General Assessment of Adjusting Vietnam's Investment Attraction Policy in the Face of the Trend of Forming Free Trade Agreements in Asia

c) Value added tax

According to the Law on Supplementing and Amending a Number of Articles of the Law on Value Added Tax dated June 17, 2003, foreign investors do not have to pay value added tax on: “Equipment, machinery, specialized means of transport in technological lines and construction materials that cannot be produced domestically and need to be imported to create fixed assets of enterprises; equipment, machinery, materials, and means of transport that cannot be produced domestically and need to be imported for direct use in scientific research and technological development activities; aircraft, drilling rigs, and ships rented from foreign countries that cannot be produced domestically and used for production and business; equipment, machinery, spare parts, specialized means of transport and materials that cannot be produced domestically and need to be imported to conduct exploration and development activities for oil and gas fields”.

3.4.2. Foreign exchange incentives

a) Regulations on opening an account

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The 1987 Law on Foreign Investment only allows enterprises with foreign investment capital to open accounts at the Bank for Foreign Trade of Vietnam or branches of foreign banks located in Vietnam (Article 17). Accordingly, enterprises with foreign investment capital are not allowed to open accounts at banks abroad. In fact, before 1992, there were many investment projects requesting to open accounts at banks abroad, especially for the loan portion abroad. Lenders only lend when this loan opens an account at a bank abroad. Investors believe that this is an international practice and is very necessary for business activities. However, due to many difficulties and complexities in management, if allowed, it is only limited to a few special necessary cases. Therefore, the 1992 amended Law on Foreign Investment was amended and supplemented to allow enterprises with foreign investment capital to open accounts in Vietnamese currency and foreign currency at Vietnamese banks or at foreign banks.

joint venture bank or at a foreign bank branch located in Vietnam. In special cases approved by the State Bank of Vietnam, foreign-invested enterprises are allowed to open loan accounts at foreign banks (Article 17). Next, the 2005 Investment Law provides more clearly and specifically, not only limited to "foreign-invested enterprises" but also extended to all "investors", in which "Investors are allowed to open foreign currency accounts and Vietnamese Dong accounts at banks licensed to operate in Vietnam. In cases approved by the State Bank of Vietnam, investors are allowed to open accounts at foreign banks" (Article 61).

b) Foreign exchange balance issue

The 1996 Law on Foreign Investment codified the provisions on State support for foreign currency balance for infrastructure projects, production of essential import substitutes and other specially encouraged projects, which were stipulated in Decree 18/CP dated April 16, 1993 of the Government detailing the implementation of the Law on Foreign Investment in Vietnam, and at the same time expanded it to investment forms in general, unlike the provisions in Decree 18/CP previously, which only applied to joint venture enterprises. This is an expansion of the scope of State support for foreign currency balance, which investors are very interested in when deciding to invest. Currently, according to the 2005 Law on Investment, the Government will ensure or support foreign currency balance for a number of important projects in the fields of energy, transport infrastructure, and waste treatment (Article 16).

3.5. FPI attraction policy

a) Regulations on industries in which foreigners are allowed to buy shares

part

According to Decision No. 260/2002/QD-BKH dated May 10, 2002 on promulgation

The list of occupations in which foreigners are allowed to buy shares in non-state enterprises has issued 35 occupations in the following occupations:

Fields: Agriculture, forestry, fishery; Industry, processing; Tourism, hotels and restaurants; Transportation, warehousing and communications; Science and technology, health, education activities.

b) Regarding regulations on capital contribution and share purchase by foreign investors

Previously, according to Decision 36/2003/QD-TTg, foreign investors were allowed to contribute capital and purchase shares of Vietnamese enterprises at a maximum of 30% of charter capital. However, the promulgation of Decree No. 139/2007/ND-CP on September 5, 2007 guiding the implementation of a number of articles of the Enterprise Law has

„open‟ a lot. Accordingly, all legal entities, including enterprises with foreign investment capital, regardless of the place of registered head office, and all individuals, regardless of nationality and place of residence, have the right to contribute capital and buy shares at an unlimited level in enterprises, except for some cases (listed joint stock companies, enterprises operating in conditional industries as prescribed by specialized laws; equitized state-owned enterprises and service enterprises applying the Schedule of Commitments on Trade in Services with the WTO. Right in the Schedule of Commitments on Services with the WTO, Vietnam committed: “One year after joining, the 30% foreign equity limit in purchasing shares of Vietnamese enterprises will be eliminated, except for capital contributions in the form of purchasing shares in joint stock commercial banks and industries not committed in this schedule of commitments”.

Regarding the participation rate of foreign parties in the stock market, since the establishment of the Vietnamese stock market, the Government has issued 3 Decisions:

Decision 139/1999/QD-TTg was issued on December 30, 1999.

- Foreign organizations and individuals are allowed to hold a maximum of 20% of the total outstanding shares of an issuing organization, investment fund certificates of a Securities Investment Fund in which a foreign organization is allowed to hold a maximum of 7% and a foreign individual is allowed to hold a maximum of 5%.

- Foreign organizations and individuals are allowed to hold up to 40% of the total outstanding bonds of an issuing organization, of which a foreign organization is allowed to hold up to 10% and a foreign individual is allowed to hold up to 5%.

- The capital contribution of a foreign securities business organization participating in a joint venture securities company must not exceed 30% of the charter capital of the joint venture securities company.

Decision 146/2003/QD-TTg dated July 17, 2003

- Foreign organizations and individuals buying and selling shares on the Vietnamese stock market are allowed to hold a maximum of 30% of the total listed shares of an issuing organization.

- The capital contribution ratio of a foreign securities business organization in a joint venture Securities Company or a joint venture Fund Management Company is maximum 49% of the charter capital.

This regulation prompted a surge in foreign investor trading at the end of 2003, accounting for 28% of the total stock trading volume on the Vietnamese stock market.

Decision 238/QD-TTg issued on February 29, 2005

- Foreign organizations and individuals buying and selling securities on the Vietnamese stock market are allowed to hold up to 49% of listed shares and registered shares of the Securities Investment Fund, with no limit on the holding ratio for outstanding bonds of the issuing organization.

- Foreign securities business organizations are allowed to contribute capital, purchase shares, or contribute capital to joint ventures to establish securities markets or securities investment fund management companies with a maximum of 49% of charter capital.

Thus, the participation rate of foreign investors has increased from 30% to 49%. This is a strategic regulation in attracting foreign investment into the market.

securities. This decision is one of the reasons why foreign investment capital has flowed strongly into Vietnam since 2006.

4. General assessment of Vietnam's adjustment of investment attraction policies in the face of the trend of forming free trade agreements in Asia

- Pacific Ocean

In recent times, the adjustment of FDI attraction policies has generally brought about significant changes in FDI attraction, contributing to promoting economic development. From an average contribution of 6.3% of GDP in the period 1991-1995, the FDI enterprise sector contributed about 10.3% of GDP in the period 1996-2000. In the period 2001-2005, the above proportion reached an average of 14.6% of GDP (in 2005 it reached about 15.5% of GDP) and in 2006 and 2007, the FDI economic sector contributed over 17% of GDP [23]. In particular, the FDI sector has increasingly demonstrated its role in contributing to the growth of Vietnam's export turnover in recent times. Since 2003, the export turnover of the economic sector with foreign investment capital has accounted for more than 50% of the total export turnover of the whole country. In 2006, the export turnover of the whole country reached 39,826.2 million USD, of which the economic sector with foreign investment capital reached 23,013.9 million USD, accounting for 54.7% [38]. The adjustment of the policy to attract foreign investment has contributed to shifting the economic structure towards industrialization and modernization. However, the policy to attract foreign investment still reveals the following limitations:

4.1. Policies related to licensing of foreign investment projects

Currently, Vietnam is applying two regimes: investment license registration and investment license appraisal. Although Vietnam has relaxed the conditions for investment license registration, allowing projects under 300 billion VND and not in the conditional investment sector to register for investment licenses. However, this policy has not yet encouraged projects requiring high capital and large scale. Although attention has been paid to improving the procedures for investment license appraisal and issuance, they are still very complicated. The appraisal time is still long due to the need to reach consensus among ministries and branches. License issuance

for foreign investors still have many shortcomings. According to the survey of the Vietnam Competitiveness Improvement Project (VNCI) just announced on January 24, 2008, there are still complicated regulations, causing costs for foreign investors. According to this survey, it is estimated that 50% of licenses and sub-licenses are illegal, more than 2,900 types of licenses are not completely in accordance with the provisions of the law. Meanwhile, there are still 22 types of legal instruments that are confusing, overlapping, creating burdens for investors [41].

4.2. Foreign capital and control policies

The current regulation is that foreign organizations and individuals buying and selling securities on the Vietnamese stock market are allowed to hold a maximum of 49% of the total number of listed shares, registered for trading of a listed organization, registered for trading on securities trading centers. This regulation limits the ability of foreign investors to control enterprises through the stock market channel.

In addition, foreign investors are only allowed to own 30% of the charter capital of Vietnamese banks. This regulation does not attract the attention of strategic investors, which are foreign banks, in the joint stock banking sector, because all joint stock banks have small capital (less than 500 billion VND), while a strategic investor is only allowed to hold a maximum of 15% of the charter capital (only a minority shareholder).

4.3. Policies in the implementation of FDI projects

a) Restricting business lines in enterprises with foreign investment capital

The limitation of 35 industries allowed to sell shares to foreign investors causes awkward situations such as [40]:

- After selling shares to foreign investors according to current regulations, Vietnamese enterprises, due to the need to expand business and the survival of the enterprise, are allowed to expand into industries that are not prohibited by law (according to

Law on Enterprises) but these industries may not be allowed to sell shares to foreign investors.

- Vietnamese enterprises operate in many industries, including secondary industries that account for a low proportion of revenue, but these industries are not included in the list of industries permitted to sell shares to foreign investors. Therefore, these types of enterprises do not have the opportunity to sell shares to foreign investors.

The above shortcomings make foreign investors hesitant to buy shares of Vietnamese enterprises because they fear that the enterprises may violate current laws or that the enterprises' business activities will be limited to certain industries, which will limit their development.

In addition, the restriction on industries that are allowed to sell shares to foreign investors has caused some industries that require high technology, require the acquisition of foreign capital and technology to have conditions to establish and develop enterprises, such as asset management (debt management services, assets, real estate, business valuation services, credit rating, debt trading and collection services), urban architecture consulting services, infrastructure development consulting services, etc., to not be allowed to call for capital from foreign investors. In addition, some industries that require large capital mobilization such as the development of power and water plants, steel production, infrastructure development, etc. are also not included in the list of industries that are allowed to sell shares to foreign investors.

b) The corporate income tax rate of 28% is not yet competitive compared to other countries in the region [39]

Research on international information shows that the current corporate income tax rate (28%) is higher than that of countries in the region with more favorable infrastructure and investment environments. This tax rate in Singapore is 19%, Philippines 30%, China 25%. Therefore, the Government needs to soon amend the general tax rate from 28% to 25%, and at the same time abolish the tax.

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