17:57 (GMT +7) - Thursday 27/10/2016

Consultant's Corner

Vietnam at an advantage in TPP

Released at: 16:34, 30/06/2016 FINANCE - TAX CONSULTANCY

Vietnam at an advantage in TPP

Photo: Deloitte Vietnam

Mr. Bui Ngoc Tuan, Tax Partner at Deloitte Vietnam, spoke with VET about what businesses will benefit and what challenges the Vietnamese Government must face when the TPP takes effect.

■ What commitments are there in the TPP regarding the elimination of tariffs?

Firstly, it is important to note that the common goal of all free trade agreements (FTAs) is to build an economic relationship through the promotion of multilateral trade in goods and strengthening business cooperation among member countries. The implementation of a tariff elimination roadmap is the best way to achieve these goals.

Of the FTAs Vietnam has signed with different countries and economic regions, the commitments to eliminate tariffs in the TPP are the most aggressive. Vietnam’s two largest partners, the US and Japan, have committed to eliminating 71 per cent of agreed tariff lines when the agreement takes effect, which represent 75.3 per cent of Vietnam’s export turnover to these two markets, and at the same time committed to remove 95-100 per cent of agreed tariff lines within the following ten years.

Vietnam also commits to eliminating more than 6,300 tariff lines on imported goods, which is 65 per cent of all tariff lines, as soon as the TPP takes effect. This is contained in Appendix 2D. According to the tariff elimination roadmap, the ratio of product lines with 0 per cent duty by the fifth year will be 85 per cent and 92 per cent by the tenth year.

With regard to exports, the TPP requires each member country commit to a basic duty rate, in Appendix 2C, which is the maximum rate a party can apply to goods exported to other parties. Moreover, the parties are entitled to accelerate the tariff elimination roadmap unilaterally for each TPP member country. This means that Vietnam could negotiate with other countries to shorten the tariff elimination timeline than the currently committed five to 15 years.

With the above strong commitment to eliminate tariffs from Vietnam and other TPP member countries, Vietnam is considered to be one of the most advantaged members in providing great opportunities to manufacturing exporters, both foreign and domestic, to put more investment into making qualified “Made in Vietnam” products and utilize the low or zero tariff scheme under the TPP to export to the US, Japan and other TPP members.

■ Vietnam is seen to have huge advantages when joining the TPP. Which industries are best placed?

It is necessary to look at both imports and exports when assessing the benefits of joining the TPP. Obviously, the first benefit is growth in export markets to TPP member countries, as Vietnamese products will enjoy lower duties and more competitive prices in major markets like the US, Japan, and South Korea. The second benefit will be the cost savings for businesses from importing goods and materials into Vietnam with lower import duties.

In terms of exports, Vietnam’s major industries, such as seafood, textiles, footwear, rubber, and coffee will have the greatest advantages as they have higher localization rates and many years of trading experience in large markets like the US and Japan.

However, the TPP has many strict rules on product origin and this is the biggest problem Vietnamese enterprises will face if they wish to take advantage of the TPP’s incentives.

Regarding imports, the impact of falling tariffs will differ depending on the specific product. Under the amended Law on Export and Import Duties No. 107/2016/QH13 dated April 6, 2016, all manufacturers importing materials to make products for export can enjoy free duties. As such, there is no impact from the tariff scheme under the TPP on goods or materials imported for making exported products.

In contrast, domestic enterprises that import goods from TPP countries for the purpose of consumption, forming fixed assets, or for production or trading in domestic market will be those that may benefit from preferential duty rates under the TPP.

It will be an exciting race as major brands that are knowledgeable about the origin of goods and the TPP’s legal issues expand distribution networks in Vietnam to take advantage of lower duty rates.

■ Can you tell us more about the origin criteria for goods to enjoy tariff incentives?

The TPP’s rules of origin are considered the most complex among the FTAs Vietnam has signed or is currently negotiating, due to the flexible application of the Regional Value Content (RVC), the method of reclassifying goods, and the method based on specific processing stages. Moreover, rules of de minimis, origin of sets of products/components and origin of refurbished goods also have impacts on identifying the origin of goods.

Obviously, Vietnam’s manufacturing sectors that have no particular rules of origin and high localization rates, including footwear and fisheries, will have many advantages in exporting to TPP countries as they already satisfy the RVC rule.

Particularly in textiles, companies must meet the “yarn forward” rule of origin in order to enjoy tariff incentives. As many textile companies still import fiber from China, this rule will change the fundamental structure of production in the long term. Therefore, such companies must find reasonably-priced fiber suppliers from other TPP members or invest in weaving and dyeing processes, in which they may have limited experience and face potential risks in environmental factors. This will be a major dilemma in the restructuring of supply chains and value chains for large corporations and companies applying segmented management of production in many countries around the world.

In imports, companies importing goods not for export manufacturing need to seek suppliers who qualify under the TPP’s rules of origin to enjoy preferential duty rates. For companies importing essential goods such as machinery, steel, automotive components, animal feed, and fertilizers it is much more important to find reliable and reasonably-priced suppliers.

■ Besides the problems particular to enterprises, what matters should the Vietnamese Government focus on in implementing the TPP?

With a focus on trading in goods, the TPP encourages Vietnam to modernize and reform its customs system and other administrative procedures to truly promote a fair trading environment.

Certain chapters in the TPP provide clear requests for information and administrative procedures that member governments must announce and commit to implement, together with a coordination mechanism to resolve matters arising through a trade committee.

Joining the TPP as an exporting country, the Vietnamese Government clearly has to take more proactive and aggressive actions to implement the commitments in trade facilitation to gain equal treatment from developed member countries.

■ With its extensive and comprehensive nature, what challenges and opportunities will the TPP present to Vietnam?

The difference between the TPP and other FTAs Vietnam has signed is that the TPP aims for more sustainable long-term development. In particular, the terms on employment, investment, environmental impact, and intellectual property will immediately set higher standards for the parties to ensure compulsory participation in international conventions and protocols.

In contrast, the terms above encourage cooperation and the exchange of experience between governments and present opportunities for enterprises in advanced research and product development in applying modern technologies.             

The TPP introduces specific working mechanisms and contact points to implement the above goals. I think this really is a great opportunity for companies and especially the Vietnamese Government to develop long-term strategies.

It is expected that the TPP will be submitted to the National Assembly (NA) for consideration and ratification in July. If the NA and other member governments complete ratification this year, the TPP is expected to take effect from 2018. Therefore, companies operating in sectors benefiting from the TPP should prepare carefully and seek technical advice to restructure supply chains and investment projects and to implement the procedures necessary to apply for certificates of origin on goods produced in Vietnam (under the specific TPP form) for export from 2018 onwards.

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