Q&A: All eyes on Vietnam: Why 2022 is an Ideal Time to Invest?
Vietnam offers favorable conditions for foreign investors for numerous reasons: Strategic location, ample workforce with competitive labor costs, and a relatively open environment for FDI to only name a few. However, the pandemic outbreak in the summer months of 2021 with heavy restrictions and supply chain disruptions led to uncertainties; thus foreign investors may remain insecure on whether 2022 is the right time for bold investment.
We think 2022 is an ideal time to invest.
With a solid vision for the future, Vietnam has created a concrete foundation to bounce back stronger in 2022, with the amendment of a variety of important laws that help improve its business climate, in addition to the free trade network with the EU, the UK, and RCEP countries. The government targets GDP growth of 6-6.5 percent in 2022 despite the likely challenges the Covid-19 pandemic could pose. To help foreign businesses better understand the key developments of the Vietnamese FDI environment and capture emerging opportunities in the country.
Recently, Dang Trinh, International Business Advisory Associate and Thang Vu, Associate Manager, Tax for Dezan Shira and Associates shared insights in a webinar on the key developments in Vietnam with an outlook for 2022 including how and why investors should stay optimistic with available market entry options.
While we have shared a few highlights below, the full webinar can be viewed here.
What’s the COVID-19 situation in Vietnam now?
After initially controlling COVID-19, Vietnam recorded a rise in infections due to the Delta variant. Businesses and residents were subject to strict lockdowns with checkpoints especially in the South including commercial center Ho Chi Minh City and surrounding provinces. Businesses were forced to implement a three on the spot (work, eat and sleep at their workplace) and one route, two destinations model in order to maintain production. This led to a disruption to supply chains and production due to different pandemic rules which at times varied between localities.
Businesses were craving a clear roadmap from the government due to the significant disruption. The pandemic left some significant scars on Vietnam with negative GDP growth in Q3. Around 1.8 million lost their jobs which was a 10-year high, with a 3.98 unemployment rate compared to 2.73 last year. Around 90,300 businesses have left the market in 2021 so far.
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However, vaccination rates have been climbing up. As of December 16, 2021, Vietnam has fully vaccinated 61.2 percent of its population compared to less than 3 percent in July, which is a massive achievement considering where Vietnam was a few months ago. The government has also authorized booster shots for prioritized groups with Ho Chi Minh City leading the way.
To sum it up, Vietnam has moved from a zero covid approach to a living safely with virus approach. Major cities such as Hanoi and Ho Chi Minh City have implemented measures to efficiently live with the virus. The government is also progressively reopening the economy. This includes a gradual reopening of tourism, while entry regulations are being simplified for businesspeople.
Can you share the general Vietnam market overview?
In the last 11 months of 2021 Vietnam has performed relatively well in terms of FDI despite the pandemic. There has been nearly US$26.46 billion in FDI inflows as of November 20, 2021.
Manufacturing and processing acquired the lion’s share of FDI inflows followed by electricity manufacturing and distribution, real estate, and wholesale and retail. Singapore, South Korea, and Japan were the leading investors in Vietnam. Vietnam’s major export partners include the US, China, the EU, ASEAN, and South Korea, while import top import partners were China, South Korea, ASEAN, Japan, and the EU.
Vietnam still heavily relies on importing raw materials. Products manufactured in Vietnam are mainly exported especially to the US, the EU, and China.
So, why invest in 2022?
Despite the pandemic, Vietnam’s market fundamentals remain strong, and its economy remains resilient. Export turnover in the first 11 months of 2021 reached US$299.67 billion rising by 17.5 percent over the same period in 2021. Vietnam has rapidly rolled out its vaccination programme. Foreign investors remain optimistic about Vietnam with several businesses such as LG expanding manufacturing in Hai Phong, while Lego Group also announced plans to invest a US$1billion factory in Binh Duong.
Vietnam is a center for free trade agreements such as the CPTPP, EVFTA, and the UKVFTA. In addition, the RCEP is expected to come into effect in 2022.
Vietnam has become an attractive destination due to low manufacturing costs partly due to the US-China trade war. Vietnam is known for its attractive labor costs and business landscape. It has become a go-to choice for regional distribution if not even global import and processing. Vietnam’s FTAs and low tariffs have further aided this trend. A clear roadmap for economic recovery is also being formulated to acquire key targets set out in the socio-economic development plan for 2021-2025 which includes a goal to achieve average GDP growth of 6.5-7 percent.
How can an investor enter the market?
There are several market entry options to enter the Vietnamese market. These are representative office (RO), branch office (BO), foreign-invested entity (FIE (also LLC)), joint-stock company (JSC), and public-private partnerships (PPP) options. In our experience, the most popular investment vehicles are the RO and FIE. The RO is simple to set up and is also a good option for first-time investors. Businesses however need to have a lease agreement before setting up an entity. The timelines for setting up can vary so it’s best to start early, to avoid any hiccups and have realistic expectations
What are some tax incentives and latest government subsidies for businesses affected by COVID-19?
The first measure that was introduced was the deferral of tax and land lease payments as per Decree 52/2021/ND-CP. The deferral varies from three to six months and also helps individuals and business households such as SMEs. The second measure was the temporary cessation of worker’s compensation benefits as per Resolution 68/NQ-CP. The resolution unveiled financial incentives for employers and employees affected by the pandemic. The third was the temporary cessation of compulsory social insurance (SI) payments as per the same Resolution for six months.
In September, the government issued Resolution 116 on supporting employees and employers through the unemployment insurance (UI) fund for those that have participated in UI. This involved one-time support ranging from US$79 to US$145 depending on the contribution period.
Last but not least was the tax cut for businesses as per Resolution 406. This includes a 30 percent reduction for companies with 2021 revenue of less than VND 200 billion (US$8.8 million). In addition, there is a 100 percent tax cut for businesses individuals and households for the Q3 and Q4 quarters. This Resolution is one of the most significant measures by the government.
What are some tax incentives for new investment projects?
Vietnam has offered several tax incentives for investors that want to enter Vietnam. We will focus on the CIT incentive. There are four types – Location-based, industry-based, preferential tax holidays, and tax holidays. Location-based incentives apply to qualifying economic and high-tech zones, certain industrial zones, and areas with difficult socio-economic conditions. Industry-based incentives are applied to several industries such as education, software, high-technology, renewable energy, and others.
Vietnam also has preferential tax rates such as a flat lifetime tax rate of 10 percent for socialized projects in certain areas with difficult socio-economic conditions as well as a flat lifetime tax rate of 15 percent for agribusinesses. Businesses can also obtain tax holidays such as four years of tax exemption and a 50 percent reduction for the next nine years.