[Vacets-local-dc] [Hanoi irks foreign investors with tax raise]

[Hai Tran]

Hanoi irks foreign investors with tax raise

 
By Amy Kazmin in BangkokPublished: March 3 2004 11:37 | Last Updated: March 3 2004 11:37
Vietnam's decision to raise the standard corporate tax rate for foreign companies, and to eliminate concessionary rates for investment in much of the country's south, has caused a furore among international business groups and provincial officials, who warn the move could discourage fresh foreign direct investment.

Vietnam's Communist authorities recently lowered the standard corporate tax rate for domestic companies to 28 per cent from 32 per cent, to stimulate growth and boost job generation.

But Hanoi simultaneously raised the corporate tax rate for foreign companies to 28 per cent, up from 25 per cent, although the higher rate will only be imposed on existing investors after their current licenses expire, or on new projects that they undertake.

The government justified the tax hike, which took effect on January 1, by saying it will create a level playing field for foreign and domestic firms. But analysts argue the move advantages existing foreign investors over new entrants into the market.

"It really discourages new investment into Vietnam," Frederick Burke, an attorney at Baker & McKenzie in Ho Chi Minh City, said. "Why would anyone come in here when from day one, they will suffer a three per cent tax disadvantage as against their competitors, just because their competitor got here before you?"

Meanwhile, local officials in 17 southern provinces are complaining that prospective investors are turning away after learning they would no longer be eligible for special corporate tax breaks, initially offered to bring jobs and investment to underdeveloped areas.

Vietnam's south has grown rapidly, prompting Hanoi to rule that tax concessions are no longer necessary to lure investors to the area. But at a heated meeting last week, officials from the region appealed for a rethink.

In another move with serious repercussions, Hanoi has also decided that multinational companies' representative offices will be treated as permanent establishments, giving rise to new tax exposure at the parent companies, if they sell items into Vietnam.

While the government has yet to clarify how the policy will be applied, Mr Burke said it could "vitiate a lot of the gains the Americans had made in lowering duty rates" on imported items through a bilateral trade agreement with Vietnam.

Vietnam's tax structure is considered one of the major problems by foreign investors in the fast-growing market. Many companies were bitterly disappointed last year, when a National Assembly committee rejected a proposal to reduce peak personal income tax for foreigners, now 50 per cent, and to lower punitive income taxes on high-earning Vietnamese professionals instead.





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