Supply Chain Reform under the Belt & Road Initiative- Vietnam

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Speakers profile

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Bee Han Theng

PartnerAssurancePwC Vietnam

Tel: +84 28 3823 0796Email: bee.han.theng@pwc.com

Hock Yee Ting

DirectorTaxPwC Vietnam

Tel: +84 28 3823 0796 (ext. 1505)Email: ting. hock.yee@pwc.com

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Content

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1 Overview of Vietnam

2 Macroeconomic overview

3 Legal and regulatory environment

4 Advantaged and challenges

5 Tax environment

Vietnam country overview

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Overview of Vietnam

With 94 million of population, Vietnam ranked third in Southeast Asia after Indonesia and the Philippines, and ranked 14th in the world.

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Overview Economy

2017 GDP size: 220 USD bn

GDP growth: 6.8% (2017); 7.1% (2018); 6.5% (to 2020f) GDP per capita: 2,385 USD (2017); 3,000 USD (2020f)2017 official unemployment rate: 2%Inflation: 3.5% (2017) 3.4% (2020F)

Territorial area330,900 km²

CapitalHa Noi

Population94 million

CurrencyVND and USD

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Why Vietnam?

Some factors making Vietnam an attractive investment destination (listed in no particular order):

5. Young population & large workforce, with high literacy rate

2. Stable & high-growth economy

3. Large market with increasing purchasing power, emerging middle class

1. Political stability

9. Rich in natural resources4. Increasing integration intoglobal economy

6. Low cost of starting up a business

7. Low labour cost & increasing productivity

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Vietnam political structure

Nguyen Xuan Phuc was elected as the new Prime Minister in 2016, but thus far, there have been few changes to Vietnam’s business environment/ direction

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• Single party leadership, VCP• National Congress of VCP held every 5

years, recently in 2016• National assembly chairwoman:

Nguyen Thi Kim Ngan• Prime Minister: Nguyen Xuan Phuc• President & General Secretary:

Nguyen Phu Trong

* Only key ministries are mentioned

Nguyen Phu Trong

Nguyen Thi Kim Ngan

Nguyen Xuan Phuc

National assembly

18 Ministries (*)

Ministry of Finance

Ministry of Industry &

Trade

Ministry of Planning & Investment

Government Supreme Court

Supreme People's

Procuracy

President

Macroeconomic overview

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Vietnam has curbed inflation and maintained positive GDP growth in recent years, with significant expansion in the industrial and service sectors

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Source: PwC Research and Analysis

Strong economic recovery since 2011… …driven by the industrial and service sectors

GDP Per capita

1614 15

GDP

20172011

Inflation

1312

Growth rate per year, % USD Billion

0

200

100

80

220

40

60

120

140

160

180

20

186.2

135.5

12

Others

Industrial

Agriculture

14

155.8

13

193.6

171.2

16152011

Services

201.3

2017

219.2

CAGR11 - 17

4.0%

8.9%

10.5%

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22,352

49%

51%16,348

39%

61%

15,598

71%

29%

增资占比

直接投资占比20,860

24%

76%

24,115

40%

60%

21,922

44%

56%

36,000

23%

77%

In 2017, there were 2,591 FDI cases, with amount of $21.3 billion, and 1,182 capital increase cases, with amount of $8.4 billion. The total number of investments was 3,779, with a total investment amount of about $36 billion

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FDI and Capital Increase Ratio Analysis(USD MN)

Source: Euromonitor, BMI, PwC Analysis

Number of FDI

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Trade — Vietnam is an export-oriented economy

Vietnam is an export-oriented economy mainly to the United States. The main export products are mostly electrical appliances, textiles, seafood and petrochemical products.

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Total Import & Export Amount (USD MN) Main Export Countries (2017)

Main Import Products (USD MN)

Main Export Products (USD MN)

Source: PwC research & analysis

20172016

Import

Export

174 177211 214

Import

Export

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Southeast Asia－Population and GDP

Vietnam ranked third in Southeast Asia after Indonesia and the Philippines, which lowers its GDP per capita.

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Total Population in 2017 (‘ooo) 2017 GDP Per Capita (USD)

VietnamMalaysiaSingapore Indonesia PhilippinesThailand

71%70%

7%

106,51295,412

63%

67%

Vietnam

5%

263,991

18%

32%

Indonesia Philippines

5.35%

27%

16%32,040

69,037

Malaysia

Age15-64

Age 0-15

72%11%Age 65+5,70869%

12%

Thailand Singapore

24%

6%

23%

16%

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Vietnam's population is aging at a faster rate than any other country in the world

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83%

2029

17%

91%

2019

88%

26%

2049

74%

12%

2009

9%

1999

92%

8%

1989

93%

7%

1979

93%

7%21%

2039

79%

Age Over 60

Age Under 60

Population Distribution by Age

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Exchange rate

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End of period exchange rate (VND/USD)

20,000

25,000

15,000

17,483

15,918

19,498

16,017

21,388

18,479

+5%

+1%

22,698

Reasonably stable since 2011

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Increase of household income

The household’s median income in Vietnam grew steadily over past years, although it is still lower than that of other South-East Asian countries

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*Note: Middle class household is defined as household with income between 75% and 125% of the median incomeSource: Euromonitor, PwC Research & Analysis

SingaporeMalaysiaVietnam Indonesia PhilippinesThailand

Per household median disposable income (USD)

SingaporePhilippines

65,95566,015

48,091

MalaysiaIndonesiaVietnam Thailand

20172007 2012

Middle class as % of total No. of Household29.8%

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SOE reform

Equitisation of SOEs, one of the most important measures in Vietnam’s economic reforms, has only been progressing slowly

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Number of SOEs over years since equitisation implementation

Source: GSO, PwC Analysis

Although the number of SOEs has decreased drastically since 1996, the actual progress made is less impressive, as many SOEs have gone through mergers and acquisitions

12,300

5,655

1,309 1,066 1,032 600 300

1996 2000 2011 2012 2013 2015 target

2020 target

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Public Private Partnerships (PPP) and BOT

PPPs are becoming increasingly important to Vietnam’s economy, as they help to fill gaps in the country’s budget

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Number of projects

1,740

Mong Duong II Thermal Power 1,950

S-Fone Network (cancelled) 773

Hutchison Telecommunication Vietnam 784

Nam Con Son Gas Pipeline 1,300

Vinh Tan 1 Coal Plant

Top Projects (USD mil)

ElectricityAirports Water and sewerage

RoadsPortsNatural GasICT

Source: PPI Database

Projects reaching financial closure by sector

65

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Hot investment opportunities

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Real estateRetail

Tourism (e.g. luxury hotels)

Restaurant chains, mid to lower end or fast food

Pharmaceuticals and healthcare

Modern agribusiness and food

Manufacturing

Local companies looking to sell off their businesses or looking for partners across all sectors

Legal and regulatory environment

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Various areas restricted for FDI

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“Pure” holding companies

Retail (via ENT requirement)

WTO commitments are key

Specific sectors, e.g. financial services, online gaming, pharmaceutical distribution

Listed companies

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Company forms

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Joint stock company

Minimum 3 shareholders

Issues shares

Can be listed

Limited liability company

Different capital gains tax treatment

No minimum number of investors

Has charter capital, not shares

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Licensing procedures

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• Generally at local provincial level- Department of Planning & Investment- Management board of industrial zone

• For encouraged, manufacturing sector — fast

• But can be very slow for “conditional” sectors

• Conditional sector application may be referred to relevant ministries in Hanoi

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Advantaged and challenges

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Vietnam

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Advantaged and challenges

• Public infrastructure needs outside investment

• Lengthy administrative procedure- Uncertainty- Bribe

• Training• Overseas resources • Increasing labor cost • Employment rights and

interests• Working environment and

benefits

• Recent news• Led by overseas MNCs

• Employees- Salary cost and lack of

labor- Trust and loyalty- Working efficiency- Focus

• Tax allowance

• Public infrastructure

Creating Competitive Advantages

Government Investment Human Capital Continuity

Tax

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General tax environment

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Self assessment Tax audits Unstable, inconsistent

Form over substance,

documentation prevails

Practice varies

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Tax rates

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Corporate income tax

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• Standard rate 20%

• Various incentives- very complex- unstable

• No dividend WHT, currently

• Generally in line with standard international practice

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Tax incentive regimes

Sector

• High technology, including IoT, VR, scientific R&D

• Agricultural sector applying high technology

• Infrastructural development• Clean energy,

environmental protection• Education, healthcare,

sports / culture

Location

• Qualifying economic and high tech zones

• Difficult socio-economic areas

Large Scale

• Large manufacturing projects in terms of:- Investment capital- Revenue- Headcount

Industrial Products

• Manufacturing of industrial products that meet one of the following:

• Supports high technology sector

• Products support the garment, textile, footwear, IT, automobiles assembly, or mechanics sector, provided not currently produced locally, or local products not met international quality standard

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Factors to consider

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Attractive tax incentiveFor high-tech and supporting industries

Preferential CIT rate

Tax Holidays

Potential PIT reduction

• preferential tax rate is 10 % for 15 years* • commencing from the year revenue first earned

• 4 years of tax exemption; and • 9 years of 50% preferential tax rate reduction

• 50% PIT reduction for high-skilled employees working in IT sector

* Potentially may be extended by another 15 years, subject to meeting conditions

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An illustration of tax incentive regime For high-tech and supporting industries

Subsequent 9 yrs5%

15 years preferential tax rate

First 4 yrs

0%

Bal 2 yrs

10%20%?

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Transfer pricing

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How to be prepared?• Annual compliance – submission of TP form 90 days following

financial year • TP documentation – adopting international standards with local

flavors• Major focus of attention now• Increasingly sophisticated audit activities• New cap on interest deductibility

– 20% of EBIDTA

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Other taxes

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• Personal income tax- Broad scope- High rates- No de minimis for short term visitors

• Withholding taxes- Broad scope- Only to cross border payments- In place of PE regime

• VAT- Standard rate 10%- No refunds, generally

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Tax audits

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Taxpayers have to expect more aggressive tax audits in future

• Sporadic, random• 10 year statute of limitations• “Closed years” sometimes re-opened• Customs audits increasing• High penalties and interest

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• Extends to overseas investors selling companies in Vietnam

• Previously only applied to direct transfers

• Now extended to include indirect transfers:

• Major issue for M & A transactions as risk lies with

Vietnam

Overseas

A

B

C

A sells BVN CGT now applies

Capital gains tax – an area to watch out in M&A transactions

C

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