Import tax on cars from EU decreases: Will car prices fall?

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Under the EVFTA, Vietnam will begin the import duty cut roadmap on cars from 70% to 0% within nine or ten years.

Taxes will reduce

According to Most Favored Nation Tariffs among WTO members, import duty rate on CBU cars from the EU to Vietnam is 70% (for cars with capacity of more than 3.0L) and 75% - 78% (for cars with capacity of less than 3.0 L) – the highest customs value and highest tax for cars imported to Vietnam.

This makes imported cars from Germany, France and Italy more expensive to Vietnam (high import duty results in high special consumption tax).

The Ministry of Finance said that according to the adopted agreement, Vietnam is committed to abolishing 48.5% of import taxes right after the agreement comes in to force and 99% taxes after about ten years.

For remaining taxes, Vietnam will introduce a more than 10-yearroadmap or offer incentives for the EU on the basis of tariff quota of the World Trade Organization (WTO). For cars, the tax abolishment roadmap for main groups is as follows: after nine years for powerful cars (over 3,000cc for gasoline engine and over 2,500cc for diesel) and after ten years for remaining cars; and maximum seven years for car components and parts.

In addition to reduction in tax, in order for car price in Vietnam to be cheap, it requires other factors. Photo: Nguyen Ha

Tax reduction, prices will fall?

A question raised is whether reduced import tax will make car prices in Vietnam fall or not, especially imported cars from the EU?

Currently, imported cars from the EU to Vietnam are products of brands Audi, Mercedes-Benz, BMW Volvo, Maserati and Volkswagen. Most of them are valued at more than VND2 billion.

Regarding the import duty roadmap for cars and other products, the Ministry of Finance is developing a draft and will soon report to the Government for signing. This roadmap will include regulations, terms and time for tax reduction implementation for ministries, sectors and localities.

It is assumed that if the import tax rate reduces from 7-9% per year, import tax on cars from the EU will gradually fall to 0% within nine or ten years.

In this case, if the tax reduction is implemented in a 2-3-year cycle, each cycle will cut from 15% to 30% per year, then it is likely that from August 2020 the import tax cut roadmap for cars from the EU will be applied.

No matter which roadmap, according to calculations, the 7-9% tax reduction per year (or 15% per 2-3-year cycle) will affect the car price. It assumed that in the first year, the import tax cutroad on CBU cars is 15%, the price will probably reduce at least VND300 million. Some cars will have higher price reductions.

That is the theory, in fact, a tax reduction does not mean that the car price will reduce. The evidence is that in 2018, the import tax on CBU cars in ASEAN region decreased to 0% (from 30%) but imported cars from this region (Thailand, Indonesia) were not cheap at the corresponding rate, sometimes they were more expensive.

Analysis from the market shows that currently imported cars from the EU (Audi, Mercedes-Benz, BMW, Volvo, Maserati, Volkswagen) are not domestically produced (except Mercedes-Benz) to compete on price. The cars are mainly from small importers, the volume is not large, so it is difficult to get competitive prices from the manufacturer.

On the other hand, cars imported from the EU often with high cylinder capacity (from 2,500cc to 3,000cc on average to 6,000cc at the highest), currently are subject to high special consumption tax (from 60% - 150%) so the reduction of import tax (from 75 to 0%) also does not drag thecar price down much.

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More importantly, the fact in Vietnam shows that the car price only decreases when there is a competitive pressure with domestically produced cars, inventories, but rarely the car price decreases by tax reduction.

So the desire for a reduction in the car price thanks to tax reduction is illusory.