Vietnam in the UK’s Pivot to ASEAN

By Charles Small, Senior Associate, Dezan Shira & Associates

David Cameron has made the first trip to Vietnam of any serving UK Prime Minister, signaling a pivot of the UK towards the booming ASEAN region, in which Vietnam is forecast to sustain real GDP growth of over five percent per annum to 2030.

The visit comes following a successful first half of 2015 for UK companies, which have invested more capital into Vietnam than companies of any other EU member, making up 24.7 percent of new EU-origin registered capital so far this year.

Prime Minister Cameron is expected to witness agreements signed in aviation, finance, and oil and gas during the trip.

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UK-Vietnam Bilateral Trade

Trade between the UK and Vietnam is growing. Exports from the UK reached £300 million (US$469 million) in 2014, up 12 percent from 2013 levels. Top UK exports to Vietnam include animal feed, chemical materials, crustaceans and fish, electrical, industrial, power generating and other specialized machinery, medicinal and pharmaceutical products, metal ores, and scientific equipment. These exports contain crucial inputs for equipping the country’s factories; machinery, equipment, tools and instruments were the most imported category of goods into Vietnam from January 1 until July 15, 2015, reaching US$15.15 billion in value.

In 2014, Vietnam’s exports to the UK reached £2.46 billion (US$3.84 billion) in value. The most significant of such exports included £740 million (US$1.15 billion) of telephones, £373 million (US$582 million) of garments, and £362 million (US$565 million) of footwear. The UK was the eighth biggest destination for Vietnamese exports in the first half of 2015, with exports reaching US$2.2 billion in value.

The UK government provides consultation to British businesses exporting to Vietnam through UK Trade & Investment. In addition, UK Export Finance provides exporters with insurance and banks with guarantees to share the risk of providing finance to UK exporters. The ministerial department also provides loans to overseas buyers of UK goods and services.

Free Trade in Vietnam

Vietnam is a member of the Association of Southeast Asian Nations (ASEAN) and the World Trade Organization, and is a party to FTAs with Australia, China, India, Japan, New Zealand and South Korea through ASEAN. It has separate bilateral FTAs with Chile, Japan and South Korea. Additionally, Vietnam is finalising an agreement with the Eurasian Economic Union (EEU), the European Union, and with the U.S. through the Trans-Pacific Partnership.

The reduction in tariffs resulting from these FTAs, particularly in the ASEAN Free Trade Area, gives businesses in Vietnam to import inputs for reduced or no tariffs.

Prime Minister Cameron’s visit is expected to include discussions on the EU-Vietnam FTA, which is nearing completion. Cameron has also expressed support for an ASEAN-EU FTA during his visit to the ASEAN headquarters in Jakarta.

UK Investment into Vietnam

Total registered UK foreign direct investment (FDI) into Vietnam stands at US$2.7 billion, and is expected to reach the US$3 billion target of the 2010 UK-Vietnam Strategic Partnership Agreement soon. Key opportunities for British businesses in this new workshop of the world are in education, infrastructure development and light industry.

Education

The UK is the EU’s largest investor in Vietnam’s education sector, and the country’s demographics are suited to it; in 2014, Vietnam’s relatively young population had a median age of 29.2 years. Literacy rates in the country are high for the region; 94.5 percent of the population aged 15 and over can read and write, but Vietnam still suffers from a skills gap which British businesses in education can do more to fill.

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In order to sustain Vietnam’s levels of growth over the long-term, the country must address its problem of low labor productivity. Productivity of the average Vietnamese worker in terms of GDP created amounts to 1/15th, 1/5th, or 2/5ths of an average worker in Singapore, Malaysia, or Thailand respectively.

This metric does not reflect the diligence of Vietnamese workers, but rather the low value-added industries which the majority work in. In 2012, 48 percent of Vietnam’s workforce were in agriculture, doing little to contribute to the country’s recent economic growth. Indeed, the World Bank found that productivity growth in Vietnam is intrinsically linked to the structural economic transformation away from employment in agriculture to non-agricultural work.

Investment in education is absolutely necessary to equip more of the country’s workforce with the skills to work in the industries driving its economic growth, and British businesses are a part of Vietnam’s continuing transformation.

Infrastructure

The UK provides credit guarantees to firms investing in infrastructure in ASEAN, and Cameron has announced that the UK would provide £1 billion (US$1.56 billion) in credit guarantees for infrastructure projects in Indonesia.

There are opportunities for British businesses to bring experience to the table in the construction of the country’s transportation network, particularly in the construction of the second phase of metro line No. 5 in Ho Chi Minh City. However, given that a single metro ticket is expected to be priced lower than a bus ticket, the commercial viability of such metro projects means that they are unlikely to be funded by private investors. Metro infrastructure under development in Ho Chi Minh City is being funded by overseas development assistance.

Railways development is currently focused mainly on mass transit. While Vietnam has a railway network spanning from north to south, only one percent of the country’s total freight volume is transported by rail.

There are close to 235,000 kilometers (146,000 miles) of roads in Vietnam. Of the 16,000 kilometers (10,000 miles) of roads designated as national, only 60 percent are paved, and only 27 percent of the 46,000 kilometers (28,500 miles) of roads designated as district level are paved. This presents a great opportunity for businesses to provide equipment, expertise and training to Vietnamese road builders.

During the UK Department for International Development (DFID)’s time in Vietnam, the organisation has supported the establishment of a Public Private Partnership (PPP) facility to assist in developing the institutional and regulatory framework necessary for identifying successful PPP projects. While DFID’s work in Vietnam is winding down, UK overseas development assistance will still be provided through multilateral organizations.

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Light Industry

Vietnam’s competitive advantage comes into the fore in light industry. Labor-intensive manufacturing benefits from the low minimum wages in the country, existing transport routes and port infrastructure, and well-established supply chains to bring necessary inputs to the factory floor. Minimum wages vary according to the location in which workers are employed under a four-tiered system, which enforces the highest minimum wage in developed areas including central Ho Chi Minh City, and sets lower minimum wages for less economically developed areas.

Furniture manufacturers can take advantage of the country’s 4.35 million hectares of natural production forests, of which the main plantation species harvested include acacia, eucalyptus, pines, rubber and other native species. When sourcing raw wood in Vietnam to manufacture for export, businesses may be eligible for a VAT refund.

The growth of Vietnam’s labor-intensive textiles industry has led to it becoming the world’s fourth largest exporter of textiles. Exports of such products reached US$10.26 billion in value in the first half of 2015, up 10.2 percent from the same period last year.

Key Tax Rates

Vietnam’s rate of Corporate Income Tax (CIT) is set to be lowered to 20 percent of profits from January 1, 2016, which will bring it to the same level as the UK’s.

There are a number of tax incentives for investors in Vietnam, which are location-specific or sector-specific. A rate of 10 percent for 15 years is applicable to new projects in localities facing extreme socio-economic difficulties, economic zones, and hi-tech zones, and  eligible hi-tech, agricultural, construction and energy projects.

Incomes of hi-tech enterprises and hi-tech agricultural enterprises may be tax-exempt for up to four years, and may be eligible for a 50 percent reduction in tax for the following nine years. Those investing in education, healthcare and sports benefit from a rate of 10 percent.

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A CIT rate of 20 percent is applicable to incomes of people’s credit funds and microfinance institutions. From January 1, 2016, incomes of people’s credit funds and microfinance institutions are eligible for a rate of 17 percent.

A 17 percent tax rate will also be applied from January 1, 2016 to new projects of investment in localities facing socio-economic difficulties, and industries including steel production, forestry, energy-saving products, aquaculture, salt production; irrigation equipment; production and refinement of animal feed, and aquatic organism; development of traditional trades. These currently fall under a 20 percent rate.

UK Overshadowed by British Overseas Territories

The scale of investment into Vietnam passing through British Overseas Territories is far greater than that registered as originating in the UK. 13.0 percent of new registered capital in foreign-invested projects in the first half of 2015 in Vietnam came from these territories into 15 projects, compared to only 3.2 percent of Vietnam’s total FDI in all of 2014. The British Virgin Islands ranked as the second most important source of FDI into Vietnam in the first half of 2015, with 12.5 percent of total investment in dollar terms.

In comparison, investment directly from the UK itself accounted for only eight new projects and 0.67 percent of new registered capital in Vietnam. Many British investors choose to enter Vietnam through non-UK holding companies, but this cannot explain away the low figures entirely. In a competitive global business environment, UK companies need to make the most of this pivot to ASEAN and reap the rewards which Vietnam has to offer.

Further Support for Your Business

Dezan Shira & Associates provides accounting services to companies with operations in Vietnam. The firm can help companies establish a direct office in the country and can guide them through the affiliated accounting, tax, legal and HR issues that come with doing so. To arrange a free consultation, please contact us at: vietnam@dezshira.com

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