Vietnam Briefing Issue 07, 2010 by Vu Pham

VIETNAM BRIEFING The Practical Application of Vietnam Business

Daily Business News Available at Volume III - Number II

www.vietnam-briefing.com/news

Establishing Representative Offices in Vietnam

In This Issue: ROs vs . Branches and WFOEs Obtaining Foreign Work Permits Foreign Contractor Applications in Vietnam Regional Update: Vietnamâ&#x20AC;&#x2122;s Service Industry Bets on Ba Ria-Vung Tau

Welcome to the Summer Issue of Vietnam Briefing!

n this issue of Vietnam Briefing, we look at the process of establishing representative offices in Vietnam. As the second best performing economy in the region this year, many foreign investors are now considering building a presence in Vietnam to take advantage of the robust growth. A representative office is the simplest way to do so initially as a company tests the viability of the Vietnamese market. We also cover related topics that include comparing representative offices with branch and wholly foreign-owned enterprises to determine which type is the most suited for your company; obtaining a foreign work permit in Vietnam; and regulations on applying as a foreign contractor. This issue’s regional update will discuss the booming prospects of Ba Ria-Vung Tau Province as it develops to become a southeast economic region catering to foreign tourists and offering world-class gaming and luxury facilities. The articles in this issue of Vietnam Briefing were written in coordination with the foreign direct investment and tax consultancy Dezan Shira & Associates based in their primary offices in Hanoi. Please contact the firm at vietnam@dezshira.com if you have any questions. Best regards, Corporate Establishment, Tax, Accounting & Payroll Throughout Asia

Complete information about the firm, staff, practice, services offered, China / Hong Kong / India / Vietnam business advisory and tax information.

www.dezshira.com Joyce Roque Editor, Vietnam Briefing

Senior Vietnam personnel:

VIETNAM BRIEFING Vietnam Briefing Daily News www.vietnam-briefing.com/news Alberto Vettoretti Managing Partner Vietnam

Hoang Thu Huyen Country Manager Hanoi

Resources:

VIETNAM BRIEFING Our quarterly magazine and daily news service detailing all aspects of foreign direct investment law and tax into Vietnam. www.vietnam-briefing.com

Our popular monthly publication and daily news service addressing technical matters concerning foreign investors and China law and tax. www.china-briefing.com

COMPLIMENTARY WEEKLY ROUND UP Sign up today for our complimentary Vietnam and Asia business and regulatory round up at www.vietnam-briefing.com Produced in association with Dezan Shira & Associates since 2008.

INDIA BRIEFING Our bimonthly magazine and daily news service detailing all aspects of foreign direct investment law and tax into India. www.india-briefing.com

2point6billion.com Our Asia web site commenting on matters on trade, investment, political relations and comparisons between the emerging nations of China and India. www.2point6billion.com

This issue’s cover is courtesy of Vu Pham, a freelance photographer from Hue. This photo was taken at a traditional crafts village located three kilometers from the city where incense makers display their colorful wares outside houses and shops. Vu is inspired by living in Hue and loves documenting the beauty of daily life there. He graduated with a BA in English at Hue University in 2002 and has previous experience working as the chief communications officer for a Netherlands-based NGO and a reporter for e-journals and magazines. To see more photos, please visit www.flickr.com/photos/wuinvietnam or contact vu.phamvan@gmail.com.

Establishing Representative Offices in Vietnam

epresentative office help companies effectively gauge the business environment in Vietnam; allowing them to conduct their own market research and study the industries that interest them. They are a liaison office for the parent company that pursues business opportunities for the overseas headquarters in providing economic, trading, scientific and technical services. An RO cannot engage in business directly with local companies since it is forbidden to conduct any revenuegenerating activities. It is not allowed to either promote the parent company’s goods or services or directly enter into contracts with local companies unless a written power of attorney is obtained. However, once the contract is signed between the parent company a n d Vi e t n a m e s e c o m p a n i e s a n d organizations, an RO can help ease the execution of contracts on economic cooperation, trade, scientific and technical commitments. This stipulation goes on further to forbid an RO to issue and use its own invoices. This is an advantage because it reduces the accounting and tax compliance burden for an RO; making it the most inexpensive entity for foreign businesses in Vietnam.

Required documents

Copies of the documents detailed below must be certified by the Vietnamese consulate in the country where the headquarters is located. It must also be translated into Vietnamese and certified by authorized agencies in Vietnam or abroad. The required documents include: C e r t i f i c a t e o f i n c o r p o r a t i o n o r business registration certificate of

[ By Hoang Thu Huyen, Dezan Shira & Associates ] the parent company; in case the above document does not show the business lines of the company another government certified document showing that information must be provided M e m o r a n d u m a n d a r t i c l e s o f association or company charter An audit report of the company for its latest financial year issued by an auditing company The company must also prepare duly signed copies of the following documents: the RO application letter and the chief representative appointment letter. These documents must be submitted i n Vi e t n a m e s e t o g e t h e r w i t h t h e signature of authorized representative and company chop or seal. In case the company does not have a common seal, a government certified document verifying the authenticity of the authorized representative’s signature will be considered.

Rental documents

The foreign company must submit the original copy of office lease agreement in Vietnamese to submit to authorities. It is necessary to verify that the landlord is certified to rent the office. Sometimes though it is not compulsory to submit these documents when applying for an RO establishment license.

Application procedures

Initially, a foreign company wanting to establish a representative office in Vietnam must first submit an application for a license to the Provincial Department of Industry and Trade. After official approval, the new RO must publish a notice of operations in a print or online newspaper for three consecutive issues. This must be done

within 45 days from the issuance date of the license. The notice must include the RO’s name, the name of its overseas parent company, office location, and chief representative to name a few. The RO must then proceed to making a seal, opening bank account and obtaining work permit for expatriates. The RO’s chief representative should be responsible for personally obtaining the official seal for security reasons. The application process can take three to five weeks. An RO license is valid for five years with an option to renew afterwards.

Hiring staff

There is no cap on the number of local and expatriate employees that a representative office can hire for as long as their employment is properly documented. All expatriate hires including the chief representative are required to get a work permit.

The chief representative

The chief representative can be a local or expatriate hire. This person will not allowed to concurrently hold the following positions during tenure: head of a branch in Vietnam; legal representative of the foreign entity allowed to sign contracts without written power of attorney from such foreign entity; or being a legal representative of an enterprise established pursuant to the laws of Vietnam. A Vietnamese chief representative must submit a copy of their identity card or passport while foreign chief representative must provide a passport copy. Copies must be certified by either local or foreign authorities.

Office location

An RO is forbidden to sub-lease office space. It is recommended that investors consider renting office space

Vietnam Briefing | 2010

Establishing Representative Offices in Vietnam in Grade A buildings. This guarantees the availability of modern facilities and centralized location.

Tax matters

F o l l o w i n g Vi e t n a m e s e l a w, a representative office will be responsible for declaring its employeesâ&#x20AC;&#x2122; personal income tax. An RO will not be liable to pay Vietnamese corporate income tax but will be liable to pay value added tax on goods and services rendered at a rate of 10 percent.

License changes

In cases wherein the RO needs to make small changes to its license that involves changing the chief representative, office name, parent company address or business registration, local address within a province or city and scope of business, it must submit documents to the provincial Department of Industry and Trade within 10 days from the date the changes were made.

License re-issuance

The foreign business has to apply for re-issuance of license for establishment of its representative office in the following cases: Address of representative office changes from one province or city under direct central management to another Name or address of foreign business is changed from one country to another The companyâ&#x20AC;&#x2122;s business lines are changed A full set of application dossiers must be submitted for a new RO license to the provincial Department of Industry and Trade within 15 days since the day the changes were made.

Closing a representative office

Representative offices wishing to close operations can do so under the following conditions: If requested by the overseas parent company

Vietnam Briefing | 2010

If the parent company closes down If the parent company does not apply for an extension on the expiration date of the RO license If the RO license was revoked by Vietnamese authorities If the government does not allow an extension of RO license For the first three conditions stated above the parent company must submit a notice of termination to authorities at least 30 days prior to the end of operations. For the other conditions, authorities will make the public announcement of RO termination.

Comparing an RO with a branch or WFOE An RO and branch office are both a type of presence for foreign businesses but not considered independent legal entities. To set up an RO, the company has to have been operated for no less than one year since legal establishment or valid business registration in the country of origin. In contrast, a branch office requires that the parent company has been operating for at least five years prior to application.

International Cost Comparisons IN U.S. DOLLARS* LOCATION FULL-TIME AVERAGE MONTHLY RENTAL FOR MINIMUM GRADE A WAGE SPACE PER SQUARE METER, PER MONTH ** CHINA Beijing

141.70

29.12

Guangzhou

151.54

13.81

Shanghai

165

30.63

Shenzhen

162

17.65

Danang

61.88

Haiphong

61.88

15***

Hanoi

69.68

39.66

Ho Chi Minh City

69.68

37.51

VIETNAM

*Based on the exchange rate US$1=RMB6.77 and US$1=VND 19,230 **Based on figures reported by real estate consultancy firm CBRE ***According to CBRE, there are only Grade B buildings in Haiphong

A wholly foreign-owned enterprise does not require such conditions to be set up. The investors of a WFOE can be any foreign organization or individual using capital in order to carry out an investment activity in Vietnam, provided that the investor is able to submit the proper documents to prove their legal presence or establishment in the origin country. A WFOE is always required to be attached to an investment project to be approved.

Required capital

There is no capitalization requirement for an RO and branch. They are set up based on the business sectors on which the parent companies operate. An RO and branch run their business in Vietnam as dependants of the parent companies. They just receive money and pay for costs and expenses arising during their operation. A WFOE in comparison has to register its investment capital to get approval from the state authority in Vietnam. When the investment is accepted, the capital will be transferred into a capital bank account opened in a authorized bank.

Permitted and prohibited activities

While an RO functions as a liaison o ff i c e f o r t h e p a r e n t c o m p a n y t o conduct market research in Vietnam and to pursue the opportunities to do business with local partners, the branch is allowed to do business in Vietnam. This means that a branch is allowed to directly sign contracts with clients and suppliers in Vietnam as well as issue invoices. An RO is prohibited from such direct profit-generating activities. To some extent, the operation of branch is quite similar to a WFOE. Both can issue official invoices according to the tax and accounting regulations. They have to do regular tax filing for both corporate and individual taxes. Whereas the RO is only required to file employeesâ&#x20AC;&#x2122; personal income tax. A branch is limited to business activities stated in the business license of its parent company. WFOE is allowed to

Establishing Representative Offices in Vietnam do all business activities which are not limited or prohibited under Vietnam laws. They are free to pursue profit by choosing the most suitable business sectors for them in the location or whenever they want.

Duration

Like the RO, the duration of a branch is limited at five years for each licence of establishment. If they want to get renewal of license, they have to submit a set of dossiers to the state authority of Vietnam who will examine if the RO or branch makes any violation during their operation or not, then to decide to re-grant the licence for another five years. Violations can include engaging in business activities not stated in their license of establishment or non tax compliance. The duration of a WFOE is dependent with the duration of investment project and will not exceed 50 years as regulated by law; typically from 30 to 50 years. The government can allow a longer duration when necessary; for a maximum of 70 years.

Office choices

A Grade A office building is a good choice for housing an RO or branch. Serviced business centers have also developed in Hanoi and Ho Chi Minh City that allows staff to move in right away. A company is prohibited to set up in an apartment building. Otherwise, it can choose any office building or even a private house for their office provided the landlords are licensed. For a WFOE, Items

office location will be dependent on the nature of their business.

Application procedures and timing

As the establishment of an RO or branch office is not considered an investment project. Application dossiers are submitted to the provincial Department of Industry and Trade which is in charge of supervising the operation of ROs and branches in Vietnam. The license of establishment for an RO or branch will normally be granted within 25 days. In comparison, the establishment of a WFOE is always attached with an investment project. The application dossiers will be submitted to the provincial Department of Planning and Investment and the investment license granted by the provincial People’s Committee. For WFOEs located in industrial parks, the application dossiers will be submitted to the provincial Management Board of Industrial Parks. The timing required to get the investment license for WFOE is varied depending on the investment project’s scale, business sector, the amount of capital. Typically, it will take one to three months before an investment license is released.

Labor

Representative offices, branches and WFOEs have the right to directly employ both Vietnamese and foreigners to work for them. There is no restriction on the number of employees. All

Representative Office

foreigners working for ROs and branches are required to obtain a work permit. There are a number of work permit exemptions for WFOEs such as the member of a limited liability company with two or more members, the owner of a one member limited liability company and members of the board of management of a share holding company. Besides these exceptions, all foreigners have to get a work permit, even if they are the legal representative or director of the company.

Tax and accounting issues

An RO is the simplest kind of establishment in terms of tax and accounting. No corporate tax filing is required, only personal income tax for employees working for RO. Regarding taxes, branches and WFOEs are quite similar to each other. They have to file taxes, including corporate income tax, value added tax or personal income tax monthly and annually. Representative o ff i c e s , b r a n c h e s a n d W F O E s c a n legally open bank accounts, RO may only receive money directly from its parent company to pay for costs. Branches and WFOEs can either receive or transfer money abroad after fulfilling its tax obligations in Vietnam. F o r m o re i n f o r m a t i o n o r a d v i c e o n e s t a b l i s h i n g a re p re s e n t a t i v e o f f i c e i n Vi e t n a m , p l e a s e c o n t a c t Dezan Shira & Associates at vietnam@dezshira.com or visit www.dezshira.com.

Branch

WFOE

Parent company

At least 1 year operation

At least 5 year operation

N/A

Capital required

Depending on scope of business

Business scope

Liaison office, market research

Trading, import-export

Manufacturing, trading, import-export

Duration

5 years

30-50 years

Location

Commercial building

Commercial building or Industrial Parks

Licence-issuing body

Provincial Department of Industry and Trade

Provincial Department of Planning and Investment, Provincial Management Board of Industrial Parks

Setup timing

25 days

1 – 3 months

Recruiting staff

Hire/pay directly

Taxation

Personal income tax

Corporate income tax, value added tax, personal income tax

Corporate income tax, value-added tax, personal income tax

Invoicing

Cannot issue invoices

Can issue invoices

Vietnam Briefing | 2010

Obtaining Foreign Work Permits [ By Hoang Thu Huyen, Dezan Shira & Associates ]

ork permits for foreigners in Vietnam are valid for a maximum of three years.

There are currently around 60,000 foreign employees in the country with valid work permits and around 20,000 illegal employed foreigners using tourist visas. Authorities are now becoming stricter when it comes to foreigners working in the country without obtaining a proper work permit. Persons who violate the regulations will be penalized or even deported back to their home countries if they cannot meet the work permit requirements.

automatically deported from the country and the hiring company penalized.

Conditions

Exemptions

Foreign nationals working in the country for companies, organizations, or individuals must comply with certain conditions to qualify for a work permit. These include the following: Must be at least 18 years of age Must be in good health as necessary to satisfy the job requirements Must be a manager, executive director or expert with technical skills and knowledge applicable to the job Must not have a criminal record and currently not subject to criminal prosecution or any criminal sentence in Vietnam or overseas An employer is permitted to recruit foreign workers who fully satisfy the above conditions in order to work as managers, executive directors and experts where local hires are not yet able to meet production and business requirements. Foreign employees in the country are required to present their work permit during immigration procedures and when required by authorized state agencies. Illegally employed foreign employees will be

Vietnam Briefing | 2010

Foreign nationals are exempted from obtaining a work permit in cases wherein: The foreign national is working in Vietnam for less than three months The foreign national is a member of limited liability company with two members and above The foreign national is the owner of a limited liability company with only one member The foreign national is a member of the board of a joint stock company The foreign national is coming to Vietnam to market products and services The foreign national is coming to Vi e t n a m w i t h i n t h r e e m o n t h s t o r e s o l v e a n e m e rg e n c y s i t u a t i o n or technologically complex situation that risks affecting production business which Vietnamese experts or foreign experts currently in Vietnam are unable to solve Foreign lawyers granted a professional permit in Vietnam.

Referring to the list above, one should be aware that the following would still be required to obtain a work permit in Vietnam: Chief representative of ROs Director of branches General director or director of foreigni n v e s t e d c o m p a n i e s i n Vi e t n a m , regardless if companies are LLCs or JSCs As mentioned above, a foreigner who is member of a company in Vietnam is exempted from a work permit. Under the Enterprise Law of Vietnam, a member of a company can be either an individual or a corporate. A s f o r D e c r e e 3 4 / 2 0 0 8 / N D â&#x20AC;&#x201C; C P, i t is unclear whether a foreigner who is appointed by a foreign corporate member of a LLC in Vietnam will still be exempted from obtaining a work permit or not. From practical experience, a work permit is still required from such foreigners as cited by the Department of Labor, Invalids and Social Affairs (DoLISA) Hanoi and Ho Chi Minh City. A work permit is not necessary when the foreigner comes to Vietnam to offer services. However, in this case, the

Obtaining a Foreign Work Permit in Vietnam person must submit a seven day advance notice to the provincial Department of Labor, War Invalids and Social Affairs prior to working in Vietnam.

Termination of work permit

A work permit may be terminated in the following circumstances: Expiration of work permit Termination of labor contract The content of labor contract is not consistent with the granted work permit Expiration or termination of the business, trade, finance, banking, insurance, science and technology, culture, sports, education, or medicine contracts When foreign employer announced the termination of the foreign national working in Vietnam Wi t h d r a w a l o f w o r k p e r m i t b y authorized state agencies Te r m i n a t i o n o f o p e r a t i o n o f t h e company, organization, and partners in Vietnam The foreigner is sentenced to prison, dies or is proclaimed missing by court

Fees

Work permit related fees include: A work license: VND400,000/permit R e n e w i n g a w o r k l i c e n s e : VND300,000/permit

E x t e n d i n g a w o r k l i c e n s e : VND200,000/permit

Application procedures

Application dossiers need to include the following: Application for issuance of work permit of the labor users Registration slip on proposed foreign recruitment based on the standard form prescribed by the Ministry of Labor, War Invalids and Social Affairs Criminal record form issued by the competent authority from the foreign countries they lived; in cases where the foreigners have resided in Vietnam for over six months, they should also submit the form of criminal record issued by the Department of Justice in the locality where they are residing C u r r i c u l u m v i t a e o f t h e f o r e i g n applicant following the format set by the Ministry of Labor, War Invalids an d S o cial Affairs, including an attached photograph of the foreigner Medical certificate issued overseas; if the laborer is residing in Vietnam, the health certificate must be granted under the regulations of the Health Ministry Legal copies of certificates as proof of professional skills such as: bachelor, master, doctor and certificates on qualifications granted overseas. If the applicant is a craftsman of traditional

crafts or a person having experience, but no formal certificate, written documents provided by authorized agencies in their home countries must be submitted attesting to their qualifications and experience of at least five years Three color photos (3cm x 4cm) of the applicant The application process is highlighted below: Labor users take responsibility of preparing a dossier following law provisions and submit to Department of Labor, War Invalids and Social Affairs The work permit shall be granted 15 working days from the date of receipt of the completed application dossier. One is advised to seek professional help when applying for an expatriate work permit in Vietnam. Many foreign applicants have been confused about the procedure and requirements when applying; leading to unnecessary delays and penalties. For professional advice on applying for work permits in Vietnam, please contact Dezan Shira & Associates at vietnam@dezshira.com or visit www.dezshira.com.

Sourcing, Trading and Setting Up in Vietnam

Global Manufacturing Moving to Vietnam

Establishing Business in Vietnam

Industrial Zones in Vietnam

Managing Human Resources in Vietnam

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Vietnam Briefing | 2010

Foreign Contractor Applications in Vietnam

[ By Hoang Thu Huyen, Dezan Shira & Associates ]

oreign businesses are considered foreign contractors if they conduct business or earn income in the country under contract with local organizations and individuals. Usually, foreign contractors are the winners of auctions organized by the Vietnamese government or organizations and may be principal contractors, general contractors, partnership contractors or subcontractors. There are regulations covering the activities of foreign contractors in Vietnam. Depending on the nature of business, contractor activities shall be subject to specific sector regulations, including construction, and technology transfer.

Requirements

To become a foreign construction contractor or subcontractor in Vietnam, an applicant must satisfy the following conditions: Win a project bid in Vietnam C o m m i t t o e m p l o y Vi e t n a m e s e subcontractors to complete the project Be financially stable in the last three years Have access to stable facilities and manpower

Construction contractor license application

Foreign businesses have to register to the state authority to become foreign contractors or subcontractors. The application must be submitted to different government groups depending on the scale and scope of the projects. For example: The Ministry of Construction for Group A projects or projects to be carried out in two provinces or more

Vietnam Briefing | 2010

T h e p r o v i n c i a l D e p a r t m e n t o f Construction for Group B and C projects Dossiers of application for contracting license include three sets – one original and two copies – of the following documents: Application letter The bidding result or the decision on selection of the contractor or the lawful contract Documents related to the contractor’s legal status; including the business registration certificate, the incorporation license and company charter Report on experiences related to contracted work and a financial audit

report in the last three years T h e p a r t n e r s h i p c o n t r a c t w i t h a Vietnamese contractor or the written commitment to employ Vietnamese subcontractors Authorization letter for persons other than the contractor’s representative at law Applications for contracting licenses m u s t b e m a d e i n Vi e t n a m e s e . Documents in foreign languages must be translated into Vietnamese and the translations notarized following Vietnamese regulations. Other foreign papers and documents must be verified by the consulate, unless otherwise specified by Vietnamese laws or international agreements.

Foreign Contractor Applications in Vietnam VAT RATES No.

Business line

Percentage (%) of added value to turnover for VAT calculation

Services, machinery and equipment lease, insurance

a/ Construction, installation with materials or machinery, equipment attached to construction works

b/ Construction, installation without materials or machinery, equipment attached to construction works

Transportation, production, other business

CIT RATES No.

Business line

Trade: distribution and supply of goods, raw materials, supplies, machinery and equipment accompanying services in Vietnam

Services, machinery and equipment lease, insurance

Construction

Other production and business activities, transportation (by sea and air)

Lease of aircraft, aircraft engines, spare parts of aircraft, ships

Reinsurance

Securities transfer

0.1

Loan interests

The contractor license will be issued within 20 days from the date of submission of completed documents.

Application for project office

Once the construction contractor license is received, the contractor must submit one set of the application file to the provincial Department of Construction to register its project office. Required documents include: Application letter Certified copy of construction contractor license After filing, the project office license will be issued within five days from the date of submission.

Permitted activities

Once licensed, foreign construction contractors are allowed to do the following: Lease office Have a seal of project office Open bank accounts with local banks Use the Vietnamese accounting system Employ local and foreign laborers a c c o r d i n g t o t h e Vi e t n a m e s e labor legislation; for expatriates,

CIT rate (%) based on turnover for CIT calculation

the contractor can only register managerial and technical experts and highly skilled laborers for entry into Vietnam The foreign contractor will be held responsible for filing the PIT documents for all its employees.

Taxation

Foreign contractors and sub-contractors in Vietnam are liable to pay the same tax rates applicable to local companies including import-export duties, personal income tax (PIT) and other taxes required by authorities. In particular, corporate income tax (CIT), and value-added tax (VAT) for foreign contractors are different depending on the methods of payment. There are two methods available as follows: O r d i n a r y m e t h o d : VAT a n d C I T payments will be filed at the same manner and tax rates as local companies; foreign contractors will be allowed to follow the ordinary method if they satisfy the following conditions Having a permanent establishment or resident status in Vietnam The business duration in Vietnam under a contractor or sub-contractor

contract is 183 days or more from the effective date of the contract Must apply the Vietnamese accounting system to their business Straight method: This method is applicable when the foreign contractors do not meet one of conditions mentioned above; the base to calculate VAT and CIT is the taxable revenue VAT r a t e s v a r y f r o m 3 0 t o 5 0 percent subject to the business line: services, production, transportation or construction with or without supplies. The VAT rate is calculated by multiplying the taxable revenue with the rates found in the accompanying chart. Payable CIT varies between 0.1 percent and 10 percent of the taxable revenue, subject to the business line: trading, services, construction, and production, among others. For more information on applying for a foreign contractor license in Vietnam, please contact vietnam@dezshira.com or visit www.dezshira.com.

Vietnam Briefing | 2010

Vietnam’s Service Industry Bets on Ba Ria-Vung Tau

[ By Joe Drury ]

CHINA

n ko Me

104˚

Mengzi

108˚

Wenshan

Nanning

Lai Chau

Tuyen Quang

Viet Tri

Bla

Xam Nua

Ha Dong

Xuwen

Thai Binh

Haikou

Dao Bach Long Vi

Ky Son

Gulf of To n k i n

Xiangkhoang Dien Chau

Nan Vinh

Hainan Dao

Basuo

Ha Tinh

Loei

Sanya Ron

Nong Khai Muang Khammouan

Udon Thani (Udorn)

Dong Hoi

Sakon Nakhon Phitsanulok

Quang Tri

Khon Kaen

Savannakhet g

on ek

Lam Nam

16˚

Hue

Traditionally an industrial center of Vietnam, a recent flood of service sector investment hopes to transform the local economy into an international tourist’s dream of luxurious living and gambling.

Nakhon Ratchasima (Korat)

Mae Nam Mun

Ubon Ratchathani

Sisaket

Tam Ky

Warin Chamrap

Pakxe g

KAMPUCHEA Sisophon

Aranyaprathet

Siemreab

n Ko

Kon Tum

To n l e Sap

Phnom Penh ng

Kampong Spoe

Vietnam

Kampot

Road

Long Xuyen

Ha Tien

International Boundary National Capital

VIETNAM Buon Ma Thuot Ninh Hoa

Kracheh

Kampong Cham Krong Kaoh Kong

Meko

Gulf of Thailand

repo

12˚

Trat

Mekon

Kampong Thurn

Dao Phu Quoc (VIETNAM)

Rach Gia

River

Svay Rieng

Tay Ninh

Dak Nong

Loc Ninh

Vinh Ben Tre Long

Da Lat

Tuy Hoa

Nha Trang Cam Ranh

Phan RangThap Cham

Thu Dau Mot Bien Hoa

Ho Chi Minh City Sa Tan An Dec My Tho Can Tho Soc Trang Bac Lieu

Phan Thiet Cu Lao Thu

Ba Ria - Vung Tau

Vung Tau

Tra Vinh

Ca Mau

Unclear FDI standards and difficulties clearing land have led to capital disbursement delays, forcing many projects to a standstill and imperiling the province’s future. Ba Ria-Vung’s predicament provides a cautionary test for this country’s former centralized economy as it strives to avoid the extremes of bureaucracy.

Welcome to Ba Ria-Vung Tau

Vietnam’s southeast economic region is the powerhouse of the country’s invigorated economy. Thanks to a coordinated infrastructure replete with highways, railroads, ports and airports linking Vietnam’s special economic zones and industrial parks to the outside world, the region produces 47.4 percent of the country’s industrial output and is responsible for 61 percent of total foreign invested projects in Vietnam.

Vietnam Briefing | 2010

Con Dao

104˚

Hon Khoai

Hon Sao

It is no great surprise then that the province attracts a lot of attention from international investors. In the first 11 months of 2009, Ba Ria-Vung boasted the largest foreign investment of any p r o v i n c e o r c i t y i n Vi e t n a m , w i t h US$6.73 billion in newly registered capital and increased capital, far ahead of second place Quang Nam Bing Duong at US$4.1 billion.

20˚

16˚

Qui Nhon Lumphat eS

Pouthisat

Sea

Dac To

Pleiku Stoeng Treng Tonl

Sattahip

Cu Lao Re

Quang Ngai

Attapu

Batdambang Rayong

China

Saravan

Surin

Bangkok

South

Da Nang Cu Lao Cham

THAILAND

Sara Buri

What is happening in Ba Ria-Vung Ta u ’s i s h a p p e n i n g i n t h e r e s t o f Vietnam, where nearly 77 percent of total foreign direct investment (FDI) is now committed to the service sector, a drastic shift from the steady seven percent ratio in the last decade.

Jiaji

Muang Pakxan

Vientiane

plants generate 40 percent of the nation’s electricity and construction for Vietnam’s largest steel mill recently broke ground.

Haiphong

Thanh Hoa

Ban Ban

Louangphrabang

Zhanjiang

Dao Cai Bau

Hong Gai

Hai Duong

Nam Dinh Ninh Binh

LAOS

20˚

Beihai

Bac Giang

Hanoi

Hoa Binh

Louang Namtha

Qinzhou

Pingxiang

Lang Son Thai Nguyen

Yen Bai Son La

Yulin

CHINA

Phongsali

Ji Yu

Cao Bang

Lao Cai

Mekong

Guixian

Jingxi Ha Giang

Simao

he winds of change are sweeping across Ba RiaVu n g Ta u P r o v i n c e i n Vi e t n a m ’s b o o m i n g southeast economic region, and they are fragrant with the scent of gambled winnings and Dom Pérignon.

108˚

An important player in this activity is Ba Ria-Vung Tau Province. With an area of 1,982 square kilometers and a population of 995,000, it shares the border with Dong Nai Province to the north, Binh Thuan Province to the east and Ho Chi Minh City to the west. Ba Ria-Vung Tau connects Vietnam to the world with a developed network of deep seaports, and fires its industry with an extensive natural gas supply system. Not surprisingly the province’s key industrial sectors are in industry and gas including petroleum, steel, fertilizer, mechanical manufacturing, electricity and construction materials. The coastal city of Vung Tau is a hub for Vietnam’s rich offshore oil industry and is conveniently located next to ports with direct shipping lines to the United States. Within the Tan Thanh industrial park, the Phu My electricity

The province has so far managed to repeat this success in 2010. According t o Vi e t n a m ’s F o r e i g n I n v e s t m e n t Agency, Bao Ria-Vung Tau attracted US$2.16 billion of FDI for 20 projects in January-May 2010, 30 percent of Vietnam’s total and the highest of any province in Vietnam.

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What happens in Vietnam, stays in Vietnam

As great as its industrial achievements stand, Ba Ria-Vung Tau’s foreign direct investment is now increasingly channeled into the service sector following Vietnam’s accession into the World Trade Organization (WTO) in 2007. In order to integrate Vietnam into the global economy, WTO commitments required opening the market to exported foreign goods and services. New regulations included phasing out industrial subsidies and allowing foreign companies to establish foreign-owned subsidiary banks and brokerages. Results have been swift. Registered FDI in Vietnamese manufacturing represented 62.9 percent between 1988 and 2006 before dropping to 51.5

Regional Updates percent in the three years after Vietnam joined the WTO. Foreign investment to the service sector jumped from 30.7 percent to 48.1 percent during the same time. Top Regional FDI (Jan-Nov 2009) $1.58 bln $2.35 bln

Ba Ria-Vung Tau $6.73 bln

Quang Nam Binh Duong

$2.5 bln

Dong Nai $4.1 bln

Ho Chi Minh City

On Jan. 1, 2009, HSBC Holdings opened a wholly-foreign owned subsidiary in Ho Chi Minh City with chartered capital of US$180 million, the first overseas bank to incorporate in Vietnam. Hotel and restaurant projects garnered the most foreign capital in 2009, attracting 40.9 percent of the country’s total pledged FDI after lingering at just 4.2 percent in 2006. Management and consultant projects also drew impressive results, accounting for 36 percent of national FDI in 2009 compared with 15.2 percent in 2006. The national switch from manufacturing to services is dramatically transforming Vietnam’s economy, and Ba Ria-Vung Tau is no exception. “In the service sector, investors are not only developing tourism services but also spending more in financial and banking services,” said Le Kim Huong, director of Ba Ria-Vung Tau’s Department of Planning and Investment in a 2008 interview with the Saigon Times. Based on the 2008’s investment trends, Huong expects the service sector to represent 40 percent of the local economy by 2015, up 30 percent from 2008. Tourism will lead this transition, as investors are keen on Vietnam’s still underdeveloped tourism industry that will transform the country into a worldclass travel destination.

In 2009, the province attracted US$4.6 billion in tourism projects according to the Vung Tau Promotion Investment Center, a diverse array ranging from animal parks and tourist complexes to five-star hotels with flower gardens and golf courses. By April of 2010, the province continued to show strong numbers with a total of 159 tourism projects spread over 6,000 hectares and investment capital reaching US$11.9 billion. Foreign investors finance an overwhelming 94 percent of these projects. Emblematic of the province’s new economy is the largest of these new developments: the MGM Grand Ho Tram, a luxury Las-Vegas style casino to be located 130 kilometers from Ho Chi Minh City on the pristine Ho Tram beach strip. Vancouver-based Asian Coast Development Ltd. will develop the US$4.2 billion project, whereas MGM Mirage will manage the property after completion. In 2013, the resort will complete the first phase of development, opening its doors to 550 luxury guest rooms, fivestar amenities, and a gaming area of 90 live tables, 500 electric games and VIP facilities. The second phase of development will add 550 guest rooms, 14 high-end private villas and 500 more electronic games. “I believe firmly that supply has not met demand in Asia,” said Lloyd Nathan former president of MGM Mirage Global Gaming Development in an Apr. 2010 interview with Bloomberg. Nathan, tapped to run the new Vietnam resort, argues, “Vietnam is going to thrive as an alternative to Singapore or Macau.” Aside from the MGM Grand Ho Tram, other ambitious projects include U.S. company Good Choice USA-Vietnam’s Tung Tau Wonderful World Theme Park, to include an 88-story tower, conference center, shopping malls and entertainment centers, a US$120 million Chinese international five-star hotel with 50 luxury villas, and a US$1 billion project by Korea’s JQ Urban Development.

Fear and loathing

Despite these rosy projections, the past two years have exposed weaknesses in Vietnam’s investment system. Many investors in the tourism sector, local and foreign, complain about projects being delayed due to problems of site clearance and land allocation. On the other hand, top-level government officials worry about lax FDI approval and licensing procedures leading to bungled investments and ineptly delayed construction. These obstacles have resulted in low levels of capital disbursement and construction setbacks, pushing the average completion time for projects in Ba Ria-Vung Tau from eight or n i n e y e a r s . O f t h e p r o v i n c e ’s 1 5 9 new projects, only ten projects are in operation or under construction; 38 projects have just started construction and the rest are in the midst of the licensing procedure or drawing plans for construction. On a national level, Vietnam seems to be sorting out its capital disbursement problems. The Foreign Investment Agency reported that capital disbursement in foreign invested projects rose by 7.1 percent year on year in the first five months of 2010 to US$4.5 billion. As Ba Ria-Vung Tau continues to attract more FDI throughout 2010, it remains to be seen whether this national trend will wind its way to this southeastern province. With a better-enforced system of go vernmen t overs ight and land clearance, the region may see its stellar FDI figures drop as quality of investment becomes favored over quantity. But such is necessary to uncork the bottled up slowdown in development, assisting the local market’s transition from oil to champagne. F o r m o re i n f o r m a t i o n o n d o i n g b u s i n e s s i n Vi e t n a m , p l e a s e e-mail vietnam@dezshira.com or visit www.dezshira.com.

Vietnam Briefing | 2010

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