However, the ordinance only provides general principles for conducting foreign currency transactions in Viet Nam without setting down specific details. In order to guide the implementation of the ordinance, the State Bank of Viet Nam has circulated for public comment a draft decree regulating foreign exchange control.

The draft decree is arranged in accordance with principles expressed in the ordinance, covering (i) liberalisation of rules on current transactions; (ii) loosening capital transactions in direct or indirect investment; (iii) limiting the use of foreign currency within the territory of Viet Nam; (iv) developing the foreign currency market, foreign exchange rates and management of gold import and export; and (v) intensifying State administration of foreign exchange. The draft decree consolidates previous provisions regarding foreign exchange and provides further regulations.

In accordance with the principle of freedom of current transactions stipulated in Article VIII of the IMF’s Articles of Agreement, the draft decree simplifies the licensing requirement for current transactions. That means that residents or non-residents who have demand for foreign currency for payments relating to import and export and money transfer are not required to obtain the permission of local State Bank branches as before. They can purchase, transfer or remit foreign currency as long as they can prove reasonable and actual demands and produce documentation for credit institutions that are permitted to conduct foreign exchange transactions.

Credit institutions in Viet Nam are still required to verify supporting documents for foreign exchange transactions to ensure that the remittance of foreign currency is for an authorized purpose and in accordance with the law. However, the requirement to produce documents evidencing fulfillment of tax obligations, which caused many difficulties in the past, has been eliminated.

Under the draft decree, foreign currency must be remitted through accounts at permitted banks and payments by cash can only be conducted in special situations if permitted by the State Bank.

This new regime will prevent individuals and organisations from laundering foreign currency and helps the State Bank control foreign exchange within Vietnamese territory. However it is uncertain whether this provision will affect set-off arrangements and financially settled derivative transactions. It may be appropriate for the State Bank to consider exempting such transactions.

As under current regulations, foreign investors will be required to maintain a foreign currency account for direct investments and a Vietnamese dong account for indirect investments.

Entities resident in Viet Nam will be required to obtain approval from the State Bank when they want to make offshore indirect investments such as the purchase of securities outside Viet Nam and all income earned from such indirect investments must be remitted to Viet Nam within two months of the end of a fiscal year, unless otherwise approved by a relevant authority and then registered with the State Bank.

For the first time in Viet Nam, resident individuals can obtain a loan from offshore lenders provided that the loan is approved by the State Bank.

Former National Assembly Chairman Nguyen Van An was recently quoted as saying, "We want to see more transactions take place in Vietnamese dong."

This wish is reflected in both the ordinance and the draft decree. Both generally forbid transactions, payments, quotations and advertisements from being made in foreign currency. Currently, many companies quote prices in foreign currency in their contracts, with the actual payment being made in the local currency. It is not entirely clear if this practice would continue to be permissible.

Under the draft decree, there are nine circumstances in which foreign currencies can be used in local transactions. These include transactions with permitted banks and contractors, receipt of foreign currency by insurers for offshore re-insurance, receipt of foreign currency through import/export agents, internal remittance within a single company and its branches, receipt of foreign currency by duty-free shops, receipt of salaries, allowances, and bonuses by foreigners whether resident or non-resident from non-resident organisations, and collections of visa fees at resident customs offices or non-resident embassies and consulates.

Unlike existing regulations, the draft decree would not allow foreigners working for foreign-invested companies to receive pay in foreign currency, nor would it allow foreign-invested offices buildings to collect rents in foreign currency.

Finally, the draft decree would give the Government authority to protect State monetary and financial security when it deems necessary by restricting the conversion, delivery, remittance and payment for the current and capital transactions; by forcing the sale of foreign currency; and by other measures.

The Government needs to further clarify what these other measures might be. Otherwise, such a provision could be viewed as a risk in doing business in Viet Nam.

Vietnam News ( VILAF – Hong Duc)