Before undertaking any trading activities in Vietnam, foreign direct investment entities must be aware of complex regulations. Tran Nguyen Mong Van of Grant Thornton Vietnam discusses the regulations and shows how companies can ensure that they comply with the rules.
Foreign Direct Investment Enterprises (FDI firms) and Export Processing Enterprises with Foreign Direct Invested Capital (FDI EPEs) are enterprises with relatively specific legal and business characteristics related to Vietnamese regulation. Most of these economic organizations are located in Vietnam with their main business activities related to the trade of goods within and outside Vietnamese territory.
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In order to ensure compliance with legal processes and to mitigate tax risks, as well as any related potential penalties that could affect their financial health and the reputation of the company, such FDI companies and FDI EPEs should pay particular attention to and have a good understanding of the relevant regulations when selling goods and undertaking other activities directly related to the sale of goods in Vietnam.
Right of FDI Companies to Export/Import and Distribute
In accordance with current regulations (the Decree establishing commercial law and the law on the management of foreign trade on the purchase and sale of goods and activities directly related to the purchase and sale of goods by investors, foreign investors and in Foreign-Invested Economic Organizations in Vietnam, No. 09/2018/NĐ-CP), the right of an FDI company to export, import and distribute is defined as follows:
- Right to export means the right to purchase goods in Vietnam for export, including the right to be named on the export declaration to carry out export-related procedures and take responsibility. Export regulations do not include the right to purchase goods from entities other than merchants for export unless otherwise provided by Vietnamese law or an international treaty to which Vietnam is a contracting party.
- Import right means the right to import goods from abroad into Vietnam for sale to merchants who have the right to distribute such goods in Vietnam, including the right to be named on the declaration of imported goods for export and responsible for the procedures relating to imports . The right to import does not include the right to organize or participate in any goods distribution system in Vietnam, unless otherwise provided by Vietnamese law or an international treaty to which Vietnam is a party.
- Distribution means wholesale, retail and franchising, and sale of goods by agents.
- The right to distribution means the right to conduct distribution activities directly.
In terms of terms, those FDI enterprises which (i) have export rights, may export goods purchased in Vietnam, goods processed in Vietnam and goods lawfully imported into Vietnam to another country or a separate non-tariff zone, or (ii) import duties , may import goods from a foreign country or a separate customs zone into Vietnam, provided that:
- they are goods not included in the List of Goods Prohibited from Export and Import, the List of Goods Temporarily Excluded from Export and Import, and the List of Goods Not Eligible for Export and Import as specified in international treaties to which Vietnam is a signatory;
- if the goods are included in the list of goods for export and import under licence, or under certain conditions, the FDI company has the relevant license or meets the conditions according to the regulations, except the registration as prescribed in the Investment Act and the Act on companies.
Under the rules of the World Trade Organization’s List of Specific Commitments in Trade in Services for Vietnam, the restrictions on market access in respect of FDI companies in business lines described as “wholesale, retail” have been abolished. Therefore, FDI companies are allowed to operate such business units without restriction.
Right of FDI EPEs to Export/Import and Distribute
In terms of definition, the EPE is an enterprise specializing in the production of goods to be subsequently exported, providing services related to the production of goods to be exported, and export-related activities, which is established and operated under the government regulations on EPEs. The trade of goods between EPEs and other enterprises in the Vietnamese market is considered an import-export relationship and must comply with the provisions of the Export and Import Act.
For production activities for export, it should be noted that FDI EPEs that sell self-produced goods are not subject to the regulations that apply to FDI companies. Accordingly, FDI EPEs are not required to complete the procedures for applying for a business license or a license to set up a retail establishment, except to register as required by the Investment Act and the Enterprise Act. In addition, FDI EPEs are not subject to value added tax (VAT) for export manufacturing activities related to their own produced goods, so they do not have to declare VAT on them to the tax authorities.
For all other manufacturing activities (i.e. the right to export goods not produced by themselves, the right to import and the right to distribute), FDI EPEs must comply with the regulations applicable to FDI companies and the following VAT obligations:
The FDI EPE must register for VAT declaration with the domestic tax authorities and separately record the income and related expenses arising from the sale of goods in Vietnamese territory. The FDI EPE must also set up a separate room to store imported and exported goods according to the right to export, the right to import and the right to distribution.
The sale in the context of these activities is subject to the issuance of VAT invoices and VAT declaration to apply deduction or refund when the conditions of the relevant regulations are met.
Planning Points
In light of the above, FDI companies must review an application for a business registration license for business units of the right to export, the right to import and the right to distribute, in addition to registration as required by the Investment Act and the Companies Act, in order to fully comply with and minimize all risks related to legislation, taxes and tariffs.
Where FDI EPEs have incurred VAT obligations under the business units of the export right, the right to import and the right to distribution, they may be entitled to a refund of VAT. They must ensure that they meet the requirements of the relevant regulations in order to claim such tax benefits.
Companies should regularly update themselves on new regulations or amendments required for their full implementation, or contact professional advisors for assistance as needed.
This article does not necessarily represent the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their owners.
By Tran Nguyen Mong Van, Grant Thornton (Vietnam). This article was posted for the first time here.
