Ministry sets EPZs straight on tariffs

Export processing zones have been told they already enjoy significant benefits

In a report released last week, the ministry said goods produced in export processing zones (EPZs) should not be subject to preferential tariffs, even if production is supplied by local companies. The report, commissioned in response to loud criticism from Ho Chi Minh City-based EPZs who had been using the lower tariffs to increase their share of the domestic market, said EPZs were already benefiting from a number of incentives and needed no further help.
“EPZ firms are currently enjoying too much preferential treatment from both local and central authorities, including lower corporate income tax (CIT) rates, lower profit remittance taxes, import tax exemptions on imported raw materials and faster administration procedures,” the report said.
Under government incentive packages, EPZs pay no CIT for the first four years of operation after which a rate of 10 per cent is introduced – much lower than the 32 per cent applied to domestic firms.
Tax Policy Department deputy director, Bach Thi Minh Huyen, said competition would suffer if common effective preferential tariffs (CEPTs) were applied to EPZs.
“It would be unfair if they were to enjoy lower export taxes as that would create a non-level playing field in the domestic market.”
Although they are located in Vietnam, EPZs are treated in tax terms as foreign countries. All goods that zone firms sell to the domestic market are considered exports and subject to standard tariffs which are about 30 per cent higher than the new CEPT levels.
Deputy Finance Minister Le Thi Bang Tam said the main purpose of EPZs was to promote exports and they should not be encouraged to sell their products on the domestic market.
“If CEPTs are applied to EPZs, there is little doubt those firms would start producing for the domestic market as they would be in a very competitive position compared to local firms,” she said.
Tam said the reaction of the Ho Chi Minh City EPZs was likely a result of mistakes and misunderstandings and warned: “People shouldn’t mix things up”. Much of the confusion surrounds a document released by the Ministry of Trade in 1999, which reads: “Low taxes should apply to EPZ manufacturers if they have certificates of origin “form D” for goods supplied to local companies outside EPZs.”
But Tam said the document was not legally binding and had been given undue priority in the past.
“The document was sent to the Ministry of Finance just to seek comments on preferential treatment for EPZs under the AFTA scheme. It has no legal value and therefore cannot be taken as a governmental decision.”
Based on the document, EPZs have been enjoying CEPT incentives since AFTA was introduced four years ago. It was not until earlier this year, when significantly lower reductions came into effect, that the ministry barred EPZs from claiming CEPT benefits.
“If there was a mistake in the implementation process of the customs sector, we will have to fix it. In no case should we build a system on one mistake which might lead to several troublesome consequences in the future,” she said.
The ministry report said there could be a possible negative impact on EPZ firms’ performance as they would be less competitive than other exporting firms from ASEAN countries. However, that impact would likely be insignificant as EPZs export only a small percentage of goods to the domestic market every year.
Only 15 of the 100 operating EPZ firms export to the local market and domestic revenues, though rising, accounted for only 11.15 per cent of total revenues last year.
But these will not comfort many EPZs, who stood to save hundreds of thousands of dollars when lower tariff levels kicked in this summer. The Ministry of Finance said it might consider a compromise that would allow EPZs to enjoy CEPT benefits for a set volume of goods.
The Ministry of Finance told Vietnam Investment Review it might consider a compromise that would allow EPZs to enjoy CEPT benefits for a certain set volume of goods, but no further details have been released.