By Oliver Massmann, Duane Morris LLC
DIFFICULTIES AS TO THE IMPORT OF USED GOODS AND RELAXATION ON IMPORT DUTY FOR FINANCE LEASING COMPANIES IN VIETNAM – OUTLOOK ON THE EUROPEAN UNION – VIETNAM FREE TRADE AGREEMENT (EVFTA)
Circular No. 23/2015/TT-BKHCN on promulgating the import of used machinery, equipment and manufacture lines, issued by the Minister of Science and Technology on November 13 2015 (Circular 23) sets up conditions on the import of Used Equipment. As the conditions of machinery under 10 years of age and in compliance with standards of safety, energy saving and environment protection, were too strict for foreign projects, a list of exemptions approved by competent authorities has been established. Circular 23 needs to be clarified concerning the criteria – of exemption, of compliance with the National Technical Regulations and National Standards – which Used Equipment imported in Vietnam must satisfy.
Three recommendations can be articulated: if the Used Equipment is imported for new or expanded investment projects, the Circular should define precisely the competent authority to issue the certification list and guide the import procedure. Moreover, the Ministry of Science and Technology should promulgate more detailed provisions on safety and energy saving and environment protection. Finally, officials in charge of examination of standards should be dispatched prior to the shipment.
Part 1 of Official Letter 504/TXNK-CST issued by the Import-Export Department of Customs General Department on March 22 2016 (Letter 504) stated that Decree 39/2014/ND-CP of the Government dated 7 may 2014 was not applicable to goods imported by a finance leasing company to an export processing enterprise (EPE). This means that a declaration and the payment of the import duties in compliance with the laws are needed. Nevertheless, Letter 504 points out that the procedure is different from the one to create fixed assets for the EPE. The EPE bears the duty to declare and pay for the import in order to use the finance leasing assets, even though it is already included in the leasing contract and that it should be exempted of it.
An exemption of import duty for the leased equipment imported by an EPE is necessary, as it was stated in the previous Letter 16587/BTC-CTCHQ of the General Customs Department on November 29 2013. Official Letter 4463/BTC-TCHQ issued on April 4 2016 recognizes the effectiveness of Letter 16587 in part, in spite of Letter 504, but its coverage is limited.
In case of agreements to purchase the machinery at the end of the finance leasing, the equipment becomes a fixed asset of the lessee. It is easier to raise the import duty on goods imported to create fixed assets to the EPE. If the procedure to import leasing goods is carried by an EPE, it should be exempted through a Letter amending Letter 504.
The taxes on assets imported for leasing should be equal to those paid when carried by the EPE itself. The applicable Decree 39/2014/ND-CP does not have specific regulations for finance leasing assets contrary to the previous Decree 16/2001/ND-CP. It should be reintroduced so a more practical regulation on import of goods under finance leasing contract prevails.
Another issue deals with the payment of the taxes related to Incoterms’ conditions on import of goods into Vietnam’s territory. Under Circular 103/2014/TT-BTC guiding the tax liability of foreign entity doing business in Vietnam, a Foreign Contractor Tax (FCT) including Value Added Tax (VAT) on input and output and Corporate Income Tax (CIT) must be applied. Pursuant to the circular, if a foreign entity sells goods under Incoterms rules, it is responsible for any risk relating to goods delivery in Vietnam. Nonetheless, the transportation and delivery of goods is mostly carried out by transportation agencies. The foreign entities do not benefit from transportation but must pay the CIT from the goods and services receivable by the buyer. Moreover, in case of import with a delivery duty paid (DDP) condition, the buyer will pay the VAT output when it should be at the expense of the seller. There may be some difficulties for the buyer to be refunded.
The calculation of the FCT should be reviewed to ensure the true purpose of the FCT : the responsibility of the seller at any risk until the goods are delivered. Besides, regulations for the deduction of VAT import for the seller under DDP conditions should be considered.
One of the concern deals with the restriction on import of used equipment. The provisions of Circular 23 are explicit: machinery over 10 years cannot be imported, unless it constitutes an exemption listed by a competent authority. Through this regulation, importers must provide certificate of the age and manufacturing standard of Used Equipment, facing bigger costs and complications since pieces of Used Equipment can be of different ages.
Besides, this regulation prevents enterprises from repairing their machinery and is not realistic regarding external factors such as: quality of the equipment, time of use, maintenance, repairing conditions etc. A newer but lower quality equipment would be preferred leading to bigger costs of repair, energy and finally to a higher impact on the environment.
Two cases of exemption are stipulated in Circular 23 to import Used Machinery over 10 years of age. The first one is the equipment belonging to an investment project with a decision of the competent authority on investment policies plus an investment registration certificate issued in accordance with the Law on Investment. The second one occurs when an enterprise has to import a piece of machinery older than 10 years, to sustain its manufacturing or business operation. It needs then the cooperation of the Ministry of Science and Technology to consider the firm’s proposal and document. More details to implement these procedures should be given.
Outlook on the EVFTA
The FTA is expected to enter into force on January 2018. This agreement will eliminate almost all tariff lines (99%) however, a few steps should be planned in advance for its implementation. For the first six years, 65% of the import duties on EU exports will be liberalized, the remaining duties being eliminated over the next ten years. For a few sensitive products, EU duties will be eliminated over a seven-year period.
These provisions prove the Vietnam’s tendency to open to new markets with deeper integration. Thus Vietnam will attract more quality investment from the EU and this will probably impact its legislation and regulations, such as the regulation on import of Used Equipment for instance. Indeed, the cooperation and the proximity with the EU will probably bring closer the Vietnamese and the European Laws.
Most important issues
– With the regulation on Used Equipment, investors may hesitate to invest because of the higher costs induced.
– The taxation deriving from this regulation remains unclear and not quite appropriate.
– The relevant regulations must be amended as the EVFTA will enter into force.
Please do not hesitate to contact Oliver Massmann under firstname.lastname@example.org if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.