VIETNAM: 2005 INVESTMENT CLIMATE STATEMENT

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SUBJECT: VIETNAM: 2005 INVESTMENT CLIMATE STATEMENT





1. This cable provides the 2005 Investment Climate Statement for Vietn

am.



2. Begin text of the 2005 Investment Climate Statement for Vietnam:



Vietnam - Investment Climate Statement



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A1 Openness to Foreign Investment:

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Vietnam, in principle, maintains a policy of encouragement of foreign

investment. A crucial element in its long-term development strategy is

the continued ability to attract and utilize relatively large amounts o

overseas capital, both foreign direct investment (FDI) and official

development



assistance (ODA). (Vietnam does not yet allow any significant foreign p

ortfolio investment.) For the 2001-2005 period, the Government of

Vietnam (GVN) has established targets for FDI at US$ 11 billion in

disbursements from exi sting and newly licensed foreign investments and

for approximately US$ 10-11 billion in ODA disbursed by foreign donors

for a total of US$ 21-22 billion from foreign sources. These levels of

FDI and ODA estimates are required to support the government's GDP

growth target of 7.5 percent per year.



By December 2004, Vietnam had attracted nearly US$ 46 billion in invest

ment commitments since the country was opened to foreign investment in

1988. Approximately US$ 27 billion, or 58 percent, of that amount has

been disbursed in 5,109 projects. Sixty-six percent of disbursed

investment was made into projects concentrated in or near the two major

cities of Ho Chi Minh City in the south and Hanoi in the north. U.S.

businesses have received 215 investment licenses for projects worth

nearly US$ 1.3 million and have injected US $ 730 million thus far into

Vietnam. Significant additional U.S. investment is counted as

investment from third countries in cases where, for example, the

investment involves a third-country subsidiary of a U.S. company. The

United States Agency for International Development (USAID) and the

Ministry of Planning and Investment have been conducting research in

this area. Their latest estimate of total U.S. investment including

all U.S.-related investment is 251 projects with a total registered

capital of USD 2.5 billion (as of July 2004).



As the GVN continues to proceed with its long-standing policy of reform

of the economy, openness to foreign business, and integration into the

world economy, Vietnam's rapidly growing population of 81 million shoul

become an increasingly attractive investment destination. Vietnam

entered into the Asia-Pacific Economic Cooperation forum (APEC) in late

1998. It is committed to enter into and fully comply with its

obligations under the ASEAN Free Trade Area (AFTA) by 2006. In

addition, it is currently engaged in negotiations to join the World

Trade Organization (WTO). Perhaps the strongest recent signals of the

country's commitment to economic reform and improving business climate

were entry -into- force of the U.S.-Vietnam Bilateral Trade Agreement

(BTA) in December 2001 and completion of agreements on economic reform

with the International Mone tary Fund (IMF) and World Bank also in 2001

Although the GVN and IMF allowed their agreement to expire in April of

2004 because the GVN was unable to meet IMF policy on audit and

accounting arrangements, the IMF remains fully committed to continuing

an effective partnership with the GVN to support the implementation of

the Comprehensive Poverty Reduction and Growth Strategy and offer

guidance on maintaining macroeconomic stability. Moreover, the IMF gav

Vietnam good marks for its macroeconomic stability.



In light of Vietnam's strong macroeconomic performance despite the glob

aleconomic downturn and continued progress on economic reform, Standard

and Poor's assigned Vietnam's foreign and local currency bonds a BB

minus long term and a Bminus short term rating and labeled the long

term outlook stable. Moody's was expected to upgrade Vietnam's long

term rating from currently B1 to BA3. These developments, taken

together with the country's relatively low-wage work force and natural

resource base, are convincing foreign investors to consider Vietnam

when looking for their next investment location.



However, despite an official policy encouraging foreign investment and

a solid economic performance, Vietnam remains a difficult investment

environment and potential investors should carefully scrutinize any

investment plans. Currently in a period of transition from a command

economy to a 'state-supervised' market economy in which the state secto

retains a 'leading role,' Vietnam is implementing a series of gradual

reforms that will enable the economy to function more efficiently. As

the GVN engages in this complex process, foreign investors must cope

with a wide range of problems and costs. These include poorly develope

infrastructure, underdeveloped and cumbersome legal and financial

systems, an unwieldy bureaucracy, non-transparent regulations, high

start-up costs, arcane land acquisition and transfer regulations and

procedures, and shortage of trained personnel. Issuance of investment

licenses can be a lengthy process. Moreover, investment projects in

both pre- and post- establishment phases must cope with frequent change

in the investment environment in areas such as taxes, tariffs, import

and export policies, and procedures. Additionally, the Vietnamese

courts have so far proved unwilling or unable to enforce laws related t

investor protections, in particular, the enforcement of arbitral awards

Finally, investors cite official corruption as a significant problem in

establishing and running their business. In particular, investments

involving joint ventures with State-owned enterprises have proven

especially vulnerable to corruption and abuse.



Foreign investment in Vietnam is regulated by the Ministry of Planning

and Investment (MPI) through the Law on Foreign Investment (LFI) and

related implementing regulations, decrees, and circulars. This law was

first introduced in 1989 when the country was opened up to investment

and was followed by aseries of amendments and supplements in order to

improve the climate for foreign investors. The latest guiding

regulation is Governmental Decree Number 27 issued in March 2003. It

provides amendments to the 2000 Decree Number 24, which promulgated

detailed regulations on the implementation of the LFI. Decree 24

includes an explicit pledge against expropriation, guarantees the right

to repatriate profits, and states the GVN's intent to treat private and

State sectors equally. The law provides significant fiscal and tax

incentives to attract foreign capital.



Vietnam is also working to establish the legal framework to support a

healthier, more transparent business environment and to level the

playing field between domestic and foreign investors. In 2004, the

National Assembly passed a revised bankruptcy law and a Law on

Competition. MPI also began drafting a Common Investment Law and

revisions to the Enterprise Law, and anticipates submitting these to th

National Assembly by the end of 2005 to become effective in 2006.



There are four primary forms of investment for foreigners in Vietnam:



a) Joint venture (JV) agreements pair foreign and local companies shar

ing capital and profits. The contribution of the local company,

typically a State-owned enterprise (SOE),to the JV frequently consists

solely of land use rights. The minimum percentage of foreign involvemen

in a JV is 30 percent, but examples of JVs where the foreign partner is

not a majority shareholder are rare. The minority partner retains veto

power over the majority partner concerning selection of senior

management and changes in the JV charter. However, for U.S. investors,

these rights will be phased out within three years of entry into force

of the BTA. Joint ventures account for the majority of foreign

investment to date. Many investors find JVs attractive because they ca

benefit from the assistance of an established Vietnamese firm in dealin

with bureaucratic and administrative procedures. They also provide

foreign investors access to land that may otherwise be difficult to

secure. Some investors complain the government allows local partners t

overvalue their land use rights.



b) Business Cooperation Contracts (BCC) permit a foreign firm to pursu

e business interests in cooperation with a Vietnamese firm by investing

capital and sharing revenues without conferring the right of

establishment or ownership. In many respects, it is the most flexible

arrangement Vietnam offers to foreign investors. However, a BCC licens

typically does not contain tax holidays or concessions given to other

types of foreign investments. BCC's have predominated in the

telecommunications sector and, as production sharing contracts, in the

petroleum sector, where the government limits foreign involvement in

operations and management.



c) 100-percent Foreign-Owned Enterprises have become more popular rece

ntly, as investors have learned to navigate the local system on their

own. The GVN has shown increasing willingness to permit them on a

case-by-case basis, particularly in industrial production for export.



d) Build-operate-transfer (BOT) agreements are the least commonly used

form of foreign investment. While authorized under the LFI and specifi

BOT legislation, the legal, regulatory, and financial framework for

BOT's remains incomplete. The LFI also recognizes build-operate-own

(BOO),build-transfer- operate (BTO),and build-transfer (BT) forms of

investment. Under a BOT agreement, the investor builds an

infrastructure project, operates it for an agreed period of time to

recover the investment and earn a profit, and then cedes it to the

government without further compensation. Several foreign-invested BOT

licenses have been granted, but many others have been held up in

protracted negotiations. The most intractable BOT issues have been

financing, product pricing and government regulatory and cost-recovery

guarantees.





Foreign investors have pressured the Vietnamese government for years to

expand the permissible forms of foreign investment. As part of an

effort to unify the laws governing foreign and domestic enterprises, th

Government issued Decree 38 in April 2003 providing for the conversion

of a number of foreign invested enterprises (FIEs) into foreign investe

shareholding companies (FISCs). The conversion option is only available

to JVs and FIEs. A FISC must continue to implement the approved

investment project of the former FIE and will be entitled to

preferential treatment under the Law on Foreign Investment

and its implementing regulations. Nevertheless, the rights of FISCs'

shareholders and the organizational structure of the FISCs will be

governed by the Law on Enterprises, the same as for domestic

shareholding companies. A FISC must have at least one foreign founding

shareholder and the total shareholding of the foreign founding

shareholder(s) must be at least 30% of the FISC's chartered capital

throughout the life of the company. FISC will be permitted to list on

the Vietnam stock exchange.



To qualify for conversion, a FIE must be in operation for at least 3

years, must have made profits in the year immediately preceding the yea

of conversion, and its legal capital must be fully paid up. All

conversions are subject to the Prime Minister's approval. Only a limite

number of FIEs have been selected by the MPI, in consultation with othe

ministries, for conversion into FISCs. The Prime Minister approved six

FIEs to take part in the first round of conversion. This number is much

lower than the MPI's target of 20-25 participants. After the first pilo

FISCs have been tested, Decree 38 will be reviewed by the Government an

may be extended to a wider range of FIEs.



Other reforms under the Government Decree Number 27 issued in March 200

include:



* A new 100 percent Foreign Owned Enterprise (FOE) may now be formed be

tween an existing FOE and (i) another existing FOE and/or (ii) new

foreign investor(s);



* A Business Cooperation Contract may now be established by an existing

joint venture enterprise or an existing FOE with another foreign

organization or individual;



* A new Joint Venture Enterprise (JVE) may now be established between a

existing FOE and a Vietnamese enterprise or between an existing FOE and

an existing JVE. However, a JVE may not be established between an

existing FOE and a foreign investor or an overseas Vietnamese investor.



Decree 27 also abolishes the restriction that any legal capital

(equity) in the form of technology transfer must not exceed 20 percent

of legal capital, and is subject only to agreement by the parties of th

company.



At present the Government maintains an extensive investment licensing

process that is characterized by stringent and time-consuming

requirements that are frequently used to protect domestic interests,

limit competition and allocate foreign investment rights among various

countries. The Ministry of Planning and Investment (MPI) is the

primary point of contact for most foreign investors. But Vietnam

currently does not offer at the central level a 'one-stop shop' for

investment negotiation and approval. Foreign investors typically must

contact and obtain support and/or approvals from a number of national

and local agencies; indeed, licensing approval is required from other

ministries or government bodies which regulate particular sectors,

especially oil and gas, pharmaceuticals, financial services. In

addition, investors may not always be aware of all regulatory

requirements for licenses, which have led at times to complaints of

unfair or discriminatory treatment. Licensing is required not only for

establishment, but also in order to make significant changes to an

operating concern such as to increase investment capital, restructure

the company by changing the form of investment or investment ratios

between foreign and domestic partners, or add additional business

activities.



In the early 1990's, all foreign investment projects required approval

by the Prime Minister. Overtime, in an effort to reduce obstacles to

foreign investment, this list of projects subject to approval at the

highest levels was reduced. At present, Prime Ministerial approval is

required for investment licenses for the following:



* projects with investment capital in excess of US$ 40 million in

electricity; mining, metallurgy, cement, mechanical engineering,

manufacture, chemicals, hotels, apartments for lease, tourism, and

entertainment;



* projects of any value in the following sectors:



* Infrastructure construction of industrial zones (IZ) and export

processing zones (EPZ),urban areas, build-operate-transfer,

build-transfer-operate and build-transfer projects;

* Construction and operation of seaports and airports; operation of sea

and air transportation;



* Oil and gas;



* Post and telecommunications services;



* Culture; including publishing, press; radio and television broadcasti

ng; medical examination and treatment establishments; education and

training; scientific research and production of medicine for human

diseases;



* Insurance, finance, auditing and inspection;

* Exploration and exploitation of rare and precious natural resources;



* Construction of residences for sale; and,



* National defense and security projects.



* projects that use five hectares or more of urban land or 50 hectares

or more of rural land. Vietnamese authorities evaluate investment

license applications using a number of criteria including:



* the legal status and financial capabilities of the foreign and

Vietnamese investors;



* the project's compatibility with Vietnam's 'Master Plan' for economic

and social development;



* the benefits accruing to the government or to the Vietnamese party,

especially acquisition of new production capabilities, industries,

technologies, expansion of markets; and job creation;



* projected revenue;



* technology and expertise;



* efficient use of resources;



* environmental protection;



* plans for land use and land clearance compensation;



* project incentives including tax rates and land, water, and sea

surface rental fees.



Over time, the GVN has gradually but steadily improved its investment

licensing regime. Greater authority over investment licensing has been

devolved to provinces, municipalities, and investment zones. Provincia

People's Committees now have authority to issue investment licenses for

projects not subject to Prime Ministerial approval, which do not exceed

US$ 5 million in invested capital, or US$ 10 million in invested

capital in the areas of Hanoi and Ho Chi Minh City. MPI is working on

a proposal to decentralize state management in foreign investment. Unde

this proposal Hanoi and Ho Chi Minh would be given authority to grant

licenses for foreign investment projects with capital up to US$ 40

million. Other provinces and cities would be authorized to issue

licenses for projects up to US$ 20 million invested capital, except

projects subject to Prime Ministerial approval. MPI may also authorize

Provincial Industrial and Export Processing Zone Management Boards to

issue investment licenses for those projects that are not subject to

approval by the Prime Minister and do not exceed US$ 40 million.

Several provincial committees and IZ management boards have

significantly streamlined licensing procedures in their jurisdictions,

reducing the time to days if not hours in some cases. Ho Chi Minh City

is in the process of implementing a "one-stop shop" for investment

licenses its government is authorized to issue. While this

decentralization is frequently in the foreign investor's favor, it has

also given rise to considerable regional differences in procedure and

interpretation of relevant investment law and regulation.



In addition, the 2000 amendment to the LFI added a

"Registration" licensing procedure where previously only an "evaluation

or approval procedure had existed. Under Registration procedures:

projects cannot be refused a license so long as all the necessary

documents have been submitted; the applicants are not required to submi

a detailed feasibility study; and the review time limit is only 15 days

compared to the 45-day period mandated for the licensing via the

Evaluation procedure. Registration procedures are only open to those

projects that are not subject to prime ministerial approval and/or

environmental impact assessment.



Government Decree 27 issued in 2003 has amended the conditions for

investment registration as follows:



Projects must satisfy one of the following alternative conditions:



a. exporting 80% of products (reduced from 100%); or

b. investing in an encouraged or specially encouraged project located

in an industrial zone (as opposed to the previous requirement of

investing in an industrial zone and satisfying export ratio criteria);

or

c. belonging to the manufacturing sector with up to USD5 million

invested capital



Because it recognizes the need for increased foreign direct investment

if Vietnam is to reach the ambitious development goal set out in the

2001-2010 Socio-Economic Development strategy, the GVN has a policy of

trying to improve the climate for investment. Perhaps the single most

important event in Vietnam's recent economic history is the

entry-into-force of the U.S.-Vietnam Bilateral Trade Agreement (BTA).

Implementation of Vietnam BTA commitments will help ensure fair access

and treatment for U.S. investment, Goods and services.

The BTA provides a broad range of benefits for U.S. investment in Vietn

am that should significantly enhance the investment environment for U.S

firms. A major part of the BTA is devoted to investment which: provides

national and most-favored-nation treatment, except where explicit

exceptions have been made; guarantees access to third-party

investor-state dispute settlement; disciplines trade-related investment

measures; ensures treatment of expropriation consistent with

international standards. In addition,other chapters of the BTA will

reduce tariffs and quantitative restrictions on U.S. investor's imports

permit U.S. investors to engage directly in trade; require the

government to operate more transparently; open sectors of interest to

U.S. business including banking, insurance, professional services,

telecommunications, distribution, etc.; and provide protection

consistent with World Trade Organization (WTO)-standards for U.S.

investors' intellectual property.



Also, a number of important policy decisions and legal changes have bee

made which are intended to create a more open, business friendly

investment climate for both foreign and domestic private investors. On

December 25, 2001, the National Assembly adopted changes to the

Constitution of 1992, which contained several business related items in

Articles 15 and 16. One provided the constitutional basis for Vietnam'

integration into the international economy. Another formally recognized

the foreign direct investment and the domestic private sectors as

components within the Vietnamese economy in addition to the already

recognized sector comprising SOEs. Previously, the approach under

Vietnamese law was to permit a firm to engage only in those activities

for which it had explicit permission. The amendment package formally

stated the principle that businesses could engage in all activities

except those prohibited by law. These constitutional changes codified a

the Constitutional level changes in approach with respect to foreign

and domestic private sector investment contained in the economic reform

of the 1990's, lending them a level of permanence that they had

heretofore not enjoyed.



In addition, in 2001-2002, both the Government and the Communist Party

of Vietnam (CPV) issued policy documents supportive of the private

sector, domestic and foreign. In August 2001, the Government signaled

its intent to continue to improve the climate for foreign investment

when it issued a resolution calling for continued efforts to improve

Vietnam's attractiveness to foreign investment in the next five years

by:



* expanding of the sectors open to foreign investment, to include real

estate, import services and domestic distribution;

* easing conditions for foreign-ownership of equitised state-owned ente

rprises;

* permitting foreign invested enterprises (FIE's) to issue stock to be

sold on the local stock exchange;

* facilitating foreign investors' participation in BOT's;

* narrowing the list of prohibited FIE exports;

* establishing a level playing field among foreign, domestic private an

state-owned enterprises; and

* continuing reform of laws and regulations on foreign investment.



Perhaps more significantly, the CPV issued a resolution in March 2002

clearly stating its support for a mixed economy with equal treatment of

foreign, private domestic and state-owned enterprises. In this

document, the CPV made several important recommendations which, when

translated into actual policy, will provide significant support for the

private sector in the future including: continuing reforms to make it

easier to do private businesses; eliminating discriminatory treatment o

domestic or foreign private sector activity; making clear distinctions

between civil and criminal offenses so as to avoid the prevalent

criminalization of certain commercial decisions and disputes;

simplifying lending procedures to give private enterprise greater acces

to domestic credit; and amending existing accounting procedures to

encourage private enterprise to perform financial audits and disclose

the results annually.

On 15 June 2004, the National Assembly passed the Law on Bankruptcy to

replace the 1993 Law, effective 15 October 2004. The main objectives of

the 2004 Law are to simplify bankruptcy procedures, to allow parties

other than creditors to participate in bankruptcy procedures, and to

give courts more flexibility in dealing with insolvent businesses.

Enterprise bankruptcy is a normal phenomenon in a market economy. It

creates favorable conditions for ineffective enterprises and business

organizations to exit the market and to be replaced by more effective

ones, making the business environment more healthy and transparent.

The much-anticipated Law on Competition was passed in November 2004 and

enters into force on July 1, 2005. The main objective of the

Competition Law is to create and promote an equitable and

non-discriminative competition environment, and to protect and encourag

fair competition. The Law stresses the importance of the rights of

organizations and individuals to compete freely within the law. Key

elements of the law address anti-competitive agreements, state monopoly

economic concentration and unfair competition. The Law also creates a

Competition Management Department under the Ministry of Trade and

addresses breaches of the Law. The introduction of a competition law i

an important step in the opening of the Vietnamese market to

international practices. However, ensuring proper implementation,

including training staff and judges, is a crucial step that remains.



As part of Vietnam's efforts to create a level playing field for

investors, MPI commenced drafting a Common Investment Law in April 2004

The Common Investment Law would regulate investment guarantee measures,

sectors and areas where investment is encouraged, and the investment

incentives that are commonly applied to both domestic and foreign

investors. To support the Common Investment Law, the Law on Enterprises

will also be revised to apply to both foreign and domestic enterprises.

The revised Law on Enterprises would regulate establishment forms and

procedures, organization, management and dissolution of enterprises of

all economic sectors. MPI plans to submit both of the above-mentioned

laws to the National Assembly by the end of 2005 and become effective i

2006.



The above actions strongly indicate the Vietnamese leadership's

intention to continue to improve the country's foreign investment

climate, even if its efforts sometimes fall short. This effort began i

1989 when the country adopted the Law on Foreign Investment (LFI) and

has continued with four major amendments of the LFI, the most recent in

2000, and the issuance and am endment of numerous implementing

regulations. Most recently, the GVN has issued laws and regulations

intended to facilitate foreign investment by reducing or eliminating

discrimination against foreign investors in pricing for goods and

services, transfer requirements, use of land use rights for mortgaging

purposes, unanimity rules applying to certain decisions made by joint

venture boards, rights of first sale and many others. Many of

these changes were mandated under the BTA.



In spite of these steps, policy does not always translate into concrete

action and many additional official measures that discriminate against

foreign investment persist. These can be found listed among the

permanent exceptions to the non-discrimination obligations contained in

the BTA investment chapter. Some must be eliminated at a later date

under the BTA; others will remain indefinitely. Additionally, Vietnam

continues to impose unofficial and arbitrary measures that negatively

affect foreign investors and in some cases, threaten their capital

investments.



At present, most foreign importers are barred from direct participation

in Vietnam's distribution system, although foreign investors have the

right to sell, market, and distribute what they manufacture locally.

Foreign investors have the right to import goods needed for their

investment projects, provided this right is included in their investmen

licenses, however, they must import the goods through licensed

Vietnamese import/export firms. An exception is made for foreign

manufacturers importing inputs directly related to production when such

import rights are explicitly included in their investment licenses.

Under the BTA, trading rights and market access in distribution

services for foreign investors will be gradually expanded. While Vietna

has greatly expanded in recent years the number of Vietnamese firms

permitted import/export rights, the vast majority of general

import/export companies remain SOE's.



The GVN holds regular 'business forum' meetings with domestic and

foreign business associations to discuss issues of importance to the

private sector. Foreign investors use these meetings to draw attention

to impediments to investment and commerce imposed by Vietnamese law and

regulation as well as by improper implementation. These fora, together

with frequent dialogues between GVN officials and foreign investors hel

between the semi-annual fora, have led to improved communication and

have sometimes allowed foreign investors to make timely comments on and

influence legal and procedural reforms.



Foreign enterprises also have the right to apply to the Ministry of

Trade or the Department of Trade in Hanoi or Ho Chi Minh City for a

representative office license, which gives foreign firms the right to

conduct market research and to pursue business interests, short of

actually selling products and services in Vietnam. Foreign banks must

apply to the State Bank of Vietnam for representative office or bank

branch licenses.



Previously, Vietnam applied different corporate income tax rates to

foreign investors and to domestic enterprises (being 25 percent and 32

percent respectively). The National Assembly in its May 2003 session

approved the Ministry of Finance amendments to the Law on Corporate

Income Tax, which provide for a uniform rate of 28 percent applied to

foreign invested and domestic businesses, representing a three percent

increase for foreign invested enterprises and a four percent reduction

for domestic companies. Tax in centives will also be the same for both

foreign invested and domestic enterprises and will be offered to

investors in selected priority sectors and in remote areas. The Amended

Law on Corporate Income Tax took effect 1 January 2004. Under this law

Government Decree 164 and Circular 128 of the Ministry of Finance issue

in December 2003 abolish the tax on profits remitted by foreign investe

enterprises. In response to foreign investors' long-standing complaints

about the high personal income tax rates for Vietnamese national

employees in the higher pay scales, which significantly increases the

gross salary employers must pay to maintain competitive and reasonable

take home salaries, the Standing Committee of the National Assembly

promulgated Ordinance 14 on Amendments to the Ordinance on Income Tax

of High Income Earners in March 2004. Under this legislation, the tax

burden on Vietnamese employees was reduced from 1 July 2004.



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A-2. CONVERSION AND TRANSFER POLICIES

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Vietnam's foreign exchange regime has been significantly improved with

the amendments to the LFI (the 2000 Governmental Decree Number 24 and

2003 Decree Number 27),which explicitly gave foreign investors the

right to exchange local currency for foreign currency to meet certain

current transactions or remit certain categories of earnings. In

addition, conversion of Vietnamese dong into hard currency no longer

requires a foreign exchange license. Despite these significant

improvements, various subsequent decrees and circulars issued by the

State Bank continue to stipulate conditions on, among other things, the

opening of bank accounts, conversion of Vietnamese Dong into foreign

currency, documentation requirements, and remittance of foreign currenc

in and out of the country.



Foreign businesses are allowed to remit profits, shared revenues from

joint-ventures, income from services and technology transfers,

legally-owned capital and properties in hard currency. Foreigners also

are allowed to remit abroad royalties and fees paid for the supply of

technologies and services, principal and interest on loans obtained for

business operations, and investment capital and other money and assets

under their legitimate ownership. But their ability to convert dong

into hard currency is subject to availability, causing

Foreign-invested-enterprises (FIEs) to experience problems in securing

hard currency. No information on average delays in remitting investment

returns is available. Approval by investment authorities is needed to

increase or decrease the capital of a foreign-invested business.



In principle, most FIEs are expected to be 'self-sufficient' for their

foreign exchange requirements, although this sometimes proves

impractical. Government of Vietnam guarantees to assist in the

balancing of foreign currency for foreign invested enterprises and

foreign business cooperation parties that invest in the construction of

infrastructure and certain other important projects in the event that

banks permitted to trade foreign currency are unable to fully satisfy

their foreign currency demand.





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A-3. EXPROPRIATION AND COMPENSATION

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The U.S. Embassy knows of no recent instances of expropriation of a

foreign investment by the Government of Vietnam. Under the BTA, in any

future case of expropriation or nationalization of U.S. investor assets

Vietnam will be obligated to apply international standards of treatment

- that is taking such an action for a public purpose; in a

non-discriminatory manner; in accordance with due process of law; and

with payment of prompt, adequate and effective compensation.

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A-4. DISPUTE SETTLEMENT

--------------



Vietnam's legal system, including dispute and claims settlement

mechanisms, remains underdeveloped and sometimes biased against foreign

entities. Negotiation between the concerned parties is the most common

and prefer red means of dispute resolution. Although contracts are

extremely difficult to enforce in Vietnam, particularly if one party to

a dispute is a foreigner, investors generally should negotiate and

include dispute resolution procedures in their contracts. However, eve

with such provisions, resolution is not guaranteed.



In the event of an investment dispute, a number of domestic avenues are

available. Economic courts, in addition to hearing bankruptcy cases,

also have jurisdiction over cases involving business disputes.

Administrative courts hear cases that concern alleged infractions of

administrative procedures by government authorities. In such cases, th

plaintiff must pay a bond to the court, half of which is forfeited if

the dispute is resolved before the beginning of court proceedings. Also

the court proceedings must begin within six months of the date of the

dispute. Many international investors express concerns about the

ability of the court system to render impartially and promptly a

decision that accurately reflects the facts and properly interprets the

relevant Vietnamese law and/or international law and practice. Thus,

they prefer to have other options available to them. According to

Vietnames e press accounts, many court judgments on business issues are

ignored because the affected party can use "influence" to forestall the

application of the judgment.



Outside of the court system, economic arbitration centers operate in a

number of provinces and cities. However, it is not clear if these

centers are legally competent to settle disputes involving foreign

parties. Another type of arbitration institution in Vietnam is the

Vietnam International Arbitration Center (VIAC),which operates in clos

coordination with the Vietnam Chamber of Commerce and Industry (VCCI).

It has authority to settle disputes arising from international economic

transactions including contracts on foreign trade and investment.

However, it is not clear if investors would be free to choose foreign

arbitrators. Nor can international standard arbitration rules, such as

those of the International Chamber of Commerce (ICC) or the United

Nations Commission on International Trade Law (UNCITRAL),be used. The

decisions of the VIAC are final and cannot be appealed to any domestic

court. The center does not yet have an established track record for

competence or impartiality, and questions have been raised about the

enforceability of its awards. For now, most foreign parties choose to

stipulate "third party" arbitration in their contracts with Vietnamese

parties and the government.



Foreign and domestic arbitral awards are technically legally enforceabl

in Vietnam. Vietnam acceded to the New York Convention on the

Recognition and Enforcement of Foreign Arbitral Awards in 1995, meaning

that foreign arbitral awards rendered by a recognized international

arbitration institution must be respected by Vietnamese courts without

review of the case's merit. In practice, however, the U.S. Embassy is

aware of contradicting judgments and decisions by different Vietnamese

courts with regards to a foreign arbitral award for a case between a

subsidiary of a U.S. firm and an Australian-Vietnamese joint venture.

The foreign arbitral award was recognized by a municipal Economic

Court, but was subsequently reversed by the Supreme Court (the highest

judicial level) upon appeal. The Supreme Court rearbitrated the case i

Vietnam (contrary to the agreed upon procedures in the contract) and

ruled that as a construction contract did not fit the narrow definition

of commercial contract found in the Commercial Code, a foreign arbitral

award relating to it could not be enforced in Vietnam. The results of

this case indicated that the enforceability of a foreign arbitral award

in Vietnam currently remains questionable. In February 2003, the

National Assembly passed the Ordinance on Commercial Arbitration. The

ordinance defines "commercial activities" more broadly to include, inte

alia, leasing, construction, consultancy, licensing, investment,

financing, banking, insurance, expl oration, mining activities and

transportation. But, this ordinance has not yet been tested and it is

not yet clear whether this change will positively affect the way courts

address these issues.



Under the investment chapter of the BTA, Vietnam gives U.S. investors

the right to choose a variety of third party dispute settlement

mechanisms in the event of an investment dispute with the GVN. Vietnam

has not yet acceded to the Convention on the Settlement of Investment

Disputes between States and Nationals of other States (ICSID),but has

asked the U.S. to provide advice in this area as part of the U.S.

technical assistance program designed to assist Vietnam to fully

implement the BTA.



Up until recently, exit strategies for foreign investors have been

limited and problematic. Since the original Law on Business Bankruptcy

was issued in December 1993 ("1993 Law"),only 61 bankruptcy cases have

been brought to court. The small number of bankruptcy cases is due

largely to the deficiencies of the 1993 Law. The new Bankruptcy Law,

ineffect beginning October 2004, at tempts to simplify bankruptcy

definitions and procedures to give both investors and the courts more

flexibility in resolving insolvency.



--------------

A-5. PERFORMANCE REQUIREMENTS/INCENTIVES

--------------

While Vietnam is not yet a member of the World Trade Organization (WTO)

under the BTA Vietnam is obligated to gradually discontinue application

of any trade-related investment measures (TRIMS) or performance

requirements inconsistent with the WTO TRIMS agreement. Vietnam

currently imposes a number of performance requirements with respect to

the establishment of an investment and/or the receipt of a benefit or

incentive. Under the terms of the BTA, Vietnam retained the right to

require that an investment project export at least eighty percent of it

production for seven years in the following sectors: cement; paint;

bathroom tiles and ceramics; PVC and other plastics; footwear; clothing

; construction steel; detergent powder; tires and inner tubes for cars

and motorbikes; NPK fertilizer; alcoholic products; tobacco; and paper.

In December 2001, Ministry of Planning and Investment issued Decision

718 revising the list of products subject to an export requirement.

However, many of the pro ducts identified in Decision 718 are not in

the list agreed upon in the BTA. According to Decision 718, Vietnam

currently has an eighty percent export requirement for: motorcycles;

minibuses and trucks (less than 10 ton); some irrigating pumps; medium

voltage, low voltage and normal electric transmission cables; cargo

ships, audio-visual products; aluminum profiles products; construction

glass; NPK fertilizer; PVC; bicycles and bicycle parts; transformers

under 35 KV; and diesel motors under 15 CV.



Vietnam also requires foreign investors in some sectors to use local

content. This is particularly applied to foreign investment in

electronics, motorcycle and automobile sectors as stipulated in

Decision 648 issued in 1999 by the Ministry of Science Technology and

Environment. Other sector requiring the use of local raw materials

include sugar, paper, vegetable oil, wood processing and milk. The BTA

stipulates Vietnam must phase out several TRIMS-inconsistent local

content requirements within five years or less of the BTA's

entry-into-force. Vietnam has eliminated trade-balancing requirements

previously imposed through restrictions on the importation of goods use

for production by foreign investors. In the same vein, it has removed

foreign exchange balancing requirements. Under the BTA, Vietnam is als

obligated to refrain from imposing requirements to transfer technology

as a condition for the establishment, expansion, acquisition,

management, conduct or operation of an investment.





The GVN employs an extensive range of incentives in an attempt to

attract foreign investment into certain priority sectors or geographica

regions. The LFI and subsequent decrees authorize MPI to 'encourage

investment in mountainous and remote areas' of the country and in

regions with 'difficult economic and social conditions'. MPI also

encourages investment in export production, agricultural and forestry

production, high technology, ecology, research and development,

labor-intensive processing of raw materials, and large industrial and/o

infrastructure projects. The law also favors to a lesser degree,

investments in metallurgy, basic chemicals, petrochemicals, fertilizer

manufacture, manufacturing (especially electronic components and car an

motorbike parts),and planting industrial crops. Under Circulars 1817

and 1818 (1999),the Ministry of Science, Technology, and Environment

(MOSTE) also encourages projects in the areas of treatment of

environmental pollution and waste, production of new or rare and

precious materials, application of new biological technology,

application of new technology for manufacturing communication and

telecommunication equipment, and electronic and informatics technology.

More recently, the GVN opened the healthcare and education sectors more

widely to foreign investment and began providing a variety of incentive

for such investment. Although the GVN encourages investment in the

provinces, enforcement of investor protections and BTA rights with

Provincial Auth orities has proven difficult at best. Investors should

use due diligence when working at the Provincial or local levels.



Depending on the sector, FIEs and foreign parties to a BCC may be

exempted from profits tax for a maximum period of two years commencing

from the first profit-making year and may be allowed a 50 percent

reduction of profits tax for a maximum period of two consecutive years.

Certain 'encouraged' projects may be exempted from profit tax for up to

four years from their first profitable year and may be allowed a 50

percent reduction of profits tax for a further four years. Where the

investment is 'especially encouraged,' the maximum period of tax

exemption shall be eight years. Such exemptions are generally written

into a company's investment license.



The law on export and import duties specifies the rates which FIEs and

parties to BCC's must pay on exports and imports. Equipment, machinery

specialized means of transportation, components and spare parts for

machinery and equipment, raw materials and inputs for manufacturing, an

construction materials that cannot be produced domestically, which are

imported to Vietnam to form fixed assets of an FIE or a BCC are exempte

from import duties. Other exemptions or reductions of import and expor

duties can be stipulated by the GVN for 'encouraged' projects and are

also generally contained in an enterprise's investment license Other

special incentives are available to foreign investors in

build-operate-transfer (BOT) projects and projects located in export

processing zones (EPZ),industrial zone (IZ) and high tech zones (HTZ).

BOTs may be joint ventures or 100 percent foreign-owned. They are

exempt from land tax and from payment of duties on goods imported to

implement the contracts. They enjoy a lower profits tax rate (10

percent),a five percent withholding tax rate (the lowest normal rate),

an eight-year tax holiday starting from the first profitable year, and

government guarantee for conversion of revenue from local to foreign

currency. The term of a BOT can extend to 50 years, after which project

ownership reverts to the government.



Projects in EPZs are entitled to profit tax rates of 10-12 percent for

the duration of the investments. EPZs were the first production zones

developed in Vietnam, but interest in them has been less than

anticipated due to inadequate infrastructure and a requirement that

these firms export 100 percent of their product. Ho Chi Minh City's Ta

Thuan Zone is Vietnam's largest EPZ, while others are planned or in

operation in Danang, Can Tho, Hanoi, and Ho Chi Minh City.

Export-producing firms wishing to operate in an EPZ apply for licenses

and pay taxes directly to the EPZ management boards, which streamlines

the process. Imports of machinery and raw materials enter the zones

duty-free, and EPZ firms sometimes also benefit from lower rents, fewer

regulations, and a variety of tax incentives.



IZs are open to companies engaged in construction, manufacturing,

processing or assembly of industrial products, and service to support

industrial production. Companies submit license applications and pay

taxes directly to the IZ management boards. IZ firms also are eligible

for certain tax benefits, including a 10 percent profit tax for the

duration of the investment. Companies that reinvest profits may be

eligible for refund of profit taxes. Foreign-invested automobile

manufacturing projects are subject to local content requirements in

their investment licenses. Vietnam has also instituted a number of

incentives designed to attract investment from foreign investors of

Vietnamese origin. They are allowed to choose to operate under

domestic, as opposed to foreign, business licenses, although they may

choose to operate as a foreign business where doing so would be

advantageous to them. The land law has also been amended to permit

limited categories of these investors to buy land use rights to build

homes, which other foreigners are not permitted to do. However, the

GVN often does not recognize the adopted nationality of many Vietnamese

origin persons unless they have formally renounced their Vietnamese

citizenship and may consider them to be Vietnamese nationals. U.S.

investors of Vietnamese origin should consult the U.S. Embassy in Hanoi

or the U.S Consulate General in Ho Chi Minh City for more information.



-------------- --------------

A-6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

-------------- --------------



Until the late-1980's, the Vietnamese economy was organized according

to principles of socialist central planning. Since then, the governmen

has moved to develop a market-oriented economy and has formally

recognized the existence of the private sector. In recent years, the

private sector, foreign and domestic and, to a lesser extent, a small

collective sector have begun to play greater roles in the economy,

although current policy dictates that the state sector will continue to

"play a leading role" in the economy.





SOEs continue to dominate the industrial economy of Vietnam. A large

majority of these SOEs suffer from weak finances, high debt, obsolete

plant and equipment, poor management, poorly trained staff, low labor

productivity, and low product quality. According to the National

Steering Committee for Enterprise Reform and Development (NSCERD),as o

December 31, 2004, Vietnam has approximately 3,300 SOEs, down from

around 12,000 in the early 1990's.



NSCERD estimates that 50 percent of the remaining SOEs are incurring

losses. As part of its 2001 economic reform agreement with the World

Bank and the IMF, the GVN committed to equitise roughly one-third of th

current SOEs over three years and ensure that those remaining become

competitive. However, actual implementation of the reform program has

been slower than planned. In addition, many international observers

expressed disappointment that the government did not agree to completel

dismantle its SOE sector over time. Especially disconcerting to these

observers is the Socio-economic Strategy for 200 1-2010 which reconfirm

the "leading role" of the state enterprise sector and instructs the

government to retain and improve SOE operations in broad range of

sectors which hold considerable interest for the international

investor, including telecommunications, banking, insurance, petroleum

and more. At the same time, however, the GVN has instructed agencies

and ministries to restructure or dissolve loss-making SOEs.

A vibrant private sector is emerging in Vietnam. Dozens of large-scale

Vietnamese private enterprises and tens of thousands small and medium

sized firms now exist. The single most crucial GVN action in

supporting of the development of the domestic private sector was the

enactment, in January 2000, of the Enterprise Law, which provided, for

the first time, simplified domestic business registration rather than

discretionary government approval and licensing. At the end of 1999,

official statistics counted 45,000 companies in the formal domestic

private sector. Since, then over 120,000 enterprises have been

registered, the large majority of which are new enterprises. The rest

were previously-existing firms that moved from the informal to the

formal sector. Also, as part of implementation of the new law, the GVN

has moved to abolish nearly 200 "unnecessary" permits required by

various ministries and localities for operation of a business.

Unfortunately, these agencies keep adding to the list of these "baby

permits" in an effort to re-establish control over issues they

previously influenced via the licensing system. Domestic private

enterprises have created substantial new employment in Vietnam, while

employment in the state sector has been stagnant or declining.



Private firms, however, continue to be severely disadvantaged relative

to SOEs in terms of access to credit and land, and in legal and

regulatory treatment. Private firms face restrictions in using land use

rights for joint ventures with foreign investors. SOEs also receive

most of the lending from state-owned banks, which dominate the banking

sector. In general, despite these restrictions, the relatively larger

private firms that are emerging in Vietnam operate with better

management and greater efficiency than the SOEs. Moreover, high-ranking

government officials have stated the GVN's intention to put foreign and

domestic investment on more or less even footing with SOEs with respect

to access to credit, legal and regulatory treatment, pricing, and fees.

However, SOEs are likely to retain better access to land and will

continue to be expected to "dominate" in key sectors as identified by

the political leadership.



--------------

A-7. PROTECTION OF PROPERTY RIGHTS

--------------



The Vietnamese legal system is in a state of transition to support a

more market-oriented economy and undergoes frequent and at times

significant change. The rudiments of a legal system that protects and

facilitates property rights have been established. But much more work

needs to develop the laws and enforcement mechanisms needed to

adequately protect property rights in Vietnam.



All land in Vietnam belongs to "the people", administered or managed by

the State. Private land use rights (LURs) were established for the

first time in 1988 when agricultural land was decollectivized and land

use rights were granted to households. A LUR is a State-granted right

to use land for a specific purpose. The 1992 constitution granted

stronger land rights to individuals, including rights over commercial

and personal property. LURs may be granted for up to 50 years,

depending on the specific use of the land. Individual holders of LURs

can sell them if they move to a new location, change jobs, or are unabl

to work. In the 1993 Land Law, the National Assembly broadened LURs to

include rights to exchange, transfer, rent, inherit, and mortgage land.

In 1998 several additional changes to the land law were enacted,

primarily to distinguish between corporate leaseholders, who can use

their land for domestic or foreign joint ventures, and individual

leaseholders who are not permitted to enter joint ventures with foreign

entities.



Additional amendments to the land law in 2001 and subsequent

implementing regulations decentralized authority for leasing land to

businesses and permitted local officials to lease land to foreign

organizations, individuals and overseas Vietnamese. Still, foreign

investors can currently only lease land from the Government or in

industrial parks. These limitations may soon be lifted. Government

Resolution Number 2 issued in January 2003, proposed allowing domestic

private companies with long-term land use rights to lease their land to

foreign investors, provided that the lease is not longer than the right

held by the leaser. The new Land Law passed by the National Assembly i

November 2003 and in effect from 1 July 2004 allows domestic private

companies with long-term land use rights to lease their land to foreign

investors. Permission, however, is subject to approval of the

authorities who grant the land use rights to the leaser, and the

continued requirement that a lease cannot be longer than the rights hel

by the leaser.



Vietnamese LUR-holders have the right to mortgage them, but Vietnamese

banks generally value land at a maximum of 70 percent of the total rent

already paid on the property, not the property's appraised value. As

organizations only were obliged to begin paying rent in February 1995,

the values of mortgages on land are not large, which limits their

usefulness for property-based project finance. The amended LFI permits

foreign banks branches to accept mortgages of land use rights. But to

date, widespread use of collateralized bank loan actions have been

hampered by a lack of central registration for mortgaged assets. Foreig

banks also want to see an amendment to the land law to permit

them to take possession of the land after a foreclosure, and amendments

to banking regulations. In March 2002, a good first step was made when

the New National Register for Secured Transactions opened for business

in Hanoi and Ho Chi Minh City. But the registry does not have

jurisdiction over land-use rights or buildings, assets that remain

under the control of local authorities and the enforceability of

collateral in the form of LUR and property remains un certain. The

National Register for Secured Transactions is working on a draft law on

registration of immovable assets that is intended to give the registry

jurisdiction over land-use rights of buildings and assets. MPI plans to

present the draft law to the National Assembly for consideration by the

end 2005.



IPR infringement continues to be widespread and enforcement of administ

rative orders and court decisions finding IPR infringement remains

problematic. Vietnam is a member of the World Intellectual Property

Organization (WIPO) and is a signatory to the Paris Convention for

Industrial Property. It has acceded to the Patent Cooperation Treaty

and the Madrid Agreement. In June 2004, Vietnam decided to join the

Berne Convention on Copyright Protection for Literary and Artistic

Works. On October 26, 2004, Vietnam became the 156th full-fledged

member of the Convention, which is the country's first multilateral

copyright agreement. The U.S.-Vietnam Bilateral Copyright agreement

obligates Vietnam to provide U.S. copyrights protection on a national

treatment basis in accordance with the terms of the Berne Convention.

Under the terms of the BTA, Vietnam was obligated to make its system

for protecting intellectual property rights (IPR),including

enforcement, consistent with the WTO TRIPS agreement by December 10,

2003. Although considerable progress has been made over the past

several years, with new regulations expanding legal protection to areas

previously not covered, such as business secrets and new plant

varieties, much remains to be done. New legislation this year included

more detailed regulations on plant varieties and administration

sanctions against counterfeits. The Government has instructed the

Ministry of Science and Technology (MOST) and the Ministry of Culture

and Information (MOCI) to draft a separate Law on Intellectual Property

Rights, which is planned to submit to the National Assembly for approva

in 2005.



Vietnam's laws offer some protection for foreign patent holders, but

there are infringements. Potential investors should contact the U.S.

Embassy in Hanoi or the Consulate General in Ho Chi Minh City for the

latest information regarding the ongoing changes to IPR protection in

Vietnam. The National Office Of Intellectual Property (NOIP),under

Ministry of Science and Technology, administers Vietnam's patent and

trademark registration system. The Vietnam Office of Literary and

Artistic Copyright, under the control and supervision of the Ministry o

Culture and Information, oversees artistic copyright.



Significant progress has been made putting in place the laws protect

copyrights including those belonging to foreigners but enforcement is

almost non-existent. Since joining the Berne Convention, MOCI tightened

copyright regulations on foreign musical and theatrical works. All

organizers must obtain permission in writing from the copyright holders

before performing their works. Enforcement of IPR remains weak and

violations of IPR are rampant. While Vietnam recently has conducted

considerable administrative and law enforcement actions against IPR

violations, IPR enforcement remains the exception rather than the rule.

For some types of products, such as PC software, music and video CDs,

VCDs and DVDs, as well as brand trademark violations, such as logos on

t- shirts and other consumer items, IPR enforcement is virtually

on-existent. Industry estimates of piracy rates for software, music and

video, run as high as 99 percent. Local police authorities often are

slow to act on administ rative orders finding infringement and court

decisions. Violators sometimes negotiate with plaintiffs, demanding

payoffs to stop producing pirated material. However, there is the

beginning of some progress with increased awareness of the need for

effective IPR enforcement to foster investment, both foreign and

domestic, in sectors such as software development and the arts. In

addition, Vietnamese authorities are becoming increasingly concerned

that the proliferation of pirated products also undermines their abilit

to prevent the distribution of pornography and other illegal content.



--------------

A-8. TRANSPARENCY OF THE REGULATORY SYSTEM

--------------



As Vietnam undergoes a transition to a more market-oriented economy, th

legal system changes frequently, and at times, significantly. Vietnames

officials have limited experience drafting legislation, and new laws an

regulations sometimes are contradictory or unclear. Not all officials,

especially those at the provincial and local levels, are fully

up-to-date on all the new laws and regulations that affect their area o

responsibility. Nor are all laws and regulations readily available to

business and the public. Different officials, sometimes within the same

agency, may interpret laws differently. There is a shortage of

practicing lawyers, law school graduate judges, and law professors.

Substantial foreign assistance is being devoted to assist Vietnam to

establish a legal structure compatible with international standards.



Although the Vietnamese government has begun to streamline and

rationalize the investment licensing process over the past year, MPI

and other national, provincial, and local government agencies retain a

great deal of discretionary authority. U.S. and other investors

frequently encounter the need for further negotiation and administrativ

processes after the licensing process has been completed. A general

lack of transparency in law and regulation make it difficult not only t

exercise rights, but even to be aware of what rules apply to an

investment. In recent years, Vietnam has improved its process for

making and publicizing laws, but beyond major national laws and

regulations, much rule-making affecting foreign investors still occurs

at the ministerial, sub-ministerial and local levels, without any

regular process for public notification and little possibility for

advance warning of changes in rules or for public input during the

rule-making process. In 2002 the GVN amended the Law on the

Promulgation of Legal Normative Documents to require that all legal

documents and agreements to international conventions be published in

the Official Gazette. As of July 2003, the Official Gazette has been

published on a daily basis. The number of laws and regulations

published in the Official Gazette each year has increased from just

4,200 in 2002 to 16, 510 in 2004.



Under the BTA, Vietnam is obligated to publish promptly all existing

and future laws, regulations and administrative procedures which might

affect any matter covered under the agreement including investment and

trade in goods and services. The BTA further commits Vietnam to enforc

only laws, regulations or administrative practices that have been so

published and to publicize such laws sufficiently in advance of their

effectiveness to ensure U.S. investors have adequate time to adjust

their operations accordingly. Vietnam has committed to provide a proces

by which the U.S. Government and U.S. nationals have the ability to

provide their views to the GVN on any such laws, regulations or

administrative practices while they are still being formulated. Finally

U.S. nationals have the right to appeal administrative action relating

to matters relating to the agreement. In December 2002, the National

Assembly passed the "Law on Legal Normative Documents". Although this

Law meets some of its BTA commitments, the GVN is not yet in full

compliance with these obligations, in particular regarding prior notice

and consultation on proposed regulatory and legal changes.





-------------- --------------

A-9. EFFICIENT CAPITAL MARKETS/PORTFOLIO INVESTMENT

-------------- --------------



Vietnam' financial system is in the early stages of reform and is not

yet an efficient allocator of financial resources. At least 50 percent

of personal savings are held as cash, gold, or other assets outside the

banking system. However, as part of its World Bank/IMF program, the GVN

adopted a comprehensive banking reform program that relies on

market-based action which is intended to ensure the stability of the

banking system, and in the medium-to-long term, promote better

mobilization of domestic resources by improving allocation of those

resources to commercially viable activities, and expand banking service

throughout Vietnam. Raising capital for development is one of

Vietnam's main economic priorities. Foreign investors generally meet

their foreign currency credit needs offshore or with foreign bank

branches, although availability of foreign currency to convert dong

assets to cover dollar liabilities can be, at times, uncertain. Foreign

banks are severely limited in their right to take dong deposits and fre

quently encounter difficulties meeting customer's dong cash and credit

needs. However, under the BTA, U.S. banks now enjoy a more liberal

policy on dong deposits. In response to strong lobbying from non-US

foreign banks to get the same treatment as US banks, in April 2004 the

State Bank of Vietnam issued Decision 327 raising the ratio of dong

deposit for foreign banks coming from the European Union, giving them

the same competitive edge as US banks. This ratio, however, does not

change for other non- European Union or non-US foreign banks. The State

Bank and the Ministry of Finance have conducted sales of state bonds

denominated in local currency, but Vietnam only has an informal

secondary market for such instruments.



The banking industry in Vietnam is characterized by its small size in

terms of deposits and loans and by the relatively large number of banks

both foreign and domestic. However, four state-owned commercial banks

(SOCB) - the Viet nam Bank of Foreign Trade (Vietcombank),the Vietnam

Industrial and Commercial Bank (Incombank),the Bank for Agriculture an

Rural Development, and the Vietnam Investment Bank - still dominate

domestic banking activity, providing an estimated 75 percent of all

lending. Most SOCBs and joint stock banks (i.e., private sector banks

with numerous shareholders) are under-capitalized, particularly when

non-performing loans are taken into account. State-directed lending

under non-commercial criteria also weakens banks in Vietnam.

Furthermore, banks in Vietnam, including the four state-owned banks,

hold a large number of non-performing loans, mainly to SOEs. As

transparent auditing and financial reporting is problematic, it is

difficult to know the exact proportion of non-performing loans.

Sources vary widely, with estimates of bad loans ranging from 4 percent

to 30 percent. In 1997, the government introduced a new accounting

standard, the 'Vietnamese accounting system.' The Ministry of Finance

continues to refine and amend this standard to bring it into consistenc

with international accounting standards. After a multi-year grace

period, foreign banks and companies are now re quired to comply fully

with its parameters. A number of major international accounting

firms have opened offices in Vietnam and, unlike foreign law firms

(which are subjected to restrictions including advising clients on

Vietnamese law and hiring Vietnamese lawyers),can provide advice on

accounting and business issues directly to foreign clients in Vietnam.

Nonetheless, a continued lack of financial transparency and compliance

with internationally accepted standards among Vietnamese firms continue

to pose problems for the government's plan to expand stock and

securities markets to raise capital internally. Despite these challenge

and after years of discussion and planning, Vietnam opened a stock

market in July 2000. A total of 25 joint stock companies, primarily

former SOE's now under a restructuring/equitisation program, have liste

on the exchange. None of them play major roles in the economy. Under

current market regulations, share prices of a listed company cannot

increase or decrease by more than five percent per trading

session. To date, with its small trading volume, and restrictive rule

on both listing and investor participation, the nascent market has yet

to become a real source for financing or intermediation. Formerly,

foreign organizations and individuals can only hold a maximum of 30

percent of total shares issued by a listed company. As part of its

efforts to encourage foreign investment and to promote the development

of the infant stock market, the Government issued Decision 146 in July

2003 abolishing the equity limit of a single foreign investor

(institutional or individual) in a listed Vietnamese company. MPI

maintains a list of sectors and business lines in which foreigners may

purchase shares in Vietnamese private enterprises in an effort to

encourage private domestic enterprises to list and foreign investors to

buy shares. In April 2002, the latest version of this list was issued

It includes selected commercial activities in five broad areas:

agriculture, forestry and aquaculture; industry and processing; hotels

and restaurants; transport, warehousing and communications; and science

technology, health care and education.



In March 2003, the Government issued Decision 36/QD-BKH revising the

regulations on foreign shareholding in Vietnamese companies that are no

listed on the Vietnam stock market. The new Decision governs purchase

of shares and capital contributions by the following foreign investors:



* Foreign economic and financial organizations established pursuant to

foreign law and conducting business overseas or in Vietnam;

* Non-resident foreigners in Vietnam;

* Foreigners who reside, earn their living and live long-term in

Vietnam;

* Overseas Vietnamese



An important reform is that Prime Minister's approval is no longer

required for the sale of shares to foreign investors. However the

maximum level of capital contribution and purchase of shares by any one

or more foreign investor in Vietnamese companies is still capped at 30

percent of the charter capital of the Vietnamese companies. The Ministr

of Finance recently has been assigned by the Government to review and

revise this restriction toward raising the 30% cap on foreign equity in

Vietnamese companies.



A handful of regional and Vietnam-specific investment funds were set up

to invest in Vietnam following the lifting of the U.S. trade embargo in

1994, but their results have mostly been poor. After promising

beginnings in 1995, by 1998 shares in some of the funds were trading at

an average discount of nearly 50 percent, and some were forced

significantly to write down the value of their portfolios, while most

failed to fully invest the funds raised for Viet nam due to a dearth of

attractive opportunities. The continuing lack of a developed stock

market means such funds do not have access to portfolio investment and

must seek out private equity opportunities.





--------------

A-10. POLITICAL VIOLENCE

--------------



Vietnam is undertaking an ambitious course of transition both

domestically and internationally, but remains essentially stable under

the continued leadership of the Communist Party of Vietnam (CPV). As

the country proceeds with its transition from a centrally-directed

economy to a more genuinely market-based economy, a process which began

in the late 1980's, the GVN and the CPV have, at the same time, reduced

official interference in private lives of citizens and have permitted a

broad expansion of personal liberties. But the GVN remains a one-Party

state that brooks no overt criticism of the GVN or CPV and continues

to restrict freedoms of religion, speech, assembly, and press, while

denying true choice of political system or leaders. There are no signs

of active opposition to the GVN or CPV, however, and most Vietnamese

appear satisfied with the economic and social improvements of the last

16 years. There have nonetheless been isolated protests, such as large

demonstrations by ethnic minorities in the Central Highlands in 2004 an

smaller gatherings at the semi-annual meetings of the National Assembly

by a variety of disaffected individuals.





--------------

A-11 CORRUPTION

--------------



U.S. and other foreign firms as well as domestic private sector firms,

have identified corruption in Vietnam in all phases of business

operations as an obstacle to their business activities. In 2004,

Vietnam scored a 2.6 out of a possible high score of 10 points on

Transparency International's Corruption Perception Index. This placed

Vietnam's rank at 102 out of 146 countries, behind neighbors Malaysia

and Thailand but above Indonesia. In large part due to a lack of

transparency, accountability, and media freedom, widespread official

corruption and inefficient bureaucracy remain serious problems that

even the CPV and GVN admit they must address squarely and soon.

Competition among government agencies for control over business and

investments has created confused overlapping of jurisdictions and

bureaucratic procedures and approvals that in turn create opportunities

for corruption. Low pay for government officials and woefully

inadequate systems for holding officials account able for their actions

compound the problems. Implementation the GVN's Public Administration

Reform, developed in with the assistance of the World Bank, and the

country's obligations under the transparency provisions of the BTA

promise some improvement in the situation. But it appears unlikely tha

they will be successful in this effort to eliminate corruption the near

term.







B. BILATERAL INVESTMENT AGREEMENTS



Vietnam has 46 bilateral investment agreements with the following count

ries and territories: Algeria, Argentina, Armenia, Australia, Austria,

Belarus, Belgium and Luxembourg, Bulgaria, Burma, Chile, China, Cuba,

Czech Republic, Cambodia, Denmark, Egypt, Finland, France, Germany,

Hungary, Iceland, India, Indonesia, Italy, Japan, Laos, Latvia,

Lithuania, Malaysia, Mongolia, Netherlands, North Korea, Philippines,

Poland, Romania, Russia, Singapore, South Korea, Sweden, Switzerland,

Taiwan, Tajikistan, Thailand, Ukraine, United Kingdom, and Uzbekistan.

Vietnam has not concluded a Bilateral Investment Treaty (BIT) with the

U.S., but the BTA contains an investment chapter that closely resembles

U.S. BITs and contains most of the principal obligations common to such

agreements. Vietnam also does not have bilateral taxation treaty with

the U.S.



C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS



In March 19, 1998, OPIC signed a new bilateral agreement with Vietnam,

providing protections and guaranties necessary for OPIC to operate in

Vietnam for the first time in more than twenty years. Subsequently, on

November 19, 2000, President Clinton delivered remarks to the Vietnames

business community. At the core of his remarks was the announcement

that OPIC was creating a special US$ 200 million line of credit to

support private sector projects in Vietnam. As of December 2004, OPIC

had signed one active insurance contract and one lending contract in

Vietnam. OPIC is reviewing several applications to support other

potential projects. Vietnam joined the Multilateral Investment Guarante

Agency (MIGA) in 1995.





D. LABOR



One of Vietnam's principal attractions for foreign investors has been

its large, relatively well-educated (the GVN reports a literacy rate of

over 90 percent) and inexpensive labor force. Now estimated at 43

million, the labor pool continues to increase by 1-1.5 million workers

annually due to the post-war population explosion. Despite its

attractions, labor in Vietnam poses some problems for foreign

investors. There is a shortage of managerial talent and skilled

workers, resulting in higher salaries for those employees. Another

factor raising the cost of skilled and managerial workers is Vietnam's

sharply progressive personal income tax system that results in labor

costs 2-3 times higher than in other Asian countries for relatively

high-paid local staff. In March 2004 the Standing Committee of the

National Assembly promulgated Ordinance 14 on Amendments to the

Ordinance on Income Tax of High Income Earners. Under this legislation

the tax burden on Vietnamese employees was reduced effective 1 July

2004. Key changes included the broadening of tax brackets and removal

of the top marginal income tax rate of 50 percent. Under two 1999

directives, foreign organizations, including FIEs, must recruit and hir

staff through state-owned employment bureaus, a requirement many

investors find onerous. Under amendments to the Labor Law that entered

into force on January 1, 2003, FIEs and foreign business cooperation

parties are now allowed to directly recruit Vietnamese workers and

foreigners. However, the requirement to use such employment service

agencies will continue to apply to branches and representative offices

of foreign companies, foreign non-governmental organizations and

foreign diplomatic missions. Employers are required by law to establish

labor unions within six months of establishment of the company. All

labor unions must be members of the Vietnam General Confederation of

Labor, an organization under the Communist Party-affiliated Fatherland

Front. There were, 96 labor strikes in 2004, according to latest

statistics. Strikes took place in SOEs, FIEs, and domestic private

companies, with the majority occurring at FIEs. There were no known

strikes at U.S.-invested companies. Most of the strikes involved

labor-management disputes over health, safety, or other working

conditions, work hours, or late payment of wages, and were settled

quickly. Vietnam is a member of the International Labor Organization

(ILO). As of May 2003, it had ratified three of the eight core labor

conventions: 100 (Equal Remuneration); 111 (Non-discrimination in

Employment); and 182 (Worst Forms of Child Labor). Vietnam ratified th

first two conventions on October 7, 1997 and the last on December 19,

2000. Vietnam has not ratified ILO Conventions on freedom of

association, protection of the right to organize and collective

bargaining. However, under the Declaration on Fundamental Principles

and Rights to Work, all ILO members, including Vietnam, have pledged

to respect and promote all the core ILO labor standards, including thos

on association, right to organize and collective bargaining. A number

of technical assistance projects in the field of labor sponsored by

foreign donors are underway in Vietnam, including work by the ILO

supported by the U.S. Department of Labor. Vietnam intends to ratify

Conventions 29 and 105 on forced labor in 2005.





E. FOREIGN TRADE ZONES/FREE PORTS



Companies may choose to produce within an export-processing zone (EPZ)

to take advantage of exemptions from customs duties for equipment, raw

materials, and commodities imported into the zones, and for finished

goods and products exported from the zones, subject to specific

provisions regulating EPZs. All of the production within an EPZ must b

exported. Industrial zones (IZs) have been developed to offer tax

advantages for establishing factories within the zones. Companies can

produce within an IZ for the domestic market or for export. The

companies pay no duties when importing raw materials, if the end

products are exported. From the establishment of its first EPZ in 1991

through December 2004, Vietnam established a total of 112 IZs and EPZs.

As of December 2004, there were 1,542 foreign invested enterprises

licensed in the zones with a total registered capital of US$ 13.4

billion, of which over US$ 7.4 billion has been implemented. Many

foreign investors commented that it is faster and more convenient

to implement their projects in the industrial zones than outside the

zones as the land use is already planned and they do not have to be

involved in site clearance, compensation works and the construction of

necessary infrastructure, which are time consuming and sometimes

difficult. Foreign investment in the industrial zones currently

concentrates on light industry projects, such as food processing and

textile and garments. The number of heavy industry projects is still

modest.



The operation of customs warehouses was approved in 1994. There are

bonded warehouses in Can Tho, Hai Phong, Ho Chi Minh City, Hanoi, Quang

Ninh, Binh Duong, Dong Nai, An Giang and Vung Tau. Entities permitted

to lease customs bonded warehouses are foreign enterprises, individuals

and overseas Vietnamese; Vietnamese import-export license companies; an

FIEs licensed to perform import-export activities. Most goods pending

import and domestic goods pending export can be deposited in bonded

warehouses under the supervision of the provincial customs office.

Exceptions include goods prohibited from import or export,

Vietnamese-made goods with fraudulent trademarks or labels, goods of

unknown origin, and goods dangerous or harmful to the public or

environment. The lease contract must be registered with the customs

bond unit at least 24 hours prior to the arrival of goods at the port.

Documents required are a notarized copy of authorization of the holder

to receive the goods, a notarized copy of the warehouse lease contract,

the bill of lading, a certificate of origin, a packing list, and custom

declaration forms. Owners of the goods pay import or export tax when

the goods are removed from the bonded warehouse.



Customs warehouse keepers can provide transportation services and act

as distributors for the goods deposited. Additional services relating

to customs declaration, appraisal, insurance, reprocessing or packaging

require the approval of the provincial customs office. In practice the

level of service needs improvement. The time involved for clearance an

delivery can be lengthy and unpredictable.





F. FOREIGN DIRECT INVESTMENT STATISTICS



Year Avg. capital Number Licensed Implemented

per project of capital capital

(million US$) projects (billion US$) (billion US$)



1992 10.5 193 2.027 0.478

1993 9.5 272 2.588 0.871

1994 10.3 362 3.746 1.936

1995 16.4 404 6.607 2.363

1996 23.5 367 8.640 2.923

1997 14.0 333 4.659 3.137

1998 15.0 260 3.897 2.364

1999 5.2 298 1.568 2.179

2000 5.8 344 2.014 2.228

2001 5.3 461 2.521 2.300

2002 1.97 697 1.376 N/A

2003 2.55 752 1.914 2.685

2004 3.07 723 2.222 2.900



Note: Authorities have been steadily adjusting the final figures for

investment inflows for recent years upwards. It is not clear whether

these adjustments reflect additional information that has become

available to investment authorities or if they reflect an attempt to

make the investment downturn in the wake of the Asian financial crisis

appear less severe. The licensed capital statistics for 1997 and 1998

may be overstated. A Singapore-invested resort complex in 1997 worth

US$ 700 million is unlikely to be completed in the foreseeable future,

and the Russian partner has recently pulled out of a joint venture

petroleum refinery project licensed in 1998 worth US$ 1.3 billion.

Absent these projects, the decline in newly licensed FDI after

1996 would appear to have been even sharper.





Cumulative FDI (as of 12/27/2004):



-- Licensed projects: 5,109 (US$ 45.766 billion)

-- Disbursed capital: US$ 26.773 billion (58 percent of licensed

capital)



Note: GVN authorities routinely revise or revoke investment licenses

that have not been utilized and other investment licenses contain

automatic expiration clauses that take effect if a project or certain

phases of a project are not implemented by a certain date. Statistics

on the number of licensed projects and the value of licensed projects

are then adjusted accordingly. Foreign direct investment in selected

sectors (Cumulative, as of 12/27/2004):





Sector Number of Licensed Implemented

projects capital capital

(billion US$) (billion US$)

1. General Industry 3,103 20.85 11.99

2. Oil & gas 27 1.90 4.43

3. Construction 293 3.88 2.04

4. Real estate development 104 3.64 1.61

5. Hotels & Tourism 166 3.61 2.20

6. Trans./Comm. 143 2.57 0.92

7. Agriculture & forestry 591 3.13 1.55

8. Fisheries 105 0.29 0.15

9. Finance & banking 56 0.74 0.63

10. Culture, Health & Edu. 179 0.67 0.34



Foreign direct investment by country (Jan to Dec 27, 2004):



Country Number of Licensed

projects capital

(million US$)



1. Taiwan 156 453

2. South Korea 159 340

3. Japan 61 224

4. Hong Kong 38 198

5. British Virgin Islands 25 177

6. Canada 12 155

7. Singapore 47 124

8. Malaysia 24 84

9. China 67 79

10. United States 30 75





Foreign Direct Investment by country:

(Cumulative, as of 12/27/2004)



Country Number of Licensed Implemented

projects capital capital

(billion US$) (billion US$)



1. Singapore 334 7.98 3.38

2. Taiwan 1,259 7.26 3.15

3. Japan 490 5.39 4.25

4. South Korea 840 4.75 2.89

5. Hong Kong 326 3.23 1.94

6. Brit.Virg.Isl. 212 2.43 1.14

7. France 142 2.15 1.06

8. Netherlands 53 1.84 1.97

9. Thailand 116 1.38 0.76

10. Malaysia 163 1.32 0.81

11. United States 215 1.28 0.73

12. United Kingdom 62 1.22 0.60

13. Switzerland 28 0.66 0.52



There is little data available on Vietnam's direct investment abroad.

According to the Ministry of Planning and Investment, as of December

2004, Vietnamese businesses had invested in 113 projects worth about US

226 million in Russia, Singapore, Laos, Japan, Hong Kong, Cambodia,

Tajikistan, the Middle East, the United States, Uzbekistan, and Taiwan.

These investments were concentrated in the following sectors: transport

communications, construction, food processing, oil and gas, hotel,

restaurant, and agriculture sectors. Vietnamese businesses have two

investment projects worth US$ 260,000 in the United States. One

Vietnamese government-owned telecommunications firm established an

office in California. There are no Vietnamese government regulations o

investment overseas.





Note: Statistics, including those on investment, are often difficult

to come by and are generally based on definitions that differ from

internationally accepted standards. Those published in government

statistical surveys are generally incomplete and often inconsistent fro

publication to publication and over time. It is the policy of the

Ministry of Planning and Investment to respond only to written requests

for statistics or information on how they are compiled and calculated,

process that is cumbersome and very time consuming. Additional

statistical data is often released in the local press but is difficult

to confirm and update year-to-year, because it is not also provided in

a database, which is readily available to the public.



End text.



MARINE