Businesses advised to capitalize on tax incentives

Companies should find ways to make the most of the tax incentives offered by the Government, Nguyen Thi Cuc, head of the Vietnam Taxation Consulting Association, told a workshop in HCMC on Tuesday.

“The corporate sector should capitalize to the full on the tax incentives that the Government provides,” Cuc said at the “Taxing our way out of global recession” workshop.

The workshop covered topics relating to new provisions on value added tax rebates for specific services and extension of tax payment deadlines. It was organized by the British Association of Chartered Certified Accountants (ACCA) and the Vietnam Taxation Consulting Association.

Concerning personal income tax, the participants voiced concerns about determining and registering personal income tax in line with Official Notice 3473/TCT-TNCN dated September 8, 2010 of the General Department of Taxation.

Particular attention was also given to corporate income tax as well as the important new provisions on customs invoices and invoices made to order.

“Tax policies in a developing country like Vietnam should be simple,” said Chas Roy Chowdhury, head of UK’s ACCA Taxation Department.

Cuc said the latest move of the Government on giving rights of invoice order to enterprises was remarkable, as before only the Ministry of Finance could supply businesses with invoices causing many difficulties.

“This shows the Government is changing the way of administration and facilitating business,” she added.

Chowdhury said, “Companies need to be fully aware that in time of crisis, cash is the most important asset and they need to pursue debts effectively to make sure that customers pay their debts on time.”

Experts also stressed the importance of taxation consultants.

Cuc, who is the former deputy head of the General Department of Taxation, said there weren’t enough taxation consultants with enough know-how working in Vietnam to help the 200,000 small and medium enterprises to deal with the complicated taxation system here.

This is very dangerous if enterprises do not know thoroughly what they have to do and and how they can benefit, she said.

Short on confidence

Input costs for enterprises are increasing due to a higher lending interest rate and a depreciating dong, but deeper problems continue to cause concern.

The recent increase in the lending interest rate and the two depreciations of the Vietnam dong against the US dollar between November and February have contributed to increasing the input costs of enterprises in Vietnam. But foreign entrepreneurs welcome the changes, saying they are the right moves by the government in correcting distortions in the monetary market, although they do still worry about long-term stability. 

Welcoming higher costs

The current lending rate has reached around 17 - 18 per cent per year, up from the capped rate of 12 per cent. In the middle of March, when it was obvious that bankers were frustrated with the cap and were trying to get around it, the State Bank of Vietnam (SBV) replaced it with a negotiated rate scheme. Banks were previously reluctant to provide loans because, with the capped lending rate of 12 per cent and the deposit rate of 10.5 per cent, there was not enough margin for them to pay their expenses and cover the risk. 

Foreign businesspeople welcome the new interest scheme, as they now have better access to funding for their business. “The government was right to remove the cap on the interest rate, which caused distortions in the market,” said Mr Michael Pease, General Director of Ford Vietnam Limited and Vice Chairman of the American Chamber of Commerce in Hanoi. 

Mr Alain Cany, Country Chairman of Jardines Matheson Group and Chairman of European Chamber of Commerce in Vietnam, is positive that the increase in the interest rate is just a temporary problem before the government can control inflation. “In any country, a free interest scheme is much better [than the cap scheme],”he said. “We are not happy to see the finance cost increase because it possibly reduces our profitability. But it makes businesses improve their efficiency and make wise decisions in their investments.

The increase in the lending interest rate does add costs to our businesses but it affect European companies less than Vietnamese companies because we are more productive and efficient. The bigger issue is the availability of funding for sound and productive businesses. With the negotiated rate scheme, the availability of loans for businesses has improved.”

The increase in the lending rate, Mr Cany, who was CEO of HSBC in Vietnam for many years, continued, is not because the cap was removed but because of two other reasons. “First is the lack of confidence in the dong, so people are reluctant to make deposits in dong at banks and ask banks to pay high interest rates for such deposits,” he explained. “Second is the government’s tight control over inflation, which makes credit availability more difficult. I believe that the current high interest rate will be a temporary problem for a few months before the government takes action to control the situation.”

Vietnamese enterprises, meanwhile, are not as upbeat as Mr Cany about the increased rate. Chairman of the Vietnamese Small and Medium-sized Enterprise Association, Mr Cao Sy Kiem, said that with an average profitability rate of only 15 to 20 per cent, most SMEs in Vietnam are facing financial difficulties in managing their businesses with an interest rate of 18 per cent. Several enterprises, particularly exporters, have switched to borrowing US dollars to reduce interest payments, despite the risk of another depreciation of the dong. The lending rate in the US dollar now stands at around 5.5 per cent per year. 

Mr Cany said that European enterprises are very good at organising their businesses to maximise the use of resources and minimise costs, as long as they have access to funding. Vietnamese enterprises may not as skilled in this regard, and are hit a lot harder when the cost of funding increases by 5 - 6 per cent. 

Not enough

At the same time, the two CEOs consider the depreciations of the dong against the US dollar to be the right way to deal with existing shortfalls in dollar supply in the foreign exchange market. However, their businesses are more exposed to the fluctuations and they are concerned about the long-term stability of their businesses in such an environment. “As we price our cars in Vietnam dong, the depreciation of the dong against the US dollar plus the increases in registration fees and the value added tax rates increased our vehicle prices by 20 per cent,” said Mr Pease. “Consequently, demand for our cars became very weak. I am very concerned about our recent sales.” 

Ford Vietnam is typical of those who will suffer under the changes. Their cars are sold in dong while the majority of components are imported and paid for with US dollars. When the dong was depreciated by 3.4 per cent against the dollar in February, after having been devalued by 5 per cent in November, the car maker saw its production costs increase significantly. At the same time, the interest rate support policy on short-term loans was canceled, and registration fees and value added tax rates on automobiles were increased, the latter going back to 10 per cent from 5 per cent last year. Consequently, car sales in general and at Ford in particular have fallen. “Our sales have gone down significantly, even in February before Tet, when they usually increase,” said Mr Pease, without revealing exactly how much the slide was. The Vietnam Automobile Manufacturers Association (VAMA) reported that total sales by members in February fell 17.75 per cent month-on-month, after having plummeted 53.8 per cent in January. 

However, Mr Pease is more at ease with the fact that his company’s access to US dollars is no longer as problematic as it was late last year. “We have seen significant improvement in dollar supply compared to the situation late last year when it was a major issue for us,” he said. 

Mr Cany, meanwhile, whose group is also investing in the Truong Hai Company, a car manufacturer in Quang Nam province, is concerned about the instability of the dong over the long term, believing that depreciation alone is not enough to stabilise the currency. “I think the depreciation was the right move because there was a large gap between the exchange rate on the black market and the official rate,” he said.
The problem, he continued, it that it has not restored confidence sufficiently and people are now awaiting the next move. “We don’t have a clear idea of the SBV’s strategy. I saw the dong depreciated two times within three months. I question what are they going to do in three months time. The SBV should state it intends to keep the dong stable and for how long and install tools to make sure its stability.” 

In his view there is no economic reason for the dong to be depreciated against the dollar. “The Vietnamese economy is competitive enough,” he believes. “The dong is the only currency in Asia to be depreciated against the dollar in the past year. It is not a matter of the competitiveness of the dong and the economy but a matter of confidence in the dong. The availability of the dollar in the market has improved but is still difficult because people are not yet confident in the dong.” 

Confidence and strategy 

Mr Cany sees that the deeper reason for both the increase in the interest rate and the depreciation of the dong is, indeed, confidence in the currency. If the SBV and the government could clearly state their monetary targets and strategies and implement consistent measures to realise them, confidence would be restored, he believes. “Once people are confident in the dong, they are more willing to keep the dong and accept lower interest rates on deposits,” he said. “Then the lending rate will automatically go down. And the pressure on the foreign exchange rate will also ease. What is really important for a business is consistency in policies.”

He did not, however, address the pressures of high inflation and trade deficit on the two inter-linked problems. International banks have pointed to these as the main reasons for the two problems, which not only require consistency in monetary policies but also fiscal policy and economic development strategies. HSBC late last month predicted the SBV would have to increase the prime rate by 1 per cent within the next few weeks due to the high inflationary pressure. In the middle of March, Standard Chartered Bank predicted that the dong would continue to suffer from further depreciation pressure due to the large trade deficit and high inflation in the economy. But, in the end, the SBV kept the prime rate unchanged at 8 per cent per annum on March 25.

The consumer price index (CPI) in the first quarter of this year reached 4.12 per cent against the end of last year. The import surplus is estimated at $3.6 billion, equal to 25.6 per cent of total export turnover, according to the latest figures from the Ministry of Planning and Investment.  

A hard role to uphold

The Vietnamese prime minister at the opening session on Wednesday of the National Assembly put the partial blame on the Government and relevant ministries for the collapse of the country’s shipbuilding giant Vinashin.

An 18-page report on the Vinashin debacle sent to lawmakers who are attending the year-end meeting of the legislature reveals the Government was fooled by Vinashin leaders. In many instances, Vinashin’s top management sent to the Government the debt-laden company’s reports that had been falsified to bloat earnings.

Vinashin is part of the broader picture about the problematic management of state-owned enterprises, particularly conglomerates and corporations.

“The role of the state as an administrator and an owner at state-owned enterprises in general and conglomerates in particular has exposed problems and failed to catch up with changes in a market economy,” says a National Assembly Economic Committee review of the Government report on social and economic performance. “Mechanisms for scrutinizing, supervising, auditing and managing corporate finance have proved to be inefficient.”

The state corporate sector has got a lot of handsome privileges from the Government, such as easy and cheap access to capital and resources like land and minerals, which are still a far-fetched dream for the non-state sector that consists of local private and foreign-invested firms.

With such favorable treatment, state-owned enterprises should have led the charge on the country’s development front as had long been desired by the authorities. Surprisingly, however, the state sector has had the lowest growth rate and created the lowest number of jobs, according to Saigon Tiep Thi newspaper.

The paper quotes statistics as indicating that the state corporate sector’s ICOR (Incremental Capital Output Ratio) – the extra capital needed to increase one unit of output – has kept rising over the years, now at between 8 and 14. Meanwhile, the private sector with limited incentives from the Government has proved to be more efficient with the ICOR index ranging from 3 to 5, and thus contributed significantly to the nation’s growth.

Nguyen Quang A, a high-profile economist, says half the total amount of investment in the economy is sucked into the state corporate sector. But this sector’s contributions to the economy have been largely insignificant despite the huge investment being funneled into state firms by the Government. What’s more, they have been steadily falling over the years.

Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in HCMC, says in an article published in Thoi bao Kinh Te Saigon of Saigon Times Group this week that state-owned enterprisers generated 30% of GDP in 2001-2005 but the ratio dipped to 28% in 2006-2009.

Their contributions to GDP growth plunged from 33% in 2001-2005 to 19% in 2006-2009, Anh says, because the state corporate sector’s GDP growth slowed down from 7.6% to 4%, half the percentage achieved by the private sector.

The state corporate sector workforce has also declined over time. A survey by the General Statistics Office shows the combined workforce of state-owned businesses slid from 44% in 2001-2005 to 24% in 2006-2008, Anh says, adding that even worse, massive layoffs happened at these companies with new job creations dropping from minus 4% to minus 22% in the corresponding periods.

The role of this sector in the manufacturing industry has also tapered off though the Government has taken a vision to steer Vietnam toward an industrialized economy by 2020. “If we look at industrial production, a focus of Vietnam’s industrialization strategy, state-owned enterprises have a very humble role,” Anh says. “In 1995, the proportions of industrial production value in the state and private sectors were equal but changed to 20%-80% in 2009.”

The picture about the state corporate sector is pretty clear now. It has failed to live up to expectations that it leads the economy. Resources should have been channeled into where efficiency of capital use is greater, more jobs are generated, and productivity is higher.

Another high-profile economist, Le Dang Doanh, has cast doubt over the lead role of state-owned companies. Speaking to Tien Phong newspaper late last month, he proposed the phrase “The state economic sector upholds the lead role” be removed from the draft document to be presented at the National Party Congress slated for January next year.

Sticking to this ideal is stirring up controversy, especially at a time when Vinashin remains a hot-button issue, he says, and Vietnam needs real conglomerates, not those technically merged via administrative decisions.

The state has kept insisting on championing a level playing field for all, so it is a paradox to emphasize the lead role of the state corporate sector only, he says.

Meanwhile, an editorial of Thoi bao Kinh te Saigon suggests putting an emphasis on the role of the state in macro-economic policymaking rather than the lead role of state firms. The rationale of this suggestion is that in the aftermath of the global financial crisis, developed economies have acknowledged the important role of the state in economic regulation and control and in coping with market shortcomings to reduce market volatility bred by greed or asymmetric information.

“It is the state that, through tools such as taxes and investment incentives, can orient businesses in all sectors toward the fields that most benefit the economy,” says the editorial.