May the draft amendment of VAT law demotivate Vietnam’s export growth?

The business community, particularly exporters and those heavily invested in international trade, is watching the draft amendment of Value Added Tax (VAT) Law with a keen eye, which could significantly disrupt their operations if implemented.

Businesses are voicing concerns that the proposed amendment could disrupt their operations, and there's a growing unease that their recommendations haven't been given proper consideration.

Pushing through the VAT Law at the eighth session in October this year under these conditions could cause major headaches moving forward, potentially changing the outlook of Vietnam’s investment climate for foreign companies.

A prominent issue for many Vietnamese businesses concerns the proposed narrowing of the 0 per cent VAT rate for export services. 

The draft amendment to the VAT Law suggests a shift from the current broad application to a specifically listed set of services eligible for the zero per cent rate.

This list, according to the draft, would only include services provided to foreign entities and individuals – such as vehicle rentals used outside of the Vietnamese territory; international transport services; and aviation and maritime industries directly linked to international transport.

Bui Ngoc Tuan, Tax Partner of Deloitte Vietnam with 30 years of experience in the field of audit, tax and customs consulting services, offered his insights on this issue.

The business community has expressed concerns about the draft amendment of VAT Law's proposal to limit the application of the 0% VAT rate. Could you elaborate on your thoughts regarding this proposal?

Bui Ngoc Tuan: Export processing enterprises (also known as EPEs) operating within Vietnam's non-tariff zones are likely to bear the brunt of the proposed Value Added Tax (VAT) Law amendment.

These enterprises are a preferred choice for foreign investors, particularly large multinationals, seeking to establish export-focused manufacturing and processing operations.

EPEs currently play a crucial role in generating sources of foreign currency for Vietnam and driving its overall export performance.

The proposed regulation seeks to restrict the application of the current 0% VAT rate, which could have far-reaching consequences for the EPE ecosystem and its supply chain.

Due to the interconnected nature of indirect taxes, where sellers incur output VAT and buyers claim corresponding input VAT, I believe any changes to the 0% VAT rate could disrupt this flow and potentially increase costs for EPEs.

Do you have specific data on these enterprises?

Bui Ngoc Tuan: A representative from Trina Solar recently shared that the company relies on domestically imported materials for 80 per cent of its production. 

The proposed revisions to Vietnam's Value Added Tax (VAT) Law, which could limit the application of the current 0 per cent VAT rate for exports, would translate directly to a significant 6 per cent cost increase for Trina Solar and additional administrative procedures to claim tax refunds, which is unknown at this stage.

If the new policies are in place, the company may consider to import materials from overseas suppliers, instead of purchasing from domestic market, to save cost. 

The company further highlighted the already cumbersome process of claiming tax refunds in the past, which took nearly two years. This lengthy wait, coupled with the potentially large sums of VAT involved, creates a significant financial burden and puts a strain on the cash flow for production.

Extensively, the potential impact can be substantial on Vietnam's broader export sector, particularly medium-sized enterprises. These companies could face tens of millions of dollars in additional yearly input VAT costs, further compounded by the complexities of navigating the tax refund process.

How do you assess the general perception that the current proposal might negatively impact Vietnam’s export situation, as expressed by Samsung Group in Vietnam through Choi Joo Ho, General Director of Samsung Vietnam Complex?

Bui Ngoc Tuan: As highlighted by the report by the Ministry of Finance, the current VAT Law has a positive impact on exports, business production, and the economy. 

The report emphasizes the crucial role of the VAT refund policy, evidenced by the steady increase in refund amounts – averaging nearly a third (27.1 per cent) of total VAT revenue between 2013 and 2021. 

This policy is believed to have lowered export prices, boosting the competitiveness of Vietnamese goods and services in the international market.

Moreover, the prevailing 0 per cent VAT rate for export services is a cornerstone of the VAT refund policy, allowing businesses to claim back VAT paid on inputs.

However, the proposed policy change threatens this progress. Abolishing the current 0 per cent VAT rate for export services, including those provided to overseas and non-tariff zones, would immediately raise production costs. 

This would directly impact the competitiveness of Vietnamese exports and potentially deter foreign investment. 

Samsung Vietnam's concerns about the impact on its supply chain further amplify these risks. The sheer number of affected businesses and the additional costs they would incur due to the new VAT raise serious concerns. 

A thorough evaluation seems necessary to understand the potential consequences before any policy changes.

So in your opinion, how should this problem be resolved?

Bui Ngoc Tuan: Since Vietnam deeply integrated into the global economy nearly two decades ago, exports have always been a driving force for growth, with the annual turnover steadily increasing year after year. 

One of the key factors driving this export growth has been Vietnam's tax policies, particularly the 0 per cent VAT rate for exported goods and services.

Given the clearly visible impacts and the current concerns from the business community regarding the draft amendment of VAT Law, I believe there should be a profound consideration of the Government’s proposal during the National Assembly’s deliberation process, to thereby make a well-considered decision that safeguards the interests of the Government, the economy, and the businesses.