VietNamNet Bridge – The government has encouraged enterprises to source local materials in manufacturing, but because of unreasonable tax policies it is cheaper to buy imported materials to make finished products in Vietnam.

Nguyen An, general director of Garmex Saigon, said that if enterprises buy import materials to make products for export under the mode of FOB (free on board), they can enjoy a tax-payment grace period of 275 days.

When enterprises use domestically sourced materials, they have two options, either “on-the-spot” imports or the normal mode. Under current law, on-the-spot imports which are used to make products for export are not subject to VAT.

However, this is not the favored mode for Garmex Saigon, for example, because the company has to follow complicated procedures to get a tax refund.

The company prefers buying materials under the traditional way, under which it pays the VAT immediately upon delivery of goods and gets the materials on time for its production schedule.

Only after exporting the finished products can Garmex follow procedures to get a tax refund.

The general director of another garment company in HCM City said that it was easier to buy imported materials than domestic materials. VAT refunds are usually high, and it takes enterprises a lot of time to receive them.

A lawyer said that in general the regulation on the 275-day tax-payment grace period for imported materials was reasonable, because domestic production could not supply all of the materials needed for the garment industry.

Moreover, garment companies, most of which do outsourcing for foreign partners, have to buy materials from foreign sources, as requested by the foreign partners.

However, the lawyer said that while import materials can be imported under favorable conditions, domestic materials cannot.

Such unreasonable tax policies can be seen in other business fields.

Tran Dinh Hung, deputy CEO of VNPT Technology, said that in mid-2013 imported phones under the mode of complete built units (CBU) had zero percent tax, while 70 percent of phone parts and accessory imports were taxed 25-30 percent.

Under such a tax policy, enterprises are inclined to use CBU imports for domestic sale instead of importing parts and accessories for domestic assembling (which could create jobs and enhance local production).   

In late 2013, the number of parts and accessories bearing import taxes was halved after the Ministry of Finance which adjusted the import tariff of many import items.

The lawyer noted that while CBU imports are not taxed, imported parts and accessories have to bear an import tax.

Sony, for example, decided to stop making TV tubes in Vietnam and focused on importing products for domestic sale because the import tax on finished products was lower than on parts and accessorie, he said.

TBKTSG