FDI Enterprises Needing Higher Quality

The figures in the V1000 Ranking Table – the list of 1,000 companies with largest corporate tax contributions to the State Budget in Vietnam 2010 – released by the Vietnam Report Company in collaboration with online newspaper VietNamNet proved an increasingly important role of foreign direct investment (FDI) enterprises in Vietnam’s economic growth.
Foreign-led firms made up 31.3 % of the list and rated firms paid more than VND20,000 billion of corporate income tax (over US$1 billion), accounting for about 23.52 % of the total income tax paid by the Top 1000 taxpayers in the three years from 2007 to 2009.
Not only contributing directly to economic development, foreign investors have also forced domestic firms to innovate and adapt to survive and develop in the economy market. The operation and completion of FDI companies are important elements to modernize market economic institutions and accelerate the process of economic restructuring in Vietnam.
Incompletely bright picture
However, the picture of FDI companies is not singly bright and more dark points are more revealing. Shortcomings of State management over this business bloc as well as evidences of adverse consequences on socioeconomic development caused by them are appearing at a higher frequency given environmental pollution, energy-consuming technologies, and limited inflows of foreign financial in their investment structures (mainly mobilised from Vietnamese sources). The development of FDI companies is likely to cause shortages of foreign currencies and exchange rate risks in the future.
FDI distribution structure in Vietnam is not rational at present. Catering and accommodation sectors currently attract the most interest of foreign investors, followed by the real estate sector. The amount of FDI capital in the manufacturing sector has declined continuously since 2005 (from 70.4 % in 2005 to 68.9 % in 2006, 51 % in 2007, 36 % in 2008 and 13.6 % in 2009). Moreover, in this field, foreign investors are mainly involved in low value-added assembly activities to take advantage of low-paid labour. Meanwhile, investments for mining and real estate soared. Minor investments for agriculture, forestry and fisheries tend to drop (from about 6 % of total registered capital in 2006 to less than 1 % in 2008). This investment structure is proven insecure for the sustainable socioeconomic development of Vietnam.
Unsatisfactory profit and tax payment
Contributions of FDI enterprises to Vietnam’s economy are remarkable. However, their contributions are still very modest in comparison with their large proportion in economic activities in Vietnam. In 2009, FDI enterprises generated 17.5 % of GDP of Vietnam, 43.4 % of industrial production value and 52.7 % of exports.
Paradoxically, although their competitiveness, technological level and governance are proven better than domestic companies, their business efficiency is uneven and relatively low, specifically with respect to profit.
According to the V1000 report, FDI companies came from Asia and Southeast Asia made a majority. Companies from developed East Asian countries like Japan, South Korea and Hong Kong accounted for nearly 50 % share of total corporate income tax paid by FDI taxpayers in the V1000 list. European and US companies contributed 21.64 %. However, many FDI companies are making modest profits, even operating at loss. Thus, their corporate income tax payments are limited.
For example, according to statistics of the Tax Department of Ho Chi Minh City, in 2009, nearly 60 % of FDI enterprises in the city reported business losses (a similar rate as previous years; thus, the global economic crisis cannot be cited as an agent). They used much of natural resources and energy (especially electricity) but their economic efficiency, then contributions to the State Budget, were very limited.
Giving reasons to this problem, some experts underscored transfer pricing and tax avoidance. This is a persistent concern but its bad effects are emerging more clearly. Many FDI enterprises are causing losses in tax revenues of the State by transfer pricing in commercial activities so as to transfer incomes and profits to the homeland. By deliberately sticking much higher values to raw materials, machines and imported inputs from parent companies and selling products back to parent companies at too low prices, FDI companies always make a loss in business activities. They are not only free from corporate income tax payment but also enjoy value-added tax refund.
Necessarily defining strategic partners in attracting ad developing FDI enterprises
As Vietnam is approaching the line of a middle-income country, it needs to be more proactive in attracting and selecting investments. The investment promotion strategy should be replaced by investment attraction strategy. Or in other words, Vietnam needs to take initiative and introduce more closely selective criteria to strategic partners and strategic investors. The highest priority is given to investors with highest ability to generate profits and spread technologies and corporate governance. It should not only focus on attracting as many projects as possible as previously while the price for environment, natural resources and the society are too high. It also drops the thinking that foreigners are better, more efficient and more law-conscious.
The selection of strategic partners should probably be based on investment practices of FDI enterprises in Vietnam. Economies with higher proportion of effective operating FDI companies should be treated as strategic partners.
After all, the most important mission of an enterprise is to make a profit and thereby contribute to the society. Thus, apart from policies to restrain transfer pricing, the State and the society need highly appreciate and honour good-performing FDI companies, proven by big profits and contributions to the State Budget of Vietnam.
Top 10 FDI companies with biggest corporate income tax contributions
V-1000 Table (www.vietnamtop1000.vn))
Prudential Vietnam Life Insurance Co., Ltd
Phu My Hung Joint Venture Company
Vietnam Beer Co., Ltd
HSBC (Vietnam) Bank
Honda Vietnam Co., Ltd
Unilever Vietnam International Co., Ltd
Toyota Motor Vietnam Company
Citibank – Hanoi Branch
Nam Thang Long Urban Development Co., Ltd
Nguồn: vccinews.com
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