Tax policy - foundation for development of Vietnam's auto supporting industry

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The auto assembly line of Hyundai Thanh Cong. Photo: Anh Vinh

Investment encouragement with preferential policies

Decree 122/2016/ND-CP and Decree 125/2017/ND-CP stipulating the tax incentive program for automobile production and assembly, in which enterprises meeting the conditions of the program, will get the import tax rate of 0% for imported car components that cannot be produced domestically.

Thanks to the preferential policies specified in Decree 122/2016/ND-CP, Decree 125/2017/ND-CP and most recently Decree 57, many businesses have more opportunities to invest in production and assembly line projects towards the strong development of the automobile supporting industry in Vietnam.

For example, VinFast car production complex in Hai Phong; Mazda car manufacturing and assembling factories, trucks and buses of Truong Hai Auto Joint Stock Company (THACO); expanding projects for the production of passenger cars and commercial vehicles under the Hyundai brand name of Thanh Cong Group JSC.

According to the General Department of Customs, during the implementation of the tax incentive program to manufacture and assemble cars according to the provisions of Article 7a of Decree 125/2017/ND-CP, 13 enterprises registered to join the program with a refund of VND12,411 billion in import tax arising at the Customs Departments of Hanoi, Hai Phong, Ha Nam Ninh and Quang Nam.

Talking to a reporter, a representative of Ha Nam Ninh Customs Department said that up to now, the unit has reimbursed more than VND10,069 billion in tax for enterprises that registered declarations for air compressors used for air conditioners, auto components and spare parts imported for manufacturing and assembling cars.

Quang Nam Customs Department has returned more than VND707.6 million for the components and spare parts manufactured and assembled by Chu Lai - Truong Hai One Member Limited Liability Company, Thaco-Mazda automobile manufacturing One Member Limited Liability Company, Truong Hai - Kia manufacturing and assembling tourist cars Co., Ltd. and Thaco Bus Manufacturing One Member Limited Company. Hai Phong Customs Department has also refunded more than VND26 billion of import tax on automobile components and parts.

Based on this result, it can be said that the preferential policies have encouraged enterprises to import raw materials and materials for production and processing in the automobile manufacturing and assembly industry; to attach importance to developing high technology, sources, energy saving and environmental protection.

However, Vietnam's auto industry is developing about 30 years later than other regional countries, and together with the reduction of import tax in ATIGA to 0%, it is creating great competitive pressure and threatening domestic production. Therefore, to facilitate the supporting industry and promote the participation of small and medium enterprises of all economic sectors, it is necessary to encourage enterprises to invest in manufacturing and assembly of cars to master core technologies, creating cooperation, association and specialization between manufacturing and assembly enterprises and producing components and spare parts enterprises.

Accordingly, Decree 57 issued by the Government on May 25, 2020 (took effect from July 10, 2020, in which Article 7a took effect from January 1, 2020) helps motivate businesses to expand their automobile production and assembly activities, thereby developing the auto supporting industry through preferential mechanisms, equal and attractive support policies. The provisions of Decree 57 aim to reduce input costs for supporting products to compete with imported goods, thereby increasing the scale of the domestic production market for the supporting industry.

Regarding the implementation of the tax incentive program for raw materials, supplies and components for the production, processing (assembly) of priority supporting industry products for the automotive manufacturing and assembly industry in the 2020-2024 period, according to the General Department of Customs, by the end of October 19, 2020, only four enterprises registered to participate in the program and had not incurred a refund because this program took effect from July 10, 2020.

Maximum tax incentives

The official effect of Decree 57 not only brought the import tax of components to 0%, but also set out extremely low output requirements in the first two preferential periods, paving the way for the development of Vietnam's automobile industry.

In which, both automobile manufacturers and enterprises manufacturing components and spare parts enjoy a preferential tax of 0%. This is a key factor promoting the development of Vietnam’s supporting industry after falling into a slump for many years.

However, the Government only grants tax exemptions to raw materials, components and supplies that are not domestically produced to give priority to the development of automobile manufacturing and assembly. More importantly, supporting industry enterprises, which import materials that cannot be produced domestically, manufacture components and supply to the domestic automobile assembly industry, also enjoy this preferential tax rate.

According to the General Department of Customs, the reduction in tax on raw materials, supplies and components for the production of supporting industrial products prioritized for the development of automobile manufacturing and assembly in Decree 57 can reduce the revenue from import tax on raw materials and components in the short term. However, it will contribute to promoting the development of supporting industry enterprises, thereby increasing other domestic tax revenues such as corporate income tax, VAT, contributing to attracting investment in the supporting industry, improving the trade balance, contributing to spillover effects and promoting the development of other industries.

Decree 57 has facilitated enterprises in the automobile manufacturing and assembly industry to develop, however, to effectively apply support policies to businesses, the customs office is facing difficulties related to the determination of raw materials, supplies and components to consider incentives.

Specifically, at Ha Nam Ninh Customs Department, there are problems related to the identification of raw materials, supplies and components that cannot be domestically produced. Therefore, there is nearly VND32 billion of component tax arising at the unit that has not processed the overpaid tax until getting an official opinion from the Ministry of Planning and Investment.

According to a representative of Quang Nam Customs Department, the unit is waiting to refund nearly VND74 billion of tax on items involved in determining whether or not they can be produced domestically. They need to clarify the product name and HS code to perform classification and tax refund due to the difference in the interpretation and classification of HS codes between customs and enterprises such as air conditioning compressors, types of car headlights, fog lamp covers, differential kit brackets, and front switch covers.

Additionally, there is no tax refund process to implement the auto parts tax incentive program, which is also one of the difficulties when implementing this regulation at Quang Nam Customs Department.

Regarding problems in the application of the preferential import tax rate of 0% of group 98.49 for imported automobile components and parts under the tax incentive program (Article 7a), Hai Phong Customs said that for components in stock from the preferential consideration before January 1, 2020, used for production and assembly of factory vehicles in the preferential period from January 1, 2020 onwards, the tax rate of 0% would be applied if they satisfied the provisions of Clause 3, Article 2 of Decree 57.

However, the content that has not been declared according to Clause 6, Article 7 means that the code, type and criteria of the internal management book of the enterprise have not been declared. Therefore, the components in stock are not only the quantity of imported parts expected to be produced and assembled for the group of vehicles registering to participate in the declared program under model code A43, but also include components already registered for import in declaration other forms including A12 and A41.