VIETNAM: 2005 INVESTMENT CLIMATE STATEMENT

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E.O. 12958: N/A

TAGS: EINV, EFIN, ELAB, KTDB, PGOV, OPIC, VN, APEC, ASEAN, FINREF, BTA, SOE, LABOR, IPROP

SUBJECT: VIETNAM: 2005 INVESTMENT CLIMATE STATEMENT



REF: Hanoi 00468



1. This cable provides the 2005 Investment Climate

Statement for Vietnam.



2. Begin text of the 2005 Investment Climate

Statement for Vietnam:



Vietnam - Investment Climate Statement



A1 Openness to Foreign Investment:

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



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 of overseas capital, both foreign

direct investment (FDI) and official development

assistance (ODA). (Vietnam does not yet allow any

significant foreign portfolio investment.) For the

2001-2005 period, the Government of Vietnam (GVN) has

established targets for FDI at US$ 11 billion in

disbursements from existing 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 investment 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 should 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

Monetary 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 gave

Vietnam good marks for its macroeconomic stability.



In light of Vietnam's strong macroeconomic

performance despite the global economic 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 B minus 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 sector

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 developed 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 changes

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 to

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 a series 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 the 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 sharing 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 involvement 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 can

benefit from the assistance of an established

Vietnamese firm in dealing 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 to overvalue their

land use rights.



b) Business Cooperation Contracts (BCC) permit a

foreign firm to pursue 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 license

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 recently, 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 specific 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, the Government issued Decree 38 in April

2003 providing for the conversion of a number of

foreign invested enterprises (FIEs) into foreign

invested 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 year of conversion,

and its legal capital must be fully paid up. All

conversions are subject to the Prime Minister's

approval. Only a limited number of FIEs have been

selected by the MPI, in consultation with other

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 pilot FISCs have been tested, Decree 38 will be

reviewed by the Government and may be extended to a

wider range of FIEs.

Other reforms under the Government Decree Number 27

issued in March 2003 include:



?A new 100 percent Foreign Owned Enterprise (FOE)

may now be formed between 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 an existing FOE and a

Vietnamese enterprise or between an existing FOE

OE

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

the 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 broadcasting; 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,

ale; 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

. Greater

authority over investment licensing has been devolved

to provinces, municipalities, and investment zones.

Provincial 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.

Under 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 submit 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

or

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 Vietnam 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 been 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's 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 at the Constitutional

level changes in approach with respect to foreign and

domestic private sector investment contained in the

economic reforms 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 enterprises;

?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 and 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;

sses;

eliminating discriminatory treatment of 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

access 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 encourage 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 is 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 in 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 in

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 amendment 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 investment 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 Vietnam 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

held 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 incentives 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 issued in December

2003 abolish the tax on profits remitted by foreign

invested 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.



A-2. CONVERSION AND TRANSFER POLICIES

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



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

currency 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.

A-3. EXPROPRIATION AND COMPENSATION

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

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.



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 preferred 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, even 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, the 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 Vietnamese

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 close 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 enforceable 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 a 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 in 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, inter alia, leasing,

construction, consultancy, licensing, investment,

financing, banking, insurance, exploration, 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, in effect

beginning October 2004, attempts 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

its 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 products

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 used for production by

foreign investors. In the same vein, it has removed

foreign exchange balancing requirements. Under the

BTA, Vietnam is also 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 geographical 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/or infrastructure

projects. The law also favors to a lesser degree,

investments in metallurgy, basic chemicals,

petrochemicals, fertilizer manufacture, manufacturing

(especially electronic components and car and

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 incentives for such

investment. Although the GVN encourages investment

in the provinces, enforcement of investor protections

and BTA rights with Provincial Authorities 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, and

construction materials that cannot be produced

domestically, which are imported to Vietnam to form

fixed assets of an FIE or a BCC are exempted from

import duties. Other exemptions or reductions of

import and export 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 a

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 Tan 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 government 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 of

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 the 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

completely dismantle its SOE sector over time.

Especially disconcerting to these observers is the

Socio-economic Strategy for 2001-2010 which

reconfirms 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 unable 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 rights held by the leaser. The new Land Law

passed by the National Assembly in 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 held 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. Foreign 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 uncertain. 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 administrative 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 approval 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 of 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 non-

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

administrative 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 ability 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, the legal system changes

frequently, and at times, significantly. Vietnamese

officials have limited experience drafting

legislation, and new laws and 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 of 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 administrative processes

after the licensing process has been completed. A

general lack of transparency in law and regulation

make it difficult not only to 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 enforce 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 process 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

services 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 frequently 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 Vietnam Bank of Foreign Trade

(Vietcombank),the Vietnam Industrial and Commercial

Bank (Incombank),the Bank for Agriculture and 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 consistency with

international accounting standards. After a multi-

year grace period, foreign banks and companies are

now required 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 continues

to pose problems for the government's plan to expand

stock and securities markets to raise capital

internally.



Despite these challenges 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 listed 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 rules 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 not 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



se



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 Ministry 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 Vietnam

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 and

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 accountable 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 that 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 countries 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 Vietnamese 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 Guarantee

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 hire 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 the 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 those 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 be 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; and 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 customs 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

and delivery can be lengthy and unpredictable.





F. FOREIGN DIRECT INVESTMENT STATISTICS



Year Avg. capital Number Licensed

Implemented per project of

Capital capital

(Mil US$) projects (Bill US$) (Bill US$)



1992 10.5193 2.027 0.478

1993 9.5272 2.588 0.871

1994 10.3 362 3.746 1.936

1995 16.4 404 6.607 2.363

1996 23.5367 8.640 2.923

1997 14.0333 4.659 3.137

1998 15.0260 3.897 2.364

1999 5.2298 1.568 2.179

2000 5.8 344 2.014 2.228

2001 5.3461 2.521 2.300

2002 1.97697 1.376 N/A

2003 2.55752 1.914 2.685

2004 3.07 723 2.222 2.900



Note: Authorities have been steadily adjusting the

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 20.8511.99

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

56 0.74 0.63

10. Culture, Health & Edu. 179 0.67 0.34



Foreign direct investment by country (Jan to Dec 27,

2004):



CountryNumber ofLicensed

projects Capital

(Million US$)

1. Taiwan156 453

2. South Korea159 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 7.983.38

2. Taiwan 1,2597.263.15

3. Japan 4905.394.25

4. South Korea 8404.752.89

5. Hong Kong 3263.231.94

6. Brit.Virg.Isl. 2122.431.14

59 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 1422.151.06

8. Netherlands 531.841.97

9. Thailand 1161.380.76

10. Malaysia 1631.320.81

11. United States 2151.280.73

12. United Kingdom 621.220.60

13. Switzerland 280.660.52



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

lished

an office in California. There are no Vietnamese

government regulations on 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 from 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, a 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