FDI paradox: the bigger incentives FIEs get, the bigger losses they incur

VietNamNet Bridge - More and more foreign invested enterprises (FIEs) have reported losses, though they continue to enjoy attractive investment incentives. Economists say this is ‘abnormal’.


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There are 21,400 FIEs in Vietnam




A Ministry of Finance’s (MOF) report presented at a recent working session with Deputy PM Vuong Dinh Hue showed a high proportion of unprofitable FIEs.

There are 21,400 FIEs, which account for 3 percent of total existing enterprises in Vietnam. FIEs maintained high growth rates in revenue and profits from 2011 to 2017. In 2017 alone, FIEs’ turnover soared by 28 percent compared with the year before, while their asset growth rate reached 22 percent and stockholder equity 14 percent.

There are 21,400 FIEs, which account for 3 percent of total existing enterprises in Vietnam. FIEs maintained high growth rates in revenue and profits from 2011 to 2017. In 2017 alone, FIEs’ turnover soared by 28 percent compared with the year before, while their asset growth rate reached 22 percent and stockholder equity 14 percent.

The MOF report mentioned problems in FDI, including imbalance in investment fields, capital structure and business performance. Foreign investment mostly goes to labor-intensive industries and areas with favorable natural and social conditions, while remote and “difficult” areas do not attract investors.

However, the biggest problem is the increase in the number of enterprises reporting losses, despite tax incentives.

According to MOF, Vietnam offers incentives in corporate income tax, import/export tariff and land access.

The incentives and high number of beneficiaries has led to a decline in tax collection. Many FIEs can enjoy a preferential tax rate of 10 percent instead of 20 percent for 15 years, and tax exemption for four years and a 50 percent tax reduction for the next nine years. In some cases, the preferential corporate income tax rate of 10 percent is applied for the lifetime of projects.

Le Dang Doanh, a respected economist, commented that the reported losses of FIEs is ‘unacceptable’.

“In general, one enterprise would not be able to continue operation if it takes losses for three consecutive years. But in Vietnam, there are enterprises which takes loss for 20 consecutive years. This is quite abnormal,” Doanh said.

He said the foreign invested economic sector has shown worrying problems, including tax evasion and transfer pricing. Using different “tricks”, they continually report losses to evade tax, which leads to loss of revenue for the state and uneven competition with Vietnamese enterprises.

According to the General Statistics Office (GSO), in 2011-2016, FIEs had 181 percent  more pre-tax profit than non-state owned enterprises.

The ‘profit’ is declared by FIEs to taxation agencies, i.e. what enterprises got after deducting costs on imported materials and machines. In many cases, the reported costs were higher than the real costs, which helped lower the real profits.

Bui Trinh, an economist, noted that the tax sum paid by FIEs was 81 percent of that paid by non-state owned enterprises.


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Chi Lan

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