of the most attractive FDI

place Up to present, 4462 FDI projects were given licenses by the

Vietnamese Government, with a total registered capital 42.06 billion USD

The speed of attractive FDI increase rapid, from 1582 billion USD (period

1989-1990) to 16.244 billion USD (period 1991-1995) and 20.768 billion

USD (period 1996-2000)’ The FDI incentives that were estimated open

and clear have attracted many the foreign investors came from 74 countries

and territories of the world invested in Vietnam Singapore is the largestinvestor with 290 projects and a registered capital of over 7 billion USDthen followed by Taiwan, Japan, Hong Kong and Korea Total capital ofthese investors alone accounted for 54.7% of the total committed FDI flowsinto Vietnam But comparative with other countries in area, the FDI flowscome into Vietnam is less than the other countries Vietnam is the last

country of the top ten destinations for FDI in developing Asia (1998-2000)

with average annual total inflows 1.5 USD billion while the rate of People’s

Republic of China is 41.6 USD billion, Hong Kong is 33.8, Singapore is

11.1, Korea is 8.0, Thailand is 5.6, Malaysia is 3.5 USD billion’ Vietnam

must learn experience from the countries which were successful in attractive

FDI and must continue improve FDI incentives policy for purpose creating

comparative attractive FDI environment

2.2.4 FDI incentives in the bilateral-multilateral agreements which Vietnam has signed or participated.

Over the past few years, along with setting up and graduallyimproving the legal and regulatory system on foreign investment, theVietnamese Government has signed and/or acceded to several bilateral and

*®UNCTAD, World Investment Report (2003) FDI policies for developments: Nationaland International persectives, UN.New York &Geneva, 2003 (page 124)

"UNCTAD (1996) Incentives and FDI, NewYork and Geneva 1996 United Nations

publication Sale No.E.96.II.A.6 (page 47)

*8 Rashimi Banga (2003) Impact of goverment policies and investment agreement on FDI

inflows India council for research on international economic relations.Working paper No

116 Core-6A, 4th floor,india Habitat Centre, Lodi Road,New- Delhi-110.003 (page 18)

See http://www.usvtc.ore/Trade%20 statitics/foreign -direct-investment-to-vie.htm

3° Asian Development Outlook 2004-FD/ in developing ASIA-Trends(page 1) Seehttp.//www.adb.org/Doccuments/Books/ADO/2004/part 03100.asp

19

multilateral investment agreements These agreements form an integral part

of the country’s legal framework for the promotion and protection of foreign

investment in Vietnam Below is brief summary of such commitments:

2.2.4.1 Bilateral Agreements on the Promotion and

Protection of Investments

To date, Vietnam has signed the bilateral agreements on the

Promotion and protection of Investment with 45 countries and territorial

regions in the world These agreement expanded the scope of the definition

from that provided under the Law on Foreign Investment and now covers,

for instance, direct investment, portfolio investment in the form of shares,

bonds, all kinds of tangible and intangible assets, intellectual property

rights, contractual rights, and other forms of participation in a company.However, except for some agreements signed after the entry into force ofthe US-Vietnam Bilateral Trace Agreement (BTA), Vietnam’s investment

commitments are limited to the granting MFN treatment, with the exception

of incentives and privileges given to investors from a third country under

the framework of a Custom Union or Regional Economic Agreement

In addition to granting MFN treatment, Vietnam committed to

implement measures to promote and protect investment in accordance with

international rules, including:

-To promote investments and investors by ensuring fair and equitable

treatment, full protection and security, and non-impairment by unreasonableand non-discriminatory measures

-To prevent expropriation of investors assets by administrative measures,except for public purpose, in a non-discriminatory manner, upon payment ofprompt, adequate and effective compensation, and in accordance with due

process of law

-To ensure foreign investors rights to repatriate capitals profits, and otherlegitimate sources incomes without delay and by convertible currencies.-To accept the right of investors to bring disputes (if any) with Stateagencies to competent courts, arbitration under the rules of UNCITRAL orICSID, or any other previously agreed dispute settlement mechanism.2.2.4.2 Vietnam-United States Bilateral trade

Agreement-Program on Investment relation Development

On July 13, 2000, after nearly five year of bargaining, the UnitedState and Vietnam announced they had signed a bilateral trade agreement(BTA) This great event has reflected effort and strives of both VN and USfor many years to completely normalise trade relations and develop

economic as well as diplomat tie of both nations The signing of BTA

Agreement has paved the way for global integration of VN with the ultimategoal of joining WTO The BTA consist of 7 chapter and 9 annexes coveringalmost international trade aspect similar to those specified in WTOcommitments including Trade in services; trade in Goods, IntellectualProperty Rights, development of Investment Relation, Transparency andright to appeal Development of investment relation is one of part of the

20

Trade Agreement (chapter IV) like a full bilateral Agreement on investment

activities to be protected between the two countries In comparison with the

Framework Agreement the ASEAN Investment Area, this chapter has abroader scope of application, covering investment in both the manufacturingand services sectors The scope of investment activities to be protectedfollowing this chapter is not only confined in direct investments but also

portfolio investment under the form of shares, bonds, tangible and

intangible asset, intellectual property right and other property and contract —

lased ones

According to BTA, two parties must apply MFN or NT conditions

for investor It means that two parties provide one another with no less

favourable treatments than those given to their domestic investors, or

investors from any third country Moreover, it also require the two parties

offer one another fair, proper and no less favourable treatments than

requirement of world conventions and not to apply any measures causing

difficulties, loss and discrimination toward the establishment and operation

of foreign investments enterprises

Through BTA agreement, Vietnam has made binding commitments

to grant MFN and NT to US investors over a certain period of time For

MEN, Vietnam does not maintain any exceptions For national treatment,Vietnam undertook national treatment exceptions for certain sector andmatters, some sector in which VN may require that an investment project be

in connection with the development of local raw material sources or sector

in which Vietnam may require that an investment project export at least80% of products®

Vietnam has committed to eliminate some of its current regulationswhich are in consistent with WTO Agreement on trade — related investmentmeasures within 5 to 7 years since the coming to effect of the Agreement

(10/12/2001) such as requirements concerning the export of certain

industrial products, development of materials sources for sugar, vegetable,

oil, milk and timber local content of automobile and motorbike production

and assembling and civil use electronics As for other specific requirements

of the Agreement, Vietnam committed to remove all the regulationsconcerning import — export balance and foreign exchange control, right afterthe coming into effects of the Agreement Moreover, Vietnam allows USinvestors to establish joint ventures or 100% foreign invested enterprise to

do business in these sectors within 3-7 year All barriers to market accessand provide US investor with NT in 8 service areas including: professional,specialized services (juridical ser vices, auditing, accounting, architecture,technical consultancy, computer, advertising, market research,telecommunications (value -— added _ telecommunication, basictelecommunication, fixed telephone, audio and visual services, financialservices (insurance and banking) heath services and tourism in Vietnam bytheir income from legal business performance Vietnam also committed toapply a regime of investment licence insurance, apply a uniform of pricesand fees of some goods and services for both domestic and FDI enterprises

3! See annex H Vietnam —United States bilateral trade Agrement

21

and create favourable conditions for business and labour recruitment

activities and transfer of technologies

It can sail that investment — related commitments in the BTAAgreement have been made, the overall objective of which is to contribute

to enhance the attractiveness, flexibility and transparency of Vietnamenvironment for foreign investment This objective is also suitable to the

direction and solutions for investment environment improvement stated in

Government Decision 09/2001/NQ-CP dated August 28/ 2001 on foreign

investment promotion and use of FDI capital in the 2001-2005 period The

full implementation of commitments in BTA Agreement also has paved theway for Vietnam accession to WTO

2.2.4.3 A framework Agreement on ASEAN

Investment Area.

FDI play an important role in the rapid economic development of thenewly industrializing and developing economics of Southeast Asia Among

the components of resource flows to the ASEAN countries, FDI constitutes

a considerable, indicating the importance of FDI as major source finance foreconomic development Between 1990 and 1997, FDI represented an annualaverage of 40% of the next resource flow to the ASEAN countries, with

Malaysia, Myanmar and Vietnam having more than 50% FDI composition

A high percentage of FDI to next private capital flow in the 1990s is almost

the norm for many development countries, and this is true for ASEAN This

suggests the increasing importance of next private capital flow, particularlyFDI, to official flow for development finance

The ASEAN region is a leading recipient of FDI flow in the

development world, with five ASEAN countries in the top 20

development-countries recipient of such long-term global capital flow from 1997 to 1998

Between 1993 and 1998, ASEAN received about 17,4% of the US$760

billion in cumulative global net FDI flow to development countries Overthe same period, ASEAN received an annual average of US$22 billion innet FDI flow, compared with an annual average by about 14% annual from

1996 to 1998, while FDI stock in ASEAN grew tenfold from US$23,8billion in 1980 to US$233,8 billion in 1998”.

Despite the region’s successes in attracting sizeable FDI flow, thecountries in the region continue to undertake collective as well as individualmeasure to further liberalise their investment regimes and to providecompetitive and attractive investment environment Further policy measureshave been introduced to attract greater FDI flow as a means to helping thecountries recover from the economic crisis, which beset the region in 1997-1998

In addition to these individual actions, the member economics arecollectively promoting ASEAN as a single investment area

In October 1998, ASEAN member countries signed a frameworkagreement on an ASEAN Investment Area (AIA) with a view to enhancingthe region’s attractiveness and competitiveness for foreign investor This

22 ASEAN Secreatariat (2003), ASEAN = Investment Area:an update

http://www.ascansec.org/6480 htm (page Ì).

2P)

was a result of the decision made in the fifth ASEAN Summit”, which

called for the establishment of a regional investment arrangement to

enhance the attractiveness of the region for direct investment flows The

establishment of AIA also pursues the objective of the Framework

Agreement on Enhancing ASEAN Economic Co-operation or it is known as

the Agreement on ASEAN Free Trade Area signed in Singapore on 28th

January 1992.The objective of the Framework Agreement on AIA is toestablish a competitive ASEAN Investment Area in order “to establish a

competitive ASEAN Investment Area with a more liberal and transparent

investment environment amongst member State in order to substantially

increase the flow of investment into ASEAN both ASEAN and non-ASEAN

sources, jointly promote ASEAN as the most attractive investment area,

strengthen and increase the competitiveness of ASEAN ’s economic sectors,

progressively reduce or eliminate investment regulations and conditions

which may impede investment flow and the operation of investment projects

in ASEAN and to ensure that the realization of the above objectives would

contribute toward free flow of investment by 20207 For the

implementation of the obligations under this Agreement, Member State

shall undertake the joint development and implementation of three

programmers: co-operation and facilitation programmer, promotion andawareness programmer and liberalization programmer The most importantobligation of member state is implement NT and open industries to ASEANforeign investor by 2010 and all foreign investor by 2020 with some

exceptions in certain sectors and matters temporary Exclusion list (TET) and

sensitive list (SL) The TET includes sectors that economics could not

commit to open or grant NT within a definite time period The time period isbased on the principle of AFTA + 3, that is by 2013 for Vietnam 2010 fororiginal member countries and 2015 for Laos and Myanmar The sensitive

list includes measure and/or sectors not yet covered by market access and

national treatment obligations As members with reconsider this list in 2003

in order to shorter it and more sectors to TEL instead Each a countrydetermines its lists on the basing it’s now interest, conditions for socio-economic development without any negotiations with others membercountries

Moreover AIA requires Member states implement some investmentincentives such as promoting free flow of capital, skilled, professionalexpertise and technology amongst the member countries, providingtransparency in investment policies, rules, procedures and administrativeprocesses, providing a more streamlined and simplified investment processand eliminating investment barriers and liberalizing investment rule andpolicies in the sectors covered by the Agreement

The AIA is an important legal basic for enhancing investmentactivities between ASEAN countries, increasing FDI flow, into ASEANcountries and make the ASEAN attractive investment environment moreand more It’s also requires all member implement complete commitments

With AIA, Vietnam must improve legislation on FDI, shouldcontinue to focus on developing a single investment regime for all foreign

8 The fifth ASEAN Summit was held in December 1995, in Bangkok, Thailand

34 Article 3 of Framework on ASEAN INVESTMENT AREA

23

investor, and to make that regime attractive for investor and stil] beneficial

for Vietnam The enforcement of AJA, it is certain make the Vietnam

investment environment attractively more and more

2.2.4.4 Asia — Pacific Economic Cooperation

The OSAKA Action Plan defined 15 areas for the Collective Action

Plan of all member economics One such area was the investment

liberalization program whose objectives are investment liberalization and

door-opening in the Asia — pacific region, by reducing or eliminating

restriction on investment; implementing WTO norms, APEC ’s non-binding

investment principles and other APEC guidelines; and expanding the system

of bilateral investment agreements in APEC

In order to achieve the above-said targets, APEC will cooperate to

take collective actions, such as: to enhance the transparency of the

investment environment of APEC economics; establish a dialogue

mechanism between government of member economics with the community

of APEC enterprises in order to improve the investment environment; create

forums to support the new WTO negotiations

Soon after becoming an APEC member in November 1998, Vietnamformulated a National Action plan (NAP) on investment liberalization in

response to APEC ’s objectives Accordingly, Vietnam will grant full

National Treatment to foreign investors by the end of 2020; gradually create

a legal foundation and apply a uniform regime of taxation and servicecharges (land rent, electricity, water, posts and telecommunications, air

transport, etc.) for both foreign and domestic investors; enhance the

transparency and predictability of Vietnam’s policies and law on foreigninvestment; simplify investment-related procedures; reduce restrictions onthe operation of foreign investment projects in response to TRIMS

Agreement; apply progressively a system of investment registration; and

diversify form of investments and measures for foreign investment

mobilization

2.2.4.5 Asia-Europe Meeting (ASEM)

Vietnam also is an origin member of ASEM ASEM’s prioritiesinclude enhancing cooperation among enterprises and improving the tradeand investment environment, through the implementation of twocooperation programs, TFAP (Trade Facilitation Action Plan) and IPAP(Investment Promotion Action Plan) The comprehensive objective of IPAP

is to build a favourable investment environment in order to increase

two-way investment flows between Asia and Europe, carry out cooperationprograms to promote investments within member economies and, at thesame time, take initiatives to improve investment-related mechanisms,policies and regulations

Within the IPAP framework, member economies have establishedhigh-ranking dialogues on policies to improve the investment environmentfollowing the non-binding investment principles, some major contents ofwhich are to provide National Treatment; eliminate restrictions on thetransfer of capital and profits abroad; apply fair and equitable treatment

24

consistent with international principles in cases of expropriation and

nationalization for public purposes; eliminate restrictions on trade-relate

activities of investment projects in with international rules and conventions,and strengthen the signing of double-tax avoidance agreement by member

economies

2.3 FDI incentives issue in WTO’s context

The WTO grew out of the General Agreement on Tariff and Trade

(GATT) and was established in 1995 as a result of the Uruguay Round

negotiations (1986-1994) The WTO ’s focus is the facilitation ofinternational trade and harmonisation of the world trade practice The WTOcover investment issues in the context of trade requirements a Up to

present, WTO has not build a multilateral legal mechanism that can help

adjust on a comprehensive scale, foreign investment activities, likeprovisions of over 1,7000 bilateral investment-related agreement signed

among countries in the would in the recent years The General Agreement

on Tariff and Trade (GATT) 1947 had little specific rules on investment

However, many northern governments argue that GATT’s obligation of

national treatment (article II.4) and non-discrimination (article XI) applied

to investment in some cases Southern government disagreed and rejectedthat the GATT had competence in the investment areas They preferredbilateral approaches” 5 Until the Uruguay Round negotiations (1986-1994)the foreign investment has been given official discussion Consequently, theshort agreement on related investment measures has been through as theFDI incentives measures in order to make facilitated conditional forliberalization trade and investment process in the world In general, Trimsagreement has not many regulars It is mainly focus on measures that areseen as distorting trade in goods These measures such as requirement ondomestic (local) content trade balancing requirement (limits on the purchase

or use of an imported product up to a maximum value or volume in relation

to local products) and foreign exchange balancing requirements, are argued

to violate nation treatment principles and article XI of the WTO (prohibition

of quantitative restraint) Under the TRIMS agreement, WTO ’s membersare to phase out TRIMS, which violate national treatment and theprohibition of quantitative restriction Trims agreement treats as a firsttrying step of GATT for purpose FDI incentive But WTO restricted Trimsagreement in relationship which of trade in goods Therefore, the agreementdid not mention others aspect of FDI incentives such as subsidies, taxincentives offered to foreign companies, or issues of employment ofnational or joint venture requirement

One of the most important agreed which is directly touch on FDI isthe General Agreement on Trade in services (GATS) This Agreement is

35 Olga Sorokina (2002) Jnternational Institutions and FDI incentives What are the

Available Investments for fostering Non-OECD enegy Investment (page 46).

See http//www.iea.org/dbtw-wpd/text base/papers/2002/fdi.pdf

36 Mariama William (2002) International Gender and Trade and Network, Investment and

Coherence: WB-IMF-WTO (page3).

See http//www.gender and trade net /investment/inves-coherena.pdf

25

only WTO agreement to provide a clears definition of foreign investment

through the form of commercial presence The GATS also required all

Member commitments give MFN and NT rule The non-discrimination is

the mainly principles underpins the WTO system, expressly in almost

agreed in WTO The MFN and NT treat as important provisions in order toencourage FDI, enhance the flows movement in the world

Incentive- or more precisely, subsidies ~ affecting trade in goodshave long been within the purview of GATT More specifically, the GATT

“Agreement on Subsidies and Countervailing Measures” agreed upon

during the Tokyo Round of Multilateral Trade Negotiatons” Theagreement distinguished among three categories of subsidies: the prohibitivesubsidies, the actionable subsidies and the non-actionable subsidies Thenature of the subsidies that are covered is defined in term of several

attributes Subsidies are defined as “financial contributions (e.g grants,loan, tax credits) provide directly or indirectly by a government or as “price

or income support’s programmes In addition, only specific” subsidies arecovered —1.e those that are limited to certain enterprises more generalised,non-specific subsidies are not covered”° Two subcategories of subsidies areprohibited: non-agricultural subsidies that are contingent upon exportperformance, and subsidies that are contingent on the use of domestic goods

in place of imported good (local content requirements) The relevance ofthis category of subsidies to FDI is emphasized by the fact that the granting

of FDI incentives has often been conditioned upon certain performance

requirements being among the most prevalent among these The actionable

subsidies are subsidies that have “ adverse effects” on international trade,

because they either case injury to the domestic industry of another membercountry, nullify or impair WTO benefits, or cause “serious prejudice” to thewhether there is a presumption of serious prejudice so that a subsidisinggovernment has the burden of demonstrating that the subsidy is allowable””.One such criterion is particularly relevant to FDI incentive: “where thereceipt firm is in a start up situation, serious prejudice shall be deemed toexit if the overall rate of subsidisation exceeds 15 percent for the total fundsinvested” Taken together with additional criteria, the overall conclusion isthat if a government grants a specific subsidy to a particular FDI project,and if the subsidy is more than 15 percent of the total investment at the time

of start-up or more than five percent of the sales (if is a tax-relate subsidy),then the government has the burden of demonstrating that the subsidies isallowable’’ Non- actionable subsidies include assistance to research anddevelopment if it amounts to less than 75 percent of the cost, regional aidand assistance to meet environmental requirements (Art 8 SCMS) Like the

UNCTAD (1996) Incentives and FDI, NewYork and Geneva 1996 United Nations

publication Sale No.E.96.I.A.6 (page 60)

*8 Thomas L Brewer and Stephen Young Investment Incentives and the InternationalAgenda The world economiy 1997 (www.blackwell - signergy Com/links/doe/10.11/1467- 9701.00065 albs) (page 188).

*° In Anmex IV Par.4.SCMs

“© Thomas L Brewer and Stephen Young Investment Incentives and the International

Agenda The world economy 1997 (www.blackwell - signergy

Com/links/doe/10.11/1467-9701.00065 albs) (page 189).

26

TRIMS, SCMS investment related provisions are limited to goods and do

not cover investment that are not subsidies

In sum, the WTO Agreement could apply, in principle, to certaintypes of FDI incentives and have broad geography coverage At the sametime, it appears that many of the rules and practices addressed in theseAgreements are used mainly by developing countries (e.g FDI — linked

export incentives and local content requirements) On the other hand, a

number of incentives that are of particular important to developed countries

to stimulate investments have not been prohibited by the new Agreements

(measures relating to regional subsidies and research — and development

support) Moreover, the focus if these Agreements are on measures thataffects the flow of international trade, rather than investment In fact, atpresent, there is no provision in the WTO that allows countries to challengeFDI incentives on the sole basic that they distort FDI flows”” For allmention about, it can said that, WTO investment provisions are limited in

scope and lack coherence In order to enhance more and more investment

liberalization, 29 countries in OECD started decide negotiations on a new

Multilateral Agreement on Investment (MAI) Since the MAT is still being

negotiated, it is impossible to know the precise nature of any provisions it

may contain on investment incentive There are brief references to the

possibility of including investment incentive in the MAI in some of thepreliminary discussions of its potential content However, not unexpectedly,

there appears to be more interest in preliminary informal indications are that

there will be very limited, if any provisions in the MAI on investmentincentives” But during the negotiation, there are many idea between bothdeveloped and developing countries and the negotiations did not yield anyresult More comprehensive regulation of FDI incentives is found only inadvanced regional integration agreement like NAFTA (North American

Free trade Area) and EU, where policies as well

In the 1996 Singapore Ministerial Conference, initiated a processdesigned to gradually lead to the negotiating of multilateral investmentrules The investment became a new issue called “Singapore issue” andWTO also established a working Group on the Relationship between Tradeand Investment (W6TI) with a new view to studying possibilities to buildmulti — lateral investment principles in the WTO framework Theconference decide that negotiations on a multi — lateral investmentmechanism must be agreed by member countries, and the establishment ofthis working team is not aimed at negotiating, but studying the possibilities.After a series of negotiations, the fourth Ministerial Conference in Doha inDecember 2001 took a further step towards negotiating multilateral rule onFDI Despite there are many various disputes among developed anddeveloping countries and Ministers also stressed the importance of having abalance of interests among members countries, the Ministerial Conferencesucceeded in a declaration confirming the necessity of the establishment of a

*' UNCTAD (1996) Incentives and FDI, NewYork and Geneva 1996 United Nations

publication Sale No.E.96.II.A.6 (page 62)

* Thomas L Brewer and Stephen Young Investment Incentives and the InternationalAgenda The world economiy 1997 (www.blackwell - signergy

Com/links/doe/10.11/1467-9701 00065 albs) (page 189).

2/

multi — lateral investment mechanism with a view to ensuring transparency,

stability and predictability of foreign investment activities Moreover, the

WTO Working Team on investment trade relation also focused on time

mainly issue which were become basic for next conference They are:

-Expand of the concept of “investment”: For the purpose of diversifyinginvestment activities, the group of developed countries suggested to

expanding the concept of investment which does not confine only in direct

investment but also in long-term cross-border investments such as portfolio

investment

-Apply the non-discrimination principle: Accordingly, member countries

have to provide investments and investors of other countries with condition

no less favourable than those given to investments and investors of their

own countries

-Apply conditions for investment establishment, on the basis of GATS

principle: The placement of this principle into the Declaration of the

Ministerial Conference was one of the biggest victories of developing

countries in the negotiations on issue relevant to the multi-lateral investmentmechanism Such form of negotiation will therefore create conditions fordeveloping countries to actively and flexibly take measures for theestablishment of new investments

-Transparency requirements include publication of all relevant laws and

regulation, investment procedures and decisions of member countries -Eliminate operational requirements: According to this principle, membercountries must not apply measures that require local content, import-export

balance, technological transfer, used of local labour, minimum ratio of

capital and other restrictions on the transfer of capital and profits abroad.-Reduce or prohibit the use of investment preferences: This issue has notbeen specifically defined in the Declaration of the Ministerial Conference,yet will be one of the contents to be discussed in the new NegotiationRound According to developing member countries, the application ofinvestment-related preferences is necessary for them to enhance theirattractiveness for foreign investments into areas and regions conform to the

plan of their development Developing state are also at comparative

disadvantage to developed in their use incentives in the mean time, mostdeveloped member countries see to it that the application of investmentpreferences will cause an unfair competition among investment recipientcountries and need to be eliminated in order to avoid “distortion” in tradeand investment activities

-Strengthen measures of investment protection and effectiveness of thedispute settlement mechanism: According to this principle, membercountries will apply measures to protect cross-border payments and capitaltransfer, and rules for compensation in case investors’ assets are

nationalized and/or taken over for public use, and protection of in case

strikes occur

There issue have been continued discussion in the CancunSeptember 2003 In the near future, WTO will have a multi-lateralinvestment with purpose encourage and making facilities conditions forliberalization FDI flows in the world

28

3 WTO's provisions and

Vietnamese legislation on FDI incentives

3.1 The WTO Agreement on Trade Related

requirement, local content requirements, export requirements, requirement

to transfer technology The rationale for using performance requirements

depends on the objective of the measure In general, the role of such

requirement is to address some of market or policy failure related Localcontent, export, joint venture and other requirements have been imposed tooffset or pre-empt restrictive business practices in the form of for example,market allocation, price fixing, exclusive dealing and collusive tendering

Sometimes performance requirements have been used to remedy distortions

created by government intervention elsewhere in the economy Given the

possibility of conflicting interests between investor and host countries,

requirements have also been used to tilt the distribution of gains from

investments in favour of the latter Governments have sometimes applied

performance requirements to achieve macro-or microeconomic developmentgoads on to effect the distribution of benefits among regions or thepopulation at large In some cases, the imposition of requirements may

create rents that tend to benefit relatively small but well-organized interest

groups in society at the expense of the larger public”.

These performance requirements treat as investment measure, whichcan cause trade-restrictive and distorting effects “With desiring to promotethe expansion and progressive liberalisation of world trade and to facilitateinvestment across international frontiers so as to increase the economicgrowth of all trading partners, particularly developing country Memberswhile ensuring free competition”, ail member state agreed and passed

* United Nation (2003) FD/ and performance requirements: new endence form selectedcountries (NewYork and Geneva: United Nation); United Nation publication Sales No.E.03.I.D.32 (page 6-7)

“4 See Agreement on Trade-related investment measures www.WTO.org

29

through the Agreement on trade-related investment measures in Uruguay

Round negotiations During the Uruguay Round, there are many various

ideas among participants over the coverage and nature of possible new

disciplines While some developed countries proposed provisions that wouldprohibit a wide range of measures in addition to the local contentrequirements found to be inconsistent with article III in FIRA panel case”,many developing countries opposed this The compromise that eventually

emerged from the negotiations is essentially limited to an interpretation and

clarification of the application to trade-related investment measures of

GATT provisions on national treatment for imported goods (Article III) and

on quantitative restriction on imports or exports (Article XI) Thus, theTrims agreement does not cover many of the measures that were discussed

in the Uruguay Round negotiation, such as export performance and transfer

of technology requirements In general, this Agreement is based on existing

GATT disciplines on trade in goods and it is not concerned with theregulation of foreign investment The disciplines of the Trims Agreementfocus on discriminatory treatment of imported and exported products and do

not govern the issue of entry and treatment of foreign investment “Without

prejudice to other rights and obligations under GATT 1994, no Member

shall apply any Trims that is inconsistent with the provision of Article III or

Article XI of GATT 1994''5 But the Agreement did not defined the term

“trade-related investment measures that are inconsistent with GATT Article

II.4 or Article XI: 1 of GATT 1994 Trims that are inconsistent with the

obligation of national treatment provided for in paragraph 4 of Article III ofGATT 1994 include those which are mandatory or enforceable underdomestic law or under administrative rulings, or compliance with which is

necessary to obtain an advantage, and which require:

(a) The purchase or use by an enterprise of products of domesticorigin or from any domestic source, whether specified in terms of particularproducts, in terms of volume or value of products, or in terms of a

proportion of volume or value of its local production; or

(b) That an enterprise’s purchases or use of imported products belimited to an amount related to the volume or value of local products that it

(a) The importation by an enterprise of products used in orrelated to its local production, generally or to an amount related to thevolume or value of local production that it exports;

“WTO a training packgage (1998) Module 5 Goods :other rules (pagel)

www.wto.org/english/thewto_e/whatis_e/eol/e/wto05/wto05.pdf Fira panel case is the case

of dispute settlement proceeding between US and Canada about Canada-Administation of

the foreign investment Review Act (FIRA) In this case the panel conclude that the local

content requirements were inconsistent with the national treatment obligation of Article III:

4 but that the export performance requirements were not inconsistent with GATT obligation.

46 A sreement on Trade-related Investment measures (Article 2)

30

(b) The importation by an enterprise of products used in or

related to its local production by restricting its access to foreign exchange

to an amount related to the foreign exchange inflows attributable to theenterprise; or

(c) The exportation or sale for export by an enterprise ofproducts, whether specified in terms of particular products, in terms ofvolume or value of products, or in terms of a proportion of volume or value

of its local production

The illustrative list cover both TRIMS which are mandatory or

enforceable under domestic law or under administrative rulings and Trims

compliance with is necessary to obtain an advantage*’ It means that theAgreement prohibits activities even if a country’s own laws require aparticular action, such as localization of products by foreign investor It also

prohibits such activities even if they do not restrict access but confer and

advantage; for instance, granting firms a subsidy on tax holiday for using

local inputs is not allowed under the agreement However, certain activities

may be exempted from the TRIMS Agreement proscriptions on nationalsecurity, heath and safety, government procurement, balance of payment orexport controls ground, provided the WTO agrees’ Developing countriesmay also receive certain exemptions, subject to the approval of the WTOmember: “a developing country Member shall be free to deviate temporarilyfrom the provision of Article 2 to the extent and in such a manner as Article

XVIII of GATT 1994, the understanding on the Balance of Payments

Provisions of GATT 1994, and the Declaration on Trade Measures Takenfor Balance-of-Payment purpose adopted on 28 November 1979 (BISD268/205-209) permit the Member to deviate from the provisions of Articles

II and XI of GATT 1994” The Agreement also provide on notificationrequirements, there for under Article 5, Members were required to notify to

the Council for Trade in Goods within 90 day after the date of entry into

force of the WTO Agreement, any Trims that are not in conformity with theAgreement The Member shall eliminate all Trims, which have been notifiedunder Article 5.1 Such elimination is to take place within two years afterthe date of the entry into force of the WTO Agreement in the case of adeveloped country Member, within five years in the case of developingcountries and within seven years in the case of least developed country

*” WTO a training packgage (1998) Module 5 Goods :other rules (pageS)

www.wto.org/english/thewto_e/whatis_e/eol/e/wto05/wto05.pdf.

* Trims Agreement Acricle 3

” Trims Agreement Article 4