With the passing of the Law on Investment (IL) and Law on Enterprises (EL) by the National Assembly of Vietnam, a foundation was laid for establishing a new Vietnamese investment regime in general and creating a level playing field for foreign and local investors in particular. The legal framework for the M&A sector in Vietnam has since been developing at a rapid pace. Portfolio foreign indirect investment was for the first time recognised as one of the official investment channels and has achieved spectacular growth in the recent years, despite a short pause in 2008 and 2009 due to the global economic recession. Currently, with some limitations, foreign investors can freely acquire stakes in Vietnamese enterprises. The limitations on foreign investment are defined by both Vietnam’s WTO commitments as well as domestic legislation. M&A activity is expected to remain buoyant in the coming years, with a projected growth rate of 25-30% per year over the next five years. The new wave of M&A sets to hit Vietnam, as Vietnam is once again perceived as an attractive investment market. The primary investors have been from Japan, Korea, Taiwan and recently from the ASEAN countries. Once the Trans-Pacific Partnership, and Free Trade Agreement between EU and Vietnam currently under final negotiation process, are concluded, it may also drive more interest in M&A activities in Vietnam.
Nevertheless, the M&A sector is still in its infancy. Its legal framework is still being developed and interpretations vary greatly among licensing authorities. Dialogues between relevant state bodies of Vietnam, e.g. the Ministry of Planning and Investment (MPI), People’s Committees at provincial level, and the investment community have been held regularly with the aim to tackle outstanding M&A related issues, such as licensing process, investment conditions and requirements. In some cases, comments from the investor community have resulted in amendments of the prevailing rules.
We much appreciate that the recent development of the laws on corporate tax and personal income tax highlighted the endeavour of the Government on easing the procedures of M&A activity in Vietnam. Some of our recommendations have been addressed and reflected in the drafts of amended EL and IL which are likely to be passed by the National Assembly by the end of 2014. However, hindrances are still there and we hope that the Government commit stronger on the improvement of M&A regulatory framework to re-ignite M&A activity in Vietnam.
We would like to note, hereafter, legal impediments to M&A in Vietnam and our recommendations for the Government on how to address these shortcomings. We welcome the opportunity to work alongside the regulators to facilitate growth and efficiency in the M&A market.
We would like to address these top recommendations for M&A in Vietnam:
- Make clearer rules on foreign ownership in Vietnamese companies;
- Entitle foreign investors acquiring less than 49% equity in local companies to act through the simple transfer procedure;
- Simplify licensing procedures to facilitate M&As;
- Clarify the basis for calculating the market share of a potential target company in relation to an economic concentration;
- Harmonise the interpretation of transfer price;
- Clarify and improve the regulatory framework on tax liabilities arisen from M&A transaction;
- Ensure that decisions taken by the Vietnam Competition Administration Department (VCAD) are made quicker.
X.2 Market Access and Licensing Process
Relevant Ministries: Ministry of Planning and Investment (MPI)
Issue description: Foreign M&A of local companies may face market access barriers with respect to a number of business sectors. Particularly, foreign investors’ acquisitions of local targets with wide business scopes do not always go smoothly. This even occurs when each business activity is open to foreign investment under Vietnam’s WTO commitments, such as distribution, or not restricted under Vietnamese law, such as education. Another issue is that the law is sometimes silent on foreign investment in other sectors, such as printing or publishing, which leaves room for discretionary judgment of the licensing authorities.
Similarly, foreign ownership in public companies, including listed companies or companies with 100 shareholders or more with contributed equity of VND 10 billion or more, cannot exceed 49%. Although in principle enterprises with foreign ownership of up to 49% are entitled to the same treatment as local companies, such rules appear to be disregarded in practice. For example, the Department of Planning and Investment (DPI) of Ho Chi Minh City refused to register the distribution of pharmaceutical products of a local company on the ground that 4.3% of its shares were then held by foreign investors . It is therefore very difficult for foreign investors to conclude an M&A deal.
Another challenge that investors face in Vietnam revolves around the different requirements for foreign investors versus domestic investors. If an acquisition is made between two local partners, the buyer needs to go through a rather simple registration process or ask the target to update its share registry with the buyer’s name. Unlike their domestic counterparts, foreign investors acquiring equity in local companies are often requested to retain two separate licences. Together with the target company, the foreign investor must apply for amendment to the latter’s Enterprise Registration Certificate (ERC) to include its names as [one of] the new owner[s]. When the amended ERC is issued, the foreign investor will be requested to go through another licensing process: applying for issuance of an Investment Certificate (IC). Applying for the IC is mandatory regardless of the number of shares to be sold. During the licensing process, licensing authorities often seek opinions of state bodies they find ‘relevant’ to the project. This has proven to be a time-consuming and complicated process, since such opinions have considerable impact and can determine whether a licence will be issued or not.
Potential gains/concerns for Vietnam: Other countries in the region with similar advantages to Vietnam, such as young and cheap labour, are competing for investors. Therefore it is important that Vietnam remains attractive by offering a clear, simple and efficient licensing process. This would help to boost the M&A market; consequently attract capital inflows, foster synergies and create economies of scale. It would also serve to reduce the administrative burden on enterprises and licensing authorities alike.
Furthermore, the MPI highlighted that the need for an IC is consistent with international practice in selected industries. However the regulations in developed economies such as Singapore, Australia and the UK do not generally require this.
Recommendations: The adoption of a set of detailed guiding regulations concerning M&A would be, in our opinion, essential at this stage. These regulations must of course closely adhere to Vietnam’s WTO commitments on the service sector and reflect the good intent of the Investment Law. This means creating a level playing field for foreign and domestic investors.
The current legal framework must be clear regarding the licensing process and it must regulate specific circumstances of foreign acquisition. Likewise, opinions of the relevant state bodies should only be sought in very limited circumstances.
As explained above, the Government is now on the process of amending the IL and EL, and it is likely that the amended IL and EL will be passed by the National Assembly by the end of 2014. Even though the amended IL and EL are still at drafting stage and there will be further changes until final conclusion, we have seen that the IL and EL drafts provide clearer definition of foreign investor and more detailed rules on the foreign ownership in Vietnamese companies, as well as simpler licensing procedures for M&A. We believe these amendments, when officially reflected in the IL and EL and implemented in practice, will be likely to impact dramatically the investment environment of Vietnam and re-ignite M&A activities in Vietnam.
Our specific recommendations are:
- Clarify rules on foreign ownership in Vietnamese companies.
- Entitle foreign investors acquiring less than 49% equity in local companies to act through the simple transfer procedure; either via the simple registration process or through internal update of the target’s registry.
- Simplify licensing procedures to facilitate mergers and acquisitions.
X.3 Tax and Transfer Pricing
Relevant Ministries: Ministry of Finance (MOF), Ministry of Planning and Investment (MPI)
Issue description: In an acquisition, the transfer price is, in principle, negotiable. Unfortunately, if that price is agreed to be less than the face value of the sellers’ capital contribution to the charter capital (equity) of the target, the licensing authority may not accept the acquisition. Subsequently, the acquisition is examined by the Tax Authority who may review the transfer price again to ensure that it reflects the ‘market price’ or the above ‘book value’ of equity. If the Tax Authority concludes that the market price or book value has not been reflected appropriately, it may refer to another transfer price it deems fit for tax management purposes. The only exception is made for a local company that has suffered from large losses. In our view, it is important that the law clarifies that the licensing authority has no authority to ‘review’ the transfer price, which is per se a purely commercial issue.
Furthermore, the law currently requires an application file for equity acquisition to be accompanied with ‘documents evidencing the completion of the assignment’. Without clear guidance on such evidence, the licensing authorities often require contracting parties to submit proof of the seller’s full receipt of the transfer price, such as bank slips. We believe that the requirement of ‘documents evidencing the transaction’s completion’ should be deleted from the law, leaving payment issues to be arranged between parties.
Moreover, tax liabilities arisen from any M&A transaction also create the concerns to the investor. Generally, any assignment of capital is subject to the standard capital gain tax rate (i.e. 22% corporate income tax of the profit derived from such assignment) while the sale of assets is subject to VAT (at a default 10% rate) in most of cases. The personal income tax of the individual seller may be applied with various tax rates of between 5% and 20% for capital investment and capital assignment depending on the types of taxable income and taxpayer. The gain from the shares transfer in a public company may also be subject to tax at 0.1% of the gross sales proceeds.
Potential gains/concerns for Vietnam: This lack of clarity regarding the applicable tax rates creates uncertain financial obligations for investors. In practice, due to these ambiguities, transfer prices are often frozen for long periods of time. This impacts on the planned timescale of transactions and could lead to deals being stopped.
Furthermore, the ambiguous tax regulatory frameworks and the sole discretion of tax authorities on the tax liabilities lead the M&A parties to face difficulties in determining risks levels on this matter or even to the risk of tax arrears or accusations of tax evasion after the conclusion of a M&A .
Recommendations: We would like to make the following recommendations:
- Harmonise the interpretation of transfer price;
- Remove the requirement for ‘documents evidencing the transaction’s completion’, leaving payment issues to be arranged between the buyer and the seller;
- Clarify and improve the regulatory frameworks on tax liabilities arisen from M&A transaction.
X.4 Anti-Trust Restrictions
Relevant Ministries: Ministry of Planning and Investment (MPI), Ministry of Industry and Trade (MOIT)
Issue description: Pursuant to the Competition Law, a transaction is prohibited if an ‘economic concentration’ is formed. This means that the companies involved in the transaction would have a combined market share of more than 50% of the relevant market. If the parties to an M&A deal have a combined market share of between 30% and 50% of the relevant market, they are required to notify the VCAD 30 days before the proposed economic concentration. The proposed economic concentration can only be carried out once written confirmation has been issued by the VCAD confirming the transaction’s legitimacy.
Potential gains/concerns for Vietnam: Though concepts such as ‘relevant market’ and ‘market share’ have been legally defined, the basis for calculating ‘market shares’ remains ambiguous and controversial. This lack of clarity causes VCAD to spend several months to investigate and confirm individual cases, which leads to severe delays in the overall progress of an acquisition. Better defined rules in this area would also serve to further protect the market from potential ‘economic concentration’.
Recommendations: It is critical for the Competition Law and its guiding regulations to be clearer on key points, including the factors required to calculate ‘market shares’ and ‘relevant market’. Furthermore, the actual reviewing process by the VCAD should be substantially shortened to ensure the overall progress of an acquisition.
We would like to make the following recommendations:
- Clarify the basis for calculating the market share of a potential target company in relation to the concept of ‘economic concentration’;
- Ensure that the VCAD can come to conclusions and make decisions in a more efficient and timely manner.
ABBREVIATIONS AND ACRONYMS
DPI Department of Planning and Investment
EL Law on Enterprises
ERC Enterprise Registration Certificate
IC Investment Certificate
IL Law on Investment
M&A Mergers and Acquisitions
MOIT Ministry of Industry and Trade
MPI Ministry of Planning and Investment
VAT Value Added Tax
VCAD Vietnam Competition Administration Department
WTO World Trade Organisation