Streamlining conditions for foreign investment

Created 14 February 2019
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Manfred Otto, senior associate at Duane Morris Vietnam LLC, outlines what lies ahead for the country in terms of both legal challenges, and possible solutions.

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Manfred Otto, senior associate at Duane Morris Vietnam LLC

Vietnam’s star is continuing to shine brightly into 2019. With a GDP steadily growing at roughly 7 per cent year-on-year, and with wind in its sails from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), besides strong fundamentals, foreign investment is on an uptrend. While challenges remain, there is a window of opportunity for the country to bolster its position as an attractive investment destination.

Vietnam has tremendously improved the conditions for international investors over the past decade, not only for foreign direct investment (FDI) in businesses, but also for indirect investment in the stock market. The top improvements made to growing FDI in recent years include reduced foreign ownership limits (FOLs), an improved business environment, and membership to major international trade agreements.

Since joining the World Trade Organization (WTO) in 2007, the country has lifted FOLs across a range of business sectors as well as for public and listed companies to 100 per cent. This sets it apart from many other countries in the ASEAN bloc, where foreign ownership is often still restricted. Business conditions have also been eased. This was one of the goals under the 2014 Resolution No.19/NQ-CP and subsequent resolutions passed by the government.

The nation leaped from 99th in the World Bank’s Doing Business 2013 report to 68th in the 2018 edition. Having more and more information available online, investors can confirm business registration and public procurement information on national online portals. In addition, the main business licensing authorities have made progress in adhering to statutory processing times, which reduces waiting periods.

Aside from the ASEAN Economic Community, the country is a member of a number of several new wide-ranging free trade agreements (FTAs). The CPTPP came into force on December 30, 2018. The ratification of the long-awaited trade and investment agreements between the EU and Vietnam (EVFTA) could follow soon. In addition, the Regional Comprehensive Economic Partnership is also on the horizon. These new trade deals will remove most tariffs on products made domestically and exported to member countries. They also contain provisions on improving customs procedures, market access, public procurement, intellectual property rights, labour rights, dispute settlement, sustainability, transparency, and many other trade conditions.

Current issues

While the improvements made in recent years are laudable, challenges remain. The country dropped one place to 69th in the World Bank’s Doing Business 2019 report. While rankings are not everything when it comes to FDI attraction, the recent figure could be a sign that the potential for improvement under the current policies has plateaued.

According the Doing Business 2019 report, it still takes almost 500 hours to pay taxes, even though certain taxes can be paid online. By comparison, the regional average is only 181 hours. A complex tax system combined with corruption fuels non-compliance with tax obligations and remains a core challenge. Without a functioning tax collection system, the national budget for public infrastructure projects and adequate salaries for public employees is diminished.

Furthermore, a number of new laws and regulations in 2018 could have a chilling effect on foreign businesses in 2019 and beyond. Hotly debated examples include the Cybersecurity Law, the Technology Transfer Law, and harsher licensing requirements for foreign retailers and e-commerce businesses.

Similarly, legal uncertainty is a challenge for new businesses, such as those active in blockchain technology development and related financial services. Onerous and uncertain licensing requirements may curb the nation’s growth towards a digital economy.

Legal solutions

What can be done to attract more foreign funding? From a pure legal perspective, the answers are simple.

First, basic improvements include reducing unnecessary administrative burdens and increasing legal certainty. Vietnam could further boost confidence by easing unequal treatment of foreign investors, including FOLs and non-tariff barriers. Vietnam is already working on streamlining its administrative procedures. Foreign investors would welcome simplified procedures for establishing companies, acquiring and selling ownership interests, paying taxes, as well as liquidating businesses.

The country could incentivise more multinational corporations as well as startups to create their regional hubs in Vietnam. With the right regulatory framework, Ho Chi Minh City could be an even more attractive location. Corporate and personal income tax rates are of course important high-level considerations, but they are not everything.

The ease of doing business in general and especially cross-border capital flows are essential factors as well. Singapore and Thailand, for example, have special incentives for global and regional headquarters, which could be studied further.

The ease of doing business should include the equal treatment of foreign investors. Under the WTO, the CPTPP, and other FTAs, businesses from other member states are in principle entitled to national treatment within a member state. This means that the members agreed to treat foreign and domestic investors equally.

Many member states have carved out exemptions to the national treatment principle. Vietnam’s exemptions include FOLs and additional business conditions in certain sectors that are considered important to national interests, including the people’s security and safety. However, where such national interests are not a major concern, the procedures for investments could be further simplified.

To help facilitating administrative procedures, the country could further automate reporting, registration, and payment processes. Having a large pool of qualified engineers and limited legacy technology to compete with, the country is in a prime position to develop and implement its own new regulatory technology (regtech), which could potentially become a major export product of Vietnam.

As with infrastructure projects, developing sophisticated regtech requires close collaboration between the public and private sectors. Vietnam is in the process of revising its legal framework for public-private partnerships (PPP). In this process, foreign investors often ask for balancing risk allocation between the private and public sectors, clarifying the conditions for viability gap funding, and for government guarantees. Hopes are high that these factors will be addressed in the upcoming PPP law.

Legal certainty is a reoccurring topic for international investors. In this respect, Vietnam’s e-government initiatives are welcome. Blockchain technology could help manage land use rights and building ownership registries as well as automatically enforce payment obligations using smart contracts. Operating under a clear regulatory framework and properly implemented, technology could alleviate many legal uncertainties.

Furthermore, investors expect a clear road map on the implementation of legal provisions in line with the CPTPP and other upcoming FTAs.

Outlook

The message should be clear: Vietnam encourages foreign investment and has a conducive legal framework. The government is approachable and open to work with the private sector on improving business conditions. At the beginning of 2019, it set clear goals under Resolution No.02/NQ-CP.

Fundamentally, Vietnam is poised to become one of the main beneficiaries of both the CPTPP and the upcoming EVFTA. We are already seeing growing interest in sectors including clothing and footwear, IT, agriculture and aquaculture, airlines, food and beverage, as well as healthcare. The trade agreements are advantageous to these sectors, and FDI should increase accordingly.

On the other hand, other sectors are facing headwinds. For instance, some foreign retailers already have second thoughts about their investments in Vietnam. Rents remain relatively high, some say not much cheaper than in Singapore, and sales are lower compared to more developed markets. In addition, the legal conditions for foreign retailers add significantly to the time and costs required for establishing stores.

Despite the apparent ­difficulties, Vietnam has a golden opportunity to ­streamline its laws and policies in a leap towards the next stage of strong socioeconomic ­development.

 

Source: VIR - Bridge

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