INDUSTRIAL : GENERAL

In the last 6 years, the number of IPs and EPZs in the county has soared from 46 in 1998 to 108 of which 68 are operational, with most established in the northern and southern delta provinces. The northern key economic zone has contributed 15% of the country's GDP and 25% to the nation's industrial production, and the southern key economic zone accounted for 30% of the country's industrial production and about 40% of the country's export revenue. The combined area of the 108 parks is about 20,200 hectares of which 13,809 hectares (68%) have been leased, excluding Dung Quat and Chu Lai Open Economic Zones and 124 industrial clusters or small-medium sized indus­trial parks which cover more than 65,000 hectares. The industrial areas have gener­ated jobs for nearly 600,000 people and employed more than one million others indi­rectly. They have also served as a catalyst for the establishment of many new urban ar­eas and the development of auxiliary industrial and services sectors.

The country's key eco­nomic zones contributed 56% of GDP in 2003; 70% of industrial production value; 70% of export value; and around 73% of budget collection. HCMC, Dong Nai, Binh Duong and Ba Ria­ Vung Tau, have 3 EPZs and 56 IPs accounting for almost 65% of the total industrial acreage nationwide. They are far more efficient than those in other regions and provide jobs for over 425,000 people. In recent years, Dong Nai and Binh Duong have been the two most popular provinces with 451 operational projects worth $5.4 bil­lion and 853 FDI operational projects worth $4.5 billion respectively. In recent years they have attracted almost as much as FDI from existing investors (expansion investment) than from ‘new’ investment per se. This is both good and bad news: it shows that most investors are profitable and confident in the future of Vietnam as a manufacturing base, but also that Vietnam is losing its battle with China and its ASEAN rivals in attracting new investors. Setting up in Vietnam can be easy and in places, literally carried out in a morning. However, although it is straight forward if you are looking for a reasonably long term operation, thus, necessarily with a relatively larger ‘registered capital’ than would typically otherwise be the case, it is much less easy to set up operations for only a few years. Thus, Vietnam struggles to attract ‘secondary’ supplier type industries.

Almost half of the foreign investment capital registered in Vietnam in recent years came through the country's IPs. Just over $1 billion or 45% of the total capital registered via new foreign investment projects set up in 2004 was earmarked for Vietnam's IZs and EPZs, a 33% increase on a 2003. There were 232 projects established in the IZs and EPZs in 2004 - an increase of 10%. Three quarters of all new projects opened up in Ho Chi Minh City, Dong Nai and Binh Duong in southern Vietnam. In total, the zones absorbed just over $1.8 bil­lion of freshly registered for­eign investment in 2004, including $759 million or 40% of the total added by foreign investors to 358 projects as supplemented capi­tal. These figures represented a 33% rise in unit volume and 40% increase in capital over 2003. Most expanded projects were based in Dong Nai, Binh Duong, Long An, Ho Chi Minh City and Hanoi.

Vietnam saw a sharp fall in the scale of investment in its IPs & EPZs in the early 2000’s. While the average invest­ment per project for the country was $23 million in 1997, the rate dropped to a mere $3.44 million in 2003 and has only slightly recovered to $4 million since. The export per person from Vietnam's EPZs and IPs is only $8,711 compared with Taiwan's $140,000 principally because 60% of exports are secondary processed goods and therefore value addition is not high. Thus, although some Vietnamese firms have been exporting under their own brand names, most domestic producers are too small to be regarded as engines of industrial growth. It is therefore important that Vietnam makes better use of technology while expanding its production process to cover not just the sub contracting / assembling phase but also other crucial phases such as research and development, design, marketing and distribution.

Despite low average monthly IP workers’ salaries of only $42-48 per month, productivity and product quality remains less competitive than in other competitor countries. Total Factor Productivity contributes only 22.5% to GDP – much lower than Thailand’s 35%, the Philippines’ 41% or Indonesia’s 43%. The ‘added value’ for each Vietnamese dong in industrial production in 1995 in HCMC was VND0.4 but only VND0.32 in 2004, demonstrating the decreasing eco­nomic efficiency and competitiveness of the city's economy. Thus, Vietnam’s high export growth rates are based mainly on the exploitation of local resources (such as agriculture, natural resources and the low labour costs), and not from technological renovation or greater man­agement efficiency. A recent analysis by the Ministry of Trade showed that external factors (rising international prices) and quantitative factors (higher manufactured volumes) were the two main reasons for the recent export growth, instead of from any substantive ‘added-value’ improvement. The reasons for this are complex but include the lack of central planning; the price of “land rental”; and the investment restrictions and limitations placed on potential foreign investors.

About USD$8.6 mil­lion worth of capital has been poured into the nation's EZs to date. The Ministry of Planning and Investment estimated that EZs were likely to attract an additional USD$2.5-3 billion by the end of 2007 and in early 2008 as sev­eral major projects currently in the pipeline complete licens­ing and investment procedures.

• Dung Quat: The Dung Quat EZ (10,300he) has li­censed 70 investment projects worth a combined USD$3.8 billion.

• Chan May-Lang Co: The Chan May-Lang Co EZ (27,000he) has attracted 50 investment projects worth USD$1 billion.

• Chu Lai: The Chu Lai OEZ covers 27,000 hect­ares and is envisaged becoming a financial, bank­ing, commercial, tourism, telecoms and service center in central Vietnam. The zone has to date attracted 57 projects with total investment capital of USD$780 million. Quang Nam last month introduced 16 projects worth US$5.7 billion to seek investors.

• Van Phong: Van Phong is the largest of 9 economic zones currently established in the country and is situated in Khanh Hoa Province. It has drawn the special attention of the Japanese group Sumitomo, which planned to build a container port expected to cost USD$250 million. The group also planned to set up a coal-fired thermoelectric plant in the zone with a total capital of USD$3.5 billion.

• Vung Ang: The 23,000 hectare Vung Ang EZ has absorbed a USD$1.25 billion thermopower plant owned by Viet Nam Ma­chinery Installation Corpora­tion (Lilama).

• In mid-2008 the PM approved the establishment of the South Phu Yen Economic Zone covering 20,730 hectares for enterprises especially operating in the oil industry.

• In mid-2008, the PM approved a plan to set up 9 additional EZs along the country's bordergate region by 2020, bring­ing the total number of EZs in the country to 30. The plan calls for the construc­tion of infrastructure and the set­ting up of a well co-ordinated man­agement mechanism, together with policies that would increase the gross import-export revenues with neighbouring border regions to USD$43 billion by 2020. The 9 target bordergate eco­nomic zones are Mong Cai, Lao Cai and Lang Scan in the north, the special economic zone of Lao Bao and another central bordergate economic zone Cau Treo, the larg­est border economic zone of Bo Y in the Central Highlands, Moc Bai, An Giang, and Dong Thap in the south.

A number of other economic zones have been set up across the country including Van Don in Quang Ninh province, Nhon Hoi in Binh Dinh (12,000ha), Nghi Son in Thanh Hoa (18,600ha), Phu Quoc (56,100ha), and Dong Nam in Nghe An (18,800ha). These zones have more than industrial parks to include ports, residential areas, free tax areas and tourism complexes where investors are often offered more preferential treat­ment than in other regions. Haiphong is applying for an economic zone.

Investment in EZ’s (Economic Zones) to end 2006 : -

-        No. registered projects –                     300

-        No. realized projects –                         60

-        Registered capital –                             $10 billion

-        Realized capital –                                $0.4 billion

Typically, enterprises carrying on manufacturing and other business activities in OEZs, including domestic investors shall be completely exempt from CIT for 4 years after taxable incomes are first generated and enjoy a 50% rebate for the 9 subsequent years. Thereafter, a rate of 10% shall apply to such projects for 15 years from the time of starting the business. Existing companies which set up new production lines or expand old ones, renew technologies, set up waste treatment facilities or invest in enhancing productivity shall be exempt for 4 years from income tax on the increased incomes. They will also enjoy a 50% rebate for the 7 subsequent years at most. For foreign invested enterprises and foreign parties to business co-operation contracts that suffer losses after paying CIT may transfer such losses to subsequent years for deduction from their taxable incomes. Such transfers may be done for not more than 5 years. Investors are also typically exempt from import tax where the goods are of foreign origin (manufactured, processed, recycled or assembled in the non-tariff area or have at least 40% of their value originating from ASEAN as evidenced by certificates of ASEAN origin. If imported raw materials or components are used, import tax shall be imposed on the volume of the imported raw materials or components constituting such goods. Foreign invested enterprises investing in a OEZ shall not have to pay import tax on raw materials, supplies and components imported for production for 5 years from the time of commencing production.

Hi-Tech Parks

There are 7 operational hi-tech parks nationwide, covering some 750ha, ex­cluding nearly 2,500ha for 14 industrial parks with hi­ tech applications. If every­thing goes as planned, an­other 33 hi-tech parks will come on stream, covering 16,426ha and the High Technol­ogy Law (1^st July 2009), offers more favorable mechanisms to encourage various localities and economic sectors to de­velop hi-tech parks.

Tax Regimes for Industry

There are two major categories of industrial estates, namely Industrial Parks (IP’s) and Enterprise Processing Zones (EPZ’s), with different levels of incentives being available in each. Incentives also not only vary between but within provinces, in favour of remoter and / or mountainous & economically challenges regions.

According to Decree 152/2004/ ND-CP dated 6^th August 2004 regulations guiding the rates, exemptions and reductions to the standard rate of 28% CIT, the following tax incentives apply to IP & EPZ investors : -

• Service establishments newly established through investment projects in IPs are subject to a tax rate of 20% from which they are exempt for 2 years after the taxable incomes are generated and be entitled to an additional 50% reduction of the payable tax amounts for the 6 subsequent years.

• Service establishments newly established through investment projects in EPZs and production establishments newly established through investment projects in IPs are subject to a tax rate of 15% from which they are exempt for 3 years after the taxable incomes are generated and be entitled to an additional 50% reduction of the payable tax amounts the 7 subsequent years.

• Business establishments newly established through projects where investment is specially encouraged; newly established foreign-invested medical, education and training, and scientific research establishments are entitled to a preferential tax rate of 10% for 15 years after commencing their business activities and be exempt from tax for 4 years after taxable incomes are generated and be able to benefit from a 50% reduction of the payable tax amounts for the 9 subsequent years.

Typical Income Tax Incentives Inside & Outside IPs & EPZs

Type of Enterprise                          Inside                                     Outside

·        Hi-Tech Enterprises                     Rate – 10%                    

    Tax Exemption – 8 years

·        EPZ Enterprises                         Rate – 10%

    Tax Exemption – 4 yrs &

    50% reduction for next 4

·        Export over 80%                        Rate – 10%                  Rate – 10% for 15 yrs

Tax Exemption – 4 yrs &

Tax Free – 4 yrs

50% reduction for next 4 Reduction – 50% for next 4yrs

·        Export over 50% less 80%          Rate – 15%                     Rate – 15% for 12 yrs

Tax Exemption – 2 yrs & Tax Free – 2 yrs

50% reduction for next 3 years

Reduction – 50% for next 3 yrs

·        Export less 50%               Rate – 15%                                  Rate – 25%

Tax Exemption – 2 yrs

·        Service & Others              IZ Service Ent. Rate – 20%              Rate – 25%

Tax Exemption – 1 yr

EPZ Service Ent. Rate – 15%

Tax Exemption – 2 yrs

Import Duties : - Foreign Invested Enterprises (FIEs) and parties to Business Co-Operation Contracts (BCCs) shall be entitled to exemption from import duties in respect of goods imported to form fixed assets, including : -

• Machinery & equipment

• Specialized means of transport which form part of the technological process and vehicles used for workers transportation (automobiles of 24 seats or more; water craft).

• Components, detailed parts, spare parts, support structures, moulds and accessories of the above equipment and machinery, specialized means of transport and vehicles.

• Raw materials and supplies imported to manufacture equipment and machinery which form part of the technological process, or to manufacture components, detailed parts, spare parts, support structures, moulds and accessories of the equipment and machinery.

• Construction materials which have not yet been locally produced.

• Raw materials and supplies imported for the implementation of BOT, BTO and BT projects; seeds of crops, breeds of domestic animals, special pharmaceutical agricultural products permitted to be imported for the implementation of agricultural, forestry and fishery projects.

The exemption from import duties applicable to the above imported goods shall also be applied in the case of expansion of a project and replacement or renewal of technology.

Typically Encouraged Special Investment Projects

• Projects for production, processing and export of 80% or more of products;

• Projects for processing of agricultural, forestry products (except wood) and aquatic products for export of at least 50% of products from domestic material sources;

• Projects for production of new breeds of high quality and high economic efficiency;

• Projects for culture of agricultural, forestry and aquatic products;

• Projects for the production of new or rare and precious materials, projects for application of new biological technology, new technology for manufacturing communications and telecommunications equipment;

• High Tech industrial enterprises;

• Projects for research and development;

• Production of waste treatment equipment;

• Projects for manufacturing antibiotic materials;

• Projects for treatment of environmental pollution and protection and treatment of waste;

• Investment under BOT (Build-Operate-Transfer), BT (Build-Transfer) contracts;

• Production of high quality steel, alloy, non-ferrous metal, special metal, billet and sponge iron for industries;

• Manufacture of machine tools for metal machining and equipment to be used in metallurgy;

• Manufacture of communication and telecommunication devices;

• Manufacture of electronic and informatics equipment and components, biological industry.

Typically Encouraged Investment Projects

·        Projects for production, processing and export of 50% or more of products;

·        Projects for production, processing and export of more than 30% of products using a large quantity of domestic materials (having value of 30% or more of production expenses);

·        Projects employing a high number of labourers and effectively utilising natural resources available in Vietnam;

·        Processing of agricultural, forestry products (except wood) and aquatic products;

·        Preservation of food, preservation of post-harvest agricultural products;

·        Exploration, exploitation and intensive processing of minerals;

·        Development of petrochemical industry, construction and operation of oil and gas pipelines, oil storage, oil port;

·        Production of equipment and component pack for exploitation of oil and gas, energy and mines; manufacture of large size lifting equipment;

·        Manufacture of electrical middle and high voltage devises;

·        Manufacture of precision mechanical safety test equipment, safety test equipment, manufacture of moulds for metal and non metal products;

·        Manufacture of diesel engines with advanced technique and technology, manufacture of machinery and spare parts for dynamics and hydraulics and compressing machine;

·        Manufacture of spare parts for automobile and motorbike, manufacture and assembly of equipment, vehicle and machinery for construction, manufacture of technical equipment for transportation sector;

·        Building of ships, and manufacture of equipment and spare parts for cargo ships and fishing boats;

·        Production of agricultural machines, spare parts, equipment, irrigation equipment;

·        Production of materials for insecticides;

·        Production of basic chemicals, pure chemicals, dyer and specialized chemicals;

·        Production of materials for detergents and additives used in chemical industry;

·        Production of special cement, composite materials, sound insulating materials, electrical insulating materials, heat insulating materials, wood­ substitute synthetic materials, refractory materials, plastic materials used for construction, crystal fibre;

·        Production of light construction materials;

·        Production of powder of papers;

·        Production of silk, fibre of various kinds, special fabric used in industries;

·        Production of high quality materials for production of footware and garments for export;

·        Production of high quality packages for exports;

·        Production of medical equipment used in analytical technology and extractive technology in medicine;

·        Production of materials for medicines, production of medicines meeting the GMP international standards;

·        Public transportation;

·        Buildings and reformation of bridges, roads, airports, railway stations, railway networks;

·        Building and operating infrastructure of IPs and EPZs and Hi Tech Zones.