Vietnam: Proposing preferential policies so that people can buy automobiles at a cheaper price? What is the evaluation of the regulations on the degree of discreteness for imported auto parts?
- What are the shortcomings of applying the regulation on the discrete level of imported auto parts to implement the tax incentive program for the production and assembly of automobiles and the classification of imported auto parts?
- Proposing preferential policies so that people can buy automobiles at a cheaper price?
- What is the impact of not applying the minimum discrete level of imported auto parts?
What are the shortcomings of applying the regulation on the discrete level of imported auto parts to implement the tax incentive program for the production and assembly of automobiles and the classification of imported auto parts?
This content is evaluated in Official Dispatch No. 1154/BCT-CN in 2023 as follows:
The first shortcoming, in the past, in order to encourage development and attract investment in the mechanical and electronic industries (including the automotive industry in Vietnam), the Government oriented management and applied preferential policies according to the localization rate for automobile production and assembly activities.
Implementation of Decision No. 175/2002/QD-TTg dated December 3, 2002 of the Prime Minister approving the Strategy for development of Vietnam's automotive industry until 2010, a vision to 2020, dated October 1, 2002. In 2004, the Ministry of Science and Technology issued Decision No. 28/2004/QD-BKHCN on the method of determining the localization rate for automobiles.
Because Decision No. 28/2004/QD-BKHCN did not specify the method and method of determining the localization rate, on 11/05/2005, the Ministry of Science and Technology issued Decision No. 05/2005/QD-BKHCN amending and supplementing Decision No. 28/2004/QD-BKHCN (amended in Circular No. 05/2012/TT-BKHCN dated March 12, 2012).
In these documents, the regulation on the discrete level of imported auto components is only for the purpose of clarifying the scoring method based on the discrete level of imported auto parts, as a basis for localization rate determination.
In fact, the policy to encourage support according to the localization rate for imported auto components has not been issued. In addition, the method of determining the localization rate in Decision No. 28/2004/QD-BKHCN has not been applied by automobile manufacturing and assembling enterprises in production and business practice and no enterprises have been eligible for incentives under this policy.
The second shortcoming, according to current regulations on classification and tax calculation for imported auto components (Decree No. 57/2020/ND-CP dated May 25, 2020 amending Decree No. 122/2016/ND-CP, Decree No. 125/2017/ND-CP and Decrees amending and supplementing):
- Enterprises that import auto parts, spare parts or complete sets of auto parts for the production and assembly of automobiles shall be classified according to each auto component and spare part according to the list of 97 chapters (average tax rate of the parts set from 12% to 14%), and at the same time, these components and spare parts must meet the condition of minimum discrete level as prescribed by the Ministry of Science and Technology. In case the minimum discretization condition is not met, the vehicle shall be classified as complete vehicle (higher tax rate).
Meanwhile, for these same components and spare parts, enterprises that import for commercial purposes to replace in maintenance and repair are entitled to the same import tax rates as automobile manufacturing and assembling enterprises but do not need to meet the minimum discrete level (this commercial enterprise will not be assembled into complete automobiles and will not be issued a factory certificate for circulation registration).
Thus, the same goods, the same characteristics, properties, purposes of use, the same HS code and the same import tax rate, but there is a distinction between the two objects; Automobile manufacturing and assembling enterprises must satisfy the condition of fragmentation, and enterprises importing for commercial purposes do not have this condition.
- To enjoy the import tax rate of 0% (import tax refund for imported components that cannot be produced domestically) for components and spare parts under the tax incentive program for the manufacture and assembly of automobiles, automobile manufacturing and assembling enterprises must satisfy the conditions specified in Article 7a of Decree No. 57/2020/ND-CP.
However, under the conditions in Article 7a of Decree No. 57/2020/ND-CP, the production condition is a key regulation aimed at increasing the output of domestically manufactured and assembled automobiles, thereby contributing to increase the localization rate in order to develop supporting industries.
However, the reality shows that the application of the above-mentioned discrete level regulation does not increase the automobile localization rate. Specifically, since the issuance of Decision No. 28/2004/QD-BKHCN and its amendments and supplements up to now, the localization rate of most passenger automobile models which have been manufactured and assembled in Vietnam are very low, fail to achieve the target set out in the Strategy for the development of the automotive industry in Vietnam to 2025, with a vision to 2035.
The third shortcoming, complete automobiles are manufactured and assembled products with more than 30,000 parts.
Currently, automobile manufacturing technology in the world is developing more and more, the features and components on automobiles are increasingly new and modern and account for a large proportion of the value compared to the value of the automobile, especially for high-end passenger automobiles or electric vehicles.
Therefore, if the state management agency rigidly regulates the degree of fragmentation of imported auto parts, it is too deeply interfered with the manufacturer's technology, supply chain, production stages and segments when the current automobile manufacturing and assembly technology has had a great change compared to 2004 (the time of issuance of Decision No. 28/2004/QD-BKHCN) and always changes to meet the increasing demand of consumers.
This has been making it difficult for automobile manufacturers and assemblers to proactively decide on production stages and segments to optimize production and participate in the global value chain.
The fourth shortcoming, when the ASEAN Trade in Goods Agreement comes into effect, CBU automobiles imported from ASEAN and from other countries and regions (according to the commitments of EVFTA, CPTPP) will be imported to Vietnam with very competitive price.
Since 2018, the opportunities for domestically produced and assembled automobiles have been narrowed further with the market dominance of CBUs imported from ASEAN by FDI enterprises, leading to the production scale of many enterprises to be narrowed, not ensuring economic efficiency in production.
The mechanical industry, the supporting industry for the domestic auto industry, which is already less competitive, will face more difficulties than the reduced gas output.
FDI enterprises, in addition to increasing the import of complete vehicles, will also increase the import of parts, accessories and spare parts with the tax rate of 0%. This is a trend that is not conducive to the long-term development of Vietnam's auto industry and Vietnam will become a market for other countries with more developed auto industry such as Thailand and Indonesia to exploit.
This also has a big impact on the macro economy. With the forecast of automobile demand of our country in 2025 according to the average plan of about 800-900 thousand vehicles and about 1.5-1.8 million vehicles in 2030, if not develop the automobile manufacturing and assembling industry in Vietnam, the entire passenger automobile market is imported; 50% of passenger automobiles and trucks are imported, 50% of domestic production with a 50% localization rate, the import turnover in 2025 is expected to be about USD 12 billion and in 2030 is USD 21 billion.
Thus, in the context of extensive integration in the near future, if the Government and ministries do not promptly have appropriate policies and solutions (one of them is the need to soon abolish the regulation on the discrete level of imported auto parts) to encourage and support the automobile manufacturing and assembly industry and the development of the mechanical industry and the auto supporting industry in the country, then Vietnam will become a automobile consumption market for FDI firms in Vietnam.
The fifth shortcoming, in terms of customs procedures, with regulations on the discrete level of imported auto parts, when inspecting the actual goods, the customs authorities face many difficulties in determining exactly which are the loose components and which are the fully assembled components in order to apply the appropriate tax rate.
In fact, as reflected by some businesses, there have been many controversies between auto parts importers and customs authorities regarding the process of determining discrete or complete components.
Meanwhile, the only previous basis for determining discrete components or complete components was Circular No. 05/2012/TT-BKHCN of the Ministry of Science and Technology with the above criteria being heavily technical. Therefore, many cases have to call for expertise, prolonging customs clearance time.
In addition, the regulation on the degree of fragmentation for imported auto parts also leads to cases where some enterprises commit commercial frauds in importing auto parts, disassembling them into parts, declared as discrete components for tax evasion.
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Proposing preferential policies so that people can buy automobiles at a cheaper price?
In Section III of Official Dispatch No. 1154/BCT-CN in 2023, the Ministry of Industry and Trade has made preferential recommendations to support the development of the automobile industry, specifically as follows:
According to Resolution No. 29-NQ/TW in 2022 of the 13th Party Central Committee on continuing to promote industrialization and modernization of the country until 2030, with a vision to 2045, one of the specific goals by 2030 is "Forming a number of large-scale, multinational domestic industrial corporations and enterprises with international competitiveness in fundamental industries, priority industries, and spearhead industry, etc.” and automobile manufacturing is one of the spearhead industries that are focused on development.
In addition, the Strategy for the Development of Vietnam's automotive industry to 2025, with a vision to 2035, has set the orientation" to encourage investment in projects large enough to create a market for the supporting industry.
With the above orientations, the Ministry of Industry and Trade proposes preferential and supportive policies to promote the development of the automotive industry based on the following criteria:
- Ensure compliance with the Party's orientation on accelerating industrialization and modernization and the development strategy of Vietnam's automotive industry to 2025, with a vision to 2035 in the direction of incentives and support for those automobile manufacturing and assembling enterprises with potential, large enough output, methodical and long-term investment for long-term production and business activities in Vietnam in order to create a market for supporting industries and contribute to automobile sales discount...;
- Consumers can access automobiles at a cheaper price;
- Based on the experience of some countries in the region, there are policies to attract large-scale automobile production and assembly projects such as Thailand, Indonesia, and the Philippines.
What is the impact of not applying the minimum discrete level of imported auto parts?
In subsection 1, Section 2 of Official Dispatch No. 1154/BCT-CN in 2023, the following is mentioned:
- The failure to apply regulations on the minimum discrete level of imported auto parts to implement the tax incentive program for automobile manufacturing and assembly and classification of imported auto parts from October 10, 2022 also brings the following positive effects:
+ Ensure the classification of components (determining HS codes) in accordance with domestic laws and the World Customs Organization's Harmonized System of Commodity Description and Coding (HS Nomenclature) and details at the 8-digit level under the ASEAN Harmonized Tariff Nomenclature; at the same time, helping domestic manufacturing enterprises and state management agencies more convenient in implementing tax incentive programs for imported auto parts and customs procedures;
+ Ensure the synchronization of the legal system, in line with international commitments that Vietnam has made in the integration process.
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