China is becoming a less and less attractive destination for investors. Labor costs as well as the number of intellectual property risks to consider are high. Funding is limited and is granted dependent on province, district, or individual location in a very unclear manner. Foreign investors are often confronted by many bureaucratic obstacles as well as other disadvantages vis-a-vis domestic state enterprises.
Thus, more and more investors are turning to the ASEAN member states, i.e. the ASEAN Economic Community (AEC). The advantages are quite striking: as a manufacturer in AEC, you can serve the Chinese market duty-free and keep your logistics costs low. Furthermore, labor costs are lower, the business culture is more similar to our own, and local employees who provide regular assistance are easier to find in, for example, Thailand, than they are in China.
Investments Must Yield Good Payoffs Even Without Incentives
It is for the reasons given above that Thailand and Vietnam are now among the most preferred Asian countries for investment. The wide range of incentives and funding measures offered by both countries will be the focus of this report. It should be noted that one should never make an investment based entirely on the subsidies it offers. The investment must be able to bring returns on its own. Still, things like tax exemptions or exemptions from customs duties are sure to provide great additional enticement, as they help to speed up the return of investment.
Investment support is quite similar in both Thailand and Vietnam. Some differences exist, however, in terms of transparency regarding the extent of funding. We provide this comparison knowing full well that new programs in Thailand or changes made “by decree” in Vietnam could potentially shift our findings for each comparison.
Nevertheless, our comparison will, with the help of clearly identified criteria, give you an overview of the maximum funding obtainable. To determine the eligibility of a project, you will need to meet for an individual consultation with SANET ASEAN ADVISORS, who can help meet your needs in both countries.
The Strategic Importance of Tax and Customs Exemptions
Aside from being advantageous from a purely financial perspective, exemptions from taxes and customs are also extremely important for a company’s global production strategy. For example, as long as the investment creates added value, investors can:
- import machinery, equipment and certain materials for production duty-free
produce in both countries tax-free and at low cost
- export their goods duty-free to China, Japan, Korea, India, Australia and New Zealand under various free trade agreements
- From this, one can clearly see that investing in either of these two countries would sustainably increase an investor’s ability to compete on the global market.
Tax Exemption that lasts “Almost Forever”
The rate at which company profits are taxed, i.e. Corporate Income Tax (CIT), is 20% in both countries.
In Vietnam, within the scope of investment promotion, this tax can be waived for up to four years. For the next nine years after that, the tax can be reduced by 50% for a total rate of 10%. Time is calculated beginning from the first year in which the company made a profit.
The maximum grant in Thailand includes an eight-year tax exemption, also followed by a five-year period where the tax rate is halved to 10%.
This means that the exemption and reduction periods last 13 years in both countries. In purely mathematical terms, the average tax rate over this duration is 6.9% versus 3.84% in Thailand. One point worthy of note, however, is that, in Thailand, the total amount of tax savings can be capped, depending on the class, up to the investment amount.
Of course, whether one receives the maximum privileges depends on various criteria and requirements, which often involve technological or field specifications, although in Thailand one must, for example, also prove settlement within a recognized enterprise zone. We will explain the criteria for eligibility further below.
Importation and Customs Duties for New and Used Machinery
These benefits are of great significance for all companies. This is especially so because machinery for new production jobs is often imported rather than being acquired directly in Thailand or Vietnam.
Both countries allow the duty-free import of new equipment.
Used machinery is also often brought in from other countries. Both Thailand and Vietnam are not so generous in this matter, as state-of-the-art technology is given a much warmer welcome than ‘run-down’ equipment.
Vietnam prohibits entirely the import of any machinery more than 10 years old. The import of used equipment less than 10 years old is only permitted if it is clearly in compliance with the “Vietnam/G7 States” technical standards. However, duties must be paid on equipment of this type.
Thailand, on the other hand, allows the import of machinery regardless of how old it is. However, duties must be paid on all second-hand machinery. Additionally, any equipment less than 5 years old is counted as part of the investment amount. This becomes important when the tax savings amount is limited to the investment amount. The value of the equipment must be verified by providing an attest from a technical expert. This value is counted towards the customs duties as well as the deductions from the investment amount.
Exemption from Import Duties on Resources and Materials
Only very few companies will be able to localize all the raw materials and components they need right from the start of production. It is typical to have to import certain parts over at least the first few years. Tariffs raise the cost of production and lower a new factory’s cost advantages.
Thus, Thailand permits the duty-free import of resources and materials for the entire duration of the promotion. Their type and quantity must, however, be specified exactly in the application for funding. The entire promotion can be put at risk if the list shows that, for example, almost all parts are being imported only to then be simply screwed together. Only those production processes which create added value in the country are considered worthy of being funded.
Vietnam only offers an exemption on import duties for materials which can be shown to not be obtainable in-country. Unfortunately, such “soft” formulations create the perfect opportunity to lose time “dealing” with the customs authorities so that tariff exemptions can be obtained.
Increased Tax Depreciation of Costs and Investments
Thailand also grants a doubled tax deduction on transport, electricity, and water costs as well as a 25% tax increase for the expense of installation and building costs. There are no provisions of this kind in Vietnam.
Non-fiscal incentives can also make business significantly easier for investors. Some of them are:
- Both countries, Vietnam and Thailand, offer investors simplified conditions and processes for the issuing of long-term visas and work permits. The Board of Investment in Thailand even has representative counters of the employment and immigration offices that offer a “One Stop Service”.
- The repatriation of profits into one’s home country is, monetary controls notwithstanding, possible in both countries.
- In Thailand, foreign investors recognized by the Board of Investment (BOI) are given the right to obtain ownership of land and property. This is valid not only for the factory property itself, but also for an appropriate private property for the investor and their family. As a communist state, Vietnam does not have a concept of immovable property. Properties can only be rented as needed, provided the chosen industrial park still has a rental contract with the state.
The Funding Process
The Board of Investment (BOI) has existed in Thailand for decades. Originally under the direct supervision of the prime minister, the task of this agency is to promote investments in Thailand. There are no differences in the treatment of foreign and Thai companies.
The benefits are laid out in clearly defined promotion guidelines. Projects with investment amounts of up to 5 million EUR are examined and approved by the authorities directly. The process is ISO-regulated and complete within 70 business days. Investors of larger amounts should expect a waiting time of 90-100 business days, as such investments must first pass through a ministerial committee.
Vietnam also aims to provide appropriately short and time-conscious decision-making channels. However, there is no standardized central office; instead, some funding measures must be approved by the local authorities who often reside within the parks themselves. This makes it somewhat difficult to be certain how much time is needed to conclude the application process for funding.
The time allowed for the process in both countries leaves much to be desired, especially considering that all documents required for application must be submitted before processing can begin.
In our experience, this takes quite a while for the applicants. The documents including everything that would be necessary for investment subsidies in, for example, Germany, such as a financial plan, a calculation of profits, equipment to be procured, HR-planning and much more. This is, of course, the responsibility of the investor, but it is only seldom that everything is ready for submission within just a few weeks.
The promotion guidelines in Thailand are very transparent. The funding amount is determined based on:
- the activity itself, i.e. the field and purpose of the products to be produced (“activities”);
- the technical level of the production (“assembling” is not sufficient);
- special additional services (“merits“) with regard to improving competitive capabilities, the ability to supply structurally weak areas and industrial development via investments. Being able to show proof of being settled in an industrial park, a budgeted amount for F&E or design, as well as a description of the planned cooperation with Thai institutes or companies is particularly helpful in this matter;
- the applicability of special branch programs, e.g. by being a part of the automotive industry in the “Automotive Super Cluster” or by establishing an “international commercial center” with tax benefits similar to those offered in Hong Kong.
The investment promotion process in Vietnam is not so simple. For example, foreign companies must be inspected and deemed worthy of being promoted to determine whether they can even establish a company there. There is no equal treatment of foreign and domestic companies in this respect.
All funding measures are established by “decrees”, with it being not uncommon for them to be “adjusted” and changed. The lack of integration between company establishment, application for funding and location selection is viewed as an impediment by many.
It is like the story of the chicken and the egg, where the question remains unanswered which came first. You have no company without a location, no location without funding approval, and no funding without a company. Excellent on-site consultation as well as a well-structured approach are required here to avoid “running in circles”.
There is hardly any room for changes in strategy or partial decisions. For example, if the “Saigon High-Tech Part (SHTP) grants funding and the investor then decides on a different industrial park, the decision to grant funding then becomes void and the whole process must begin again so the new location can be inspected and approved by the relevant authorities.
The intensity with which the technology to be used must be disclosed is also perceived as troublesome. Whoever wants to receive hi-tech funding must then allow quite a deep look into the specs of their “hi-tech”. Finally, the chance of running into a “black sheep” with the authorities who expects a little extra to pad their pocket before they hand out the decision you are looking for is also higher.
The Bottom Line
In summary, investment promotion itself is, as mentioned in the introduction, similarly attractive in both countries. Both countries have more to offer than China as well as most of their Southeast Asian counterparts. In this comparison, Thailand is more favorable in terms of transparency, the equal treatment of foreign and domestic companies, as well as the right for many to own property on the business premises.
Tax issues are decided on a case-by-case basis to determine into which funding category each investment should be classified.
When trying to obtain maximum state benefits, it is most important for investors to always keep their eye on the various factors that make up the perfect location: the job market, labor costs, legal security, political stability, protection of intellectual property, the local sales market, the country’s infrastructure and the quality of the procurement market are just some of the aspects that an investor must examine in a thorough feasibility analysis.
Because, in the end, and this does bear repeating here, an investment must yield good payoffs, even without tax benefits.