- Export Processing Enterprises in Vietnam are a popular investment vehicle for investors looking at Vietnam as China plus one destination.
- EPEs offer lower taxes and the government gives incentives for certain product lines
- While customs and tax audits for EPEs are stringent, the tax benefits for EPEs compared to traditional manufacturing enterprises make them worthwhile.
Export Processing Enterprises (EPEs) are a popular investment vehicle for foreign investors in Vietnam. This is particularly true as Vietnam has emerged as a China plus one destination for foreign companies outsourcing operations to reduce costs and improve market share.
The recent novel coronavirus COVID-19 outbreak in China has accentuated this issue, impacting businesses not only in Vietnam but the rest of ASEAN as supply chains begin to feel the impact. With raw materials and inputs being sourced from China and travel restrictions still in place, businesses may need to look at alternate suppliers and production as a long-term strategy.
Once a business decides on an alternative, an EPE is an ideal investment for investors looking to manufacture and export to different destinations.
Export processing enterprises and export processing zones
EPEs, as defined by Decree No 82/2018/ND-CP, are enterprises that are established and operate in an Export Processing Zones (EPZ) OR that specialize on a manufacturing product for import and operate in an industrial or economic zone. EPEs are also required to be separated by fence systems, have ports, entrance and exit doors and fulfill requirements by customs authorities related to non-tariff areas and rules on import and export duty.
Export Processing Zones (EPZs) offer tariff-free trade, and low-cost labor making them an ideal location for EPEs. EPZs are often located within industrial or economic zones and focus on manufacturing goods for export. They also provide tax incentives, lower land rentals and are exempt from export taxes when exporting their products and materials.
EPEs also typically connected to seaports, and airports making export more efficient. Due to their location within EPZs, these businesses benefit from unique tax treatment which we will discuss below.
EPEs set up in EPZs are allowed to sell goods to the local market; however, import duties will be payable by the recipient. Conversely, EPEs set up in industrial zones other than EPZs are prohibited to sell to domestic enterprises in the Vietnamese market.
Taxation of Export Processing Enterprises
EPEs are subject to the standard corporate income tax (CIT) of 20 percent, however, businesses may be subject to a lower tax rate if their products are encouraged by the Vietnamese government or are located in economically disadvantaged areas. This tax is also applicable to foreign income. However, similar tax paid overseas is deductible from the Vietnamese Enterprise Income Tax.
As mentioned, EPEs receive unique treatment when it comes to tax on imports and exports. However, they are also subject to stringent customs and tax compliance requirements to ensure that businesses do not misuse the preferential treatment.
Generally, in transactions with overseas entities or other EPEs, they do not have to pay any import export duties (import export VAT and import and export tax, but still have to pay CIT on gross profit). However, in case an EPE buys goods from domestic companies, those goods are subject to export duties. But as per Vietnam law, the exported parties in Vietnam are in charge of export duties. In addition, if an EPE buys goods and services which is used outside of the EPZ, they would still have to pay VAT of 10 percent.
The table below outlines the VAT and duties obligations for EPEs and non-EPEs for a range of scenarios.
EPEs are subject to stringent customs checks in order to ensure that all materials imported are used legitimately for goods to be exported. Any discrepancies, either surplus or minus, between accounting books and customs declarations will be subject to taxes and duties.
A surplus discrepancy occurs when the balance of materials in the accounting books is higher than that in the customs finalization report (i.e., the amount of imported materials exceeds the number of materials used to manufacture exported goods). If the surplus materials are still in stock, no tax or duties need to be paid. If the surplus materials cannot be traced, taxes may be payable.
A minus discrepancy means the balance of materials is higher in the customs report than in the accounting books. This could be due to materials being sold to the Vietnamese market; if this is the case, import tax and VAT is payable. According to OL 9376, minus discrepancies will not be assessed for import tax in either of the following scenarios:
- The minus discrepancy is as a result of "declaration norms which is lower than actually used";
- The minus discrepancy is a result of differences in measurement units between EPE and Customs;
- No local sale of materials has been made by the EPE; and
- Customs cannot find evidence of such local sales.
EPE tax illustrations
The following two simplified examples help to illustrate when an EPE located in an EPZ has duties and/or tax obligations coming from surplus or minus discrepancies.
Firstly, the accounts of Company X state that 50 pieces of Material A were imported. On the other hand, the customs finalization report says that only 48 were used in the goods exported. Whether Company X is obligated to pay duties depends on whether the two non-exported pieces are still in stock:
- If the surplus (two pieces) are still in stock, no import tax is due
- If they cannot be traced, the company is required to pay import taxes
Secondly, the accounts of Company Y state that 50 pieces of Material B were used for export goods. Contrary to the previous example, the customs finalization report says that 52 were imported and used, thus implying a minus discrepancy. In this scenario:
- If the discrepancy (two pieces) were sold to the Vietnamese market, import tax is payable on these pieces
- If the discrepancy is simply because of differences in calculation or a declaration lower than actual usage and no evidence of local sale can be found, no import tax is payable
Although the customs checks for EPEs are rigorous, it is a small price to pay for the exemptions that they allow. The tax benefits afforded to this type of enterprise make EPEs an attractive alternative to traditional manufacturing for many companies conducting very limited processing within the Vietnamese market. In order to take advantage of the preferential tax treatment of EPEs, it is vital to keep company accounts in order and comply with all customs and investment procedures.
Note: This article was first published in January 2017 and has been updated to include the latest developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.