SBG Corporate Member – Ernst & Young Vietnam Limited, would like to share with you the article below:
Authors:
- Anh Tuan Thach, Partner, Tax
- Wesley Chua, Manager, International Tax and Transaction Services, EY Consulting Vietnam Joint Stock Company
Key considerations when it comes to tax preferences in FTAs
Free Trade Agreements (FTAs) are seen as a key feature of trade with Vietnam. Due to changes in supply chains as a result of global trade tensions and the COVID-19 pandemic, many companies have established an increased presence in Vietnam, either with their own manufacturing facilities or sourcing offices for procurement. While taking advantage of these FTAs’ opportunities, businesses should carefully evaluate compliance requirements as the penalty for non-compliance can be a significant cost to the business.
Authors: Anh Tuan Thach, Partner, Tax and Wesley Chua, Manager, International Tax and Transaction Services, EY Consulting Vietnam Joint Stock Company
On 23 May 2022, US President Joe Biden launched the Indo-Pacific Economic Framework for Prosperity (IPEF) with a dozen initial partners: Australia, Brunei, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. The IPEF seeks to tackle rising inflation and help lower costs by making supply chains more resilient in the long term.
The rollout of the IPEF has met with a warm reception from many invited partners including Vietnam. Since 1986, Vietnam has been focusing on a range of reform policies (Doi Moi) to support trade liberalization and free-market-oriented measures. One of the most important reform policies was related to export and import activities. To encourage such activities, Vietnam entered into an international network of FTAs. As of June 2022, Vietnam has signed 15 FTAs, of which all had taken effect. These FTAs have bought significant opportunities for both exports from Vietnam as well as imports from those FTA signatories.
Fully utilizing the benefits of these FTAs can help businesses reduce their customs duty costs hence making their products more competitive, enhancing their market accessibility and investment, and getting benefits from the rules relating to some issues such as intellectual property protection, e-commerce, and governmental procurement, and many others. Below describes the main benefits that businesses in the Vietnam market can extract from FTAs.
- Customs duty benefits for imported goods into Vietnam
The number of tariff lines entitled to an FTA rate of 0% ranged between 29% and 98%, depending on the specific FTA and year by year[1]. By the respective year of full implementation, the FTAs that Vietnam has entered into will have 72% to 100% of tariff lines entitled to a rate of 0%.
Using Harmonized System (HS) code 73151910 (which is the code for a part of a bicycle or motorcycle chain) as an example, the import duty rate for this type of product under the Most Favoured Nation (“MFN”) would be 35% and ASEAN Trade-in-Goods Agreement at 0%.
With this information, Vietnamese importers can significantly reduce their import duty rate based on where they source their products. For goods sourced from Singapore, importers will not need to pay any import duty when the goods arrived in Vietnam. Depending on each business circumstance, this may give a new look at structuring its supply chain and where it can arrange for its production.
- Customs duty benefits for exported goods from Vietnam
The various FTAs also means that goods originating from Vietnam can be eligible for preferential duty rates when sold overseas to FTA member countries or territories.
In general, under the relevant FTAs, the duty reduction commitments of Vietnam’s FTA partners for Vietnamese goods are higher than those of Vietnam for imported goods.
- Customs duty benefits for goods stored in “bonded zones” or “non-tariff areas” in Vietnam
Although some aspects of Vietnam’s domestic regulations for the implementation of FTAs remain unclear, in principle, it should be possible to obtain non-manipulation certificates and back-to-back Certificates of Origin for those goods originating from other FTA countries that are routed through a distribution hub in Vietnam. Of course, this is on the condition that the goods meet the necessary rules of origin of the relevant FTAs. This will help businesses retain the origin of goods so that they can enjoy preferential duty rates when the goods are re-exported into other FTA countries or territories, or even imported into the Vietnam market.
With the increased ability to self-certify the origin, uncertainty about how to retain FTA benefits when utilizing a distribution hub in Vietnam has decreased.
- Other benefits
While duty reduction is a core benefit of most FTAs, the FTAs can also provide other important benefits such as eligibility to conduct trade in services, removal of regulatory and technical barriers for specified goods, access to bidding for public procurement, measures on intellectual property protection, support for international employee mobility, and so on. These added benefits vary widely across different FTAs, and companies need to review relevant FTAs to identify potential benefits for their business beyond preferential duty rates.
Summary and recommendations
FTAs are seen as a key feature of trade with Vietnam. Due to changes in supply chains as a result of global trade tensions and the COVID-19 pandemic, many companies have established an increased presence in Vietnam, either with their own manufacturing facilities or sourcing offices for procurement.
While taking advantage of these FTAs’ opportunities, businesses should carefully evaluate compliance requirements as the penalty for non-compliance can be a significant cost to the business.
Vietnam’s expanded network of FTAs and multilateral commitments are promoting companies to consider the country as a distribution hub, particularly for Southeast Asia. Until recently, this would not have been the case, but the situation is rapidly changing. To have a high return on investment, a detailed and structured approach to enjoy FTA benefits in Vietnam is vital for companies, who want to accelerate their footprint in the country.
Disclaimer
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms
[1] Source: General Department of Vietnam Customs
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