Viet Nam will be obligated to conform to multilateral treaties governing the organization when it joins the WTO. For instance, it will be required to eliminate certain subsidies in accordance with the Agreement on Subsidies and Countervailing Measures these will be subsidies which are banned on the basis of their trade-distorting effect.
Countries joining the WTO are obliged to progressively remove illegal subsidies within a phase-out period determined during WTO accession negotiations. Details of Viet Nam’s phase-out timetable have yet to be released.
Some subsidies specific to an industry, sector or region are not prohibited but are ‘actionable,’ and they may still be challenged by another member country if it can demonstrate that the subsidy has an ‘adverse effect’ on its trade interests.
Viet Nam needs to pay particular attention to its obligations under the agreement because of its policy of encouraging investment through the grant of tax incentives. The agreement makes clear that the granting of tax credits or preferential tax rates constitutes a ‘subsidy’. If these incentives contravene the agreement then Viet Nam may be challenged by other member countries.
Corporate income tax incentives are detailed in Decree No 164/2003 of the Government implementing the Law on Corporate Income Tax, as amended by Decree No 152/2004. The Decree provides for enterprises meeting certain criteria to enjoy preferential tax treatment. Some of the criteria refer to export ratios and would clearly constitute prohibited subsidies under the agreement. For example, the decree grants preferential tax rates for projects which export more than 50 per cent of total goods produced or traded. Additional tax breaks are granted under Article 39 for export projects that perform well. These incentives would need to be withdrawn upon WTO accession. The decree also grants various other tax breaks to enterprises operating in specific industry sectors and geographical areas. These incentives could be challenged by other member countries if the tax incentives are demonstrated to adversely affect their interests.
The Agreement on Subsidies and Countervailing Measures does allow countries to provide subsidies for socio-economically depressed areas, as long as such regions are determined on the basis of ‘neutral and objective criteria’ that are listed in the legislation. The decree, however, simply lists regions which are deemed to be disadvantaged. If the regions were instead determined by reference to economic criteria – unemployment 10 per cent above the national average, or household income, per-capita income or GDP 15 per cent below the national average – then the tax breaks granted in such regions would be non-actionable under the agreement. Generally, rather than giving tax preferences to specific sectors or regions, a more sustainable option for Viet Nam in the long-term would be to lower the corporate tax rate across-the-board to stimulate investment activity.
Meanwhile, the Government is drafting a decree to implement the new Law on Investment which contains a revised list of sectors and regions which are ‘eligible’ for investment incentives. Problematically, the list of ‘eligible’ sectors and regions in the latest draft of this Investment Law decree differs from those in the existing decree on corporate income tax. It’s unclear how the two decrees would operate together in practice.
The other major question is how to manage tax incentives that have already been granted to enterprises and which form part of the investor’s investment license, but which are prohibited by the WTO.
Viet Nam is legally bound by its international commitments to abolish prohibited subsidies but is also legally bound to honors its commitments to investors. Article 42 of the draft Investment Law decree would provide, however, Viet Nam’s international obligations would prevail over investment incentives recorded in the investment license.
The Government may consider issuing a separate regulation providing compensation to investors who lose their incentives, although this would have to be worded carefully as the payment of direct compensation might itself constitute a subsidy under WTO rules. A preferred option would be negotiation between the Government and the investor to reach a mutually acceptable outcome, with recourse to arbitration if no agreement can be reached.
Vietnam News (VILAF – Hong Duc)