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Why Doing Business In Vietnam: Benefits vs Challenges

Why Doing Business In Vietnam: Benefits vs Challenges

Vietnam is attracting more investors thanks to its fast-growing
market, especially a friendly business destination with great investment
incentives. Both pros and cons of doing business in Vietnam will be
well clarified in this below article. Find out with us!

1. An overview of Vietnam business environment

Vietnam
used to be a low-middle-income country until the country got its social
and economic achievements after the 1986 Renovation and a series of
participation in international organizations like ASEAN. Throughout the
years, you may be impressed by a new Vietnam in terms of the business
environment. It is now an attractive investment location and promised
land for foreigners starting a business in Vietnam.

Data: GSO

Vietnam
has witnessed an ever-growing increase in its performance for
developments. Below are some key highlights to help you visualize the
Vietnam business environment in recent years:

  • Vietnam GDP growth increased by 2.91% in 2021
  • Socio-political and macro-economic stability is a stand-out feature for Vietnam potential business growth
  • The population of over 97 million people has marked the prospective purchasing power of Vietnam market
  • Vietnam is among the world’s top factories for supplying electronic items, mobile phone, textile-garments, and other industries
  • Until
    August 2020, over 32,539 FDI projects selected Vietnam as their home,
    with total registered capital reaching around US$381 billion
  • The
    EVFTA will eliminate almost 99 percent of customs duties between the EU
    and Vietnam, expected to be a driving boost to Vietnam’s economy

In
recent years, Vietnam business trends are highly focusing on the
private sector, together with the open business environment to attract
foreign investors into the Vietnamese market. The country has also
affirmed its position as a strong base for IT and manufacturing sectors
thanks to its competitive and reasonable labor costs.

In what follows, we will delve into a better understanding of the benefits of doing business in Vietnam in various aspects!

2. Advantages of doing business in Vietnam

2.1. Strategic location

Vietnam
is located in the center of ASEAN and is one of the most prospective
economies in Southeast Asia. The country shares its boundaries with the
Pacific Ocean, Gulf of Thailand, Laos, Cambodia and China, providing
Vietnam with favorable conditions for international shipping and
trading.

Interestingly, most investors eye the Vietnamese market
as one of the largest beneficiaries of the shift in supply chains from
the “giant” China.

Vietnam is located close to the manufacturing
hub of southern China, which is one of the world’s largest economies and
most influential trading hubs. Thanks to this proximi­ty, Vietnam also
becomes an attractive investment location for foreign investors finding
ways to penetrate the Vietnam market but also directly access the supply
chains from China.

2.2. High-growth economy plus potential market

Vietnam is a dynamic and emerging market with great potential!

Looking
into statistics, Vietnam’s GDP has steadily increased over recent
years. Vietnam’s GDP growth rate between 2011 and 2020 was accordingly
6.24%, 5.25%, 5.42%, 5.98%, 6.68%, 6.21%, 6.81%, 7.08%, 7.02% and 2.91%.
(Source: GSO). Although the year 2020 has witnessed the lowest increase
of the course 2011-2020 in its GDP growth, in the period of Covid-19
pandemic when socio-economic sectors have been considerably affected,
this impressive expansion rate ­has made Vietnam relatively stand-out
among the fastest-growing economies in Asia.

Vietnam’s inflation
rate remained under control in 2020, at 3.2%, a good performance for
stabilizing market prices compared to its targeted level of 4% on-year.
From a centralized to a market-oriented economy, the country’s
purchasing power is currently based on over 97 million population which
makes up the world’s fifteenth ranking.

Vietnam is one of the top
countries in terms of growth prospects. The opportunities for its
economy boosts seem to not fade away. In particular, the EVFTA and the
EVIPA signed in June 2019 are expected to bring positive values for
Vietnam’s emerging market itself as well as foreign investments in the
upcoming time.

2.3. Competitive labor cost

The
cost of starting a business in Vietnam can be a matter of concern to
most foreign investors. Among key cost-related factors, it is good to
know that Vietnam offers a fairly low labor cost!

Vietnam is
structured with a young population and potential workforce. Remarkably,
the country’s average wage cost is much more competitive than those of
neighboring countries like China. Statista estimates that manufacturing
labor costs per hour in China can increase to US$6.5 in 2020, meanwhile
those are only around US$3 in Vietnam.

In the context of the
recent China-US trade tension, a large number of foreign manufacturers
are likely to seek another option of the market, which obviously paves
the way for Vietnam to spot on.

2.4. Regulatory framework

In
parallel with Vietnam’s significant efforts to improve its economic
growth throughout the years, considerable improvements in its legal and
institutional framework have been witnessed as well.

Vietnam’s
regulatory system is appreciated by its open business environment,
transparent investment policies, together with favorable profit-based
incentives for enterprises.

For example, the Enterprise Law and
Investment Law of 2014 are fundamental laws that govern the
incorporation and operation of companies in Vietnam. These laws have
standardized individuals’ carte blanche to do business in permitted
business areas as well as reduce a broad array of administrative hassle
to enterprises.

The private and FDI sectors, among others, have
been granted preferable conditions while doing business in Vietnam by
virtue of these laws.

Improvements for Vietnam’s regulatory regime
in relation to its business and investment environment have contributed
significantly to Vietnam ranking in the international era. Strikingly,
the country was ranked 70th among 190 economies in the World Bank’s Doing Business 2020 report.

Vietnam’s
National Assembly recently passed the Investment Law and Enterprises
Law (Amendment), which will come into force on January 1, 2021. Such
further updates and changes in respective laws are expected to make
doing business in Vietnam less burdensome and benefit foreign
enterprises investing in Vietnam.

2.5. Tax incentives

The
table below helps you clarify some basis taxes in Vietnam that will
impact most business operations and investments in this country:

Basic types of tax Tax rates applied
Corporate income tax 20%
Personal income tax Based on the taxpayer’s residency status and nature of incomeEmployment income tax: 5% – 35% for residents, 20% for non-residents
Foreign contractor tax Based on the specific business sector
Value-added tax 0%, 5%, 10%
Import duties Based on the dutiable value and a duty rate (%) applicable to each commodity item
Other types of tax Special sales tax: 7% – 75%Natural resources tax: 1% – 35%Property tax: 0.03% – 0.15%Export duties based on export tariff of each type of goods and productCapital assignment profits tax: 20%

Vietnam
offers a variety of tax benefits for entities doing business in its
country. New investment projects can enjoy tax incentives based on the
sector, location and size of the project conducted. Business expansion
projects meeting specific conditions as per Vietnam regulations can also
be granted CIT incentives.

Taxpayers eligible for tax incentives
in Vietnam can reap benefits from Preferential Tax Rate and Tax Holiday.
Below are some common examples of tax incentives for foreign investors
in Vietnam:

Investment projects based on Location/Sector/Project Scale Preferential Tax Rate & Tax Holiday
Located in Economic Zones or High-tech Zones 10% for 15 yearsTax exemption up to 4 years, and 50% reduction for the subsequent 9 years
Engage in manufacturing of high-grade steel, agriculture-related equipment or craft developments 17% for 10 yearsTax exemption up to 2 years, and 50% reduction for the subsequent 4 years
Qualified large-scale manufacturing/investment projects 10% for 15 years (subject to certain conditions)

2.6. Vietnam’s free trade agreements (FTAs)

To
speed up the country’s integration into the global economy, Vietnam has
been actively entering into a range of free trade agreements, both
collective and bilateral agreements. Currently, Vietnam has built
diplomatic relations with nearly 190 worldwide countries and signed
around 15 FTAs with key trade partners!

Below are some typical Vietnam’s trade pacts:

  • Vietnam – Japan Economic Partnership Agreement (EPA) (2008)
  • Vietnam – Chile FTA (2011)
  • Vietnam – Eurasia Economic Union (2015)
  • Vietnam – South Korea (2015)
  • Vietnam – EFTA (European Free Trade Association) (on-going negotiations)
  • Comprehensive and Progressive Agreement on Trans-Pacific Partnership (2018)
  • Vietnam – European Union FTA (2019)
  • Comprehensive and Progressive Agreement for Trans-Pacific Partnership
  • Other
    Vietnam’s FTAs signed as an ASEAN member nation with Japan, China,
    India, Australia and New Zealand, South Korea, Hong Kong

Vietnam’s
joining in various free trade agreements has created strong motivations
for foreign investors from developed countries to put their first step
into Vietnamese markets.

3. Challenges of starting a business in Vietnam

Doing business in Vietnam goes with several potential challenges!

  • High corporate tax rates on some certain investments

It
should be noted that Vietnam applies a standard corporate income tax
rate of 20% on most corporate entities, but on some specific business
categories, the imposed tax rate is fairly high.

Pursuant to Article 10, Law on Corporate Income Tax No. 14/2008/QH12,
companies with the operation in the exploration and mining of oil, gas
and other related precious natural resources industries must be subject
to corporate tax rate ranging between 32% and 50%, depending on the
location and circumstances of the projects.

  • Restrictions of foreign currency

Foreign
currency capital for indirect investment in Vietnam is required to
exchange into VND, the official currency in Vietnam. What’s more,
transactions relating to offerings, payments, quotations, advertisements
and other forms alike should be done in the Vietnamese currency as
well.

However, the inflow of foreign currency into Vietnam is to
date open with minimum restrictions. Similarly, transferring foreign
currency overseas has also been considerably made less severe. If you
are a foreign investor or foreigner residing in Vietnam for employment
purposes, then you are allowed to transfer your gains abroad provided
that you have completed all related finance liabilities to the
government of Vietnam.

  • Business setup requirements

Investors
should be ready to deal with a set of requirements for setting up a
company in Vietnam. The paid-up capital requirement is a typical
example. Normally, the standard paid-up capital for your investment in
Vietnam should be at least USD 10,000. And depending on the type of
business that you decide to invest in. this amount can be lower or
higher.

Licensing procedure may be a challenge for foreign
investments engaging in some conditional sector activities as regulated
in Appendix 4 of Law on Investment No. 67/2014/QH13.
Particularly, you may be required to submit more additional documents
like the certificate of business qualification, professional liability
insurance, etc.

4. Conclusion

Vietnam
is now one of the most prospective markets among ASEAN countries. There
have been great achievements in terms of the country’s GDP growth,
regulatory system and tax-friendly policies in Vietnam to attract large
flows of foreign investment.

Doing business in Vietnam is opening
doors of opportunities for foreign investors in different sectors,
especially after the huge impacts from the US-China trade war which has
led to new waves of investment in the global era.

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