The massive reduction in corporate income tax in the US, despite being an initial concern for the Vietnamese government, may not have as strong an impact on the country’s ability to attract foreign direct investment as previously thought, thanks in part to Vietnam’s improving business climate improvements, which are increasing investor confidence.

In comments on macroeconomic stability released last week, Prime Minister Nguyen Xuan Phuc expressed concerns about the US’ corporate income tax (CIT) cut, which he believes will have negative impacts on the Vietnamese economy, such as a possible reduction in foreign direct investment (FDI), including US investments.

“The US has cut down its CIT and increased tax barriers, and this may lead some partners of Vietnam to follow suit. Thus, we must find proper and timely solutions to encourage tax, trade, and investment,” Phuc said.

In January 2018, the US enacted a bill the cornerstone of which was a reduction in the headline rate of federal CIT from 35 to 21 per cent starting from early 2018. This represents the most comprehensive reform to the US tax code in over 30 years, aiming to attract more FDI to the US and pull US overseas investments back.

This is also in line with President Donald Trump’s commitment to reduce CIT when he was running for the presidency.

Initial worries now settled as experts say the cuts are unlikely to affect investments from the US

However, Nguyen Viet Ha, managing director of the Hanoi office of US-backed investment consultant Bower Group Asia Inc., told VIR that the US’ CIT reduction will not impact Vietnam’s FDI attraction greatly, including US investments.

“This new policy will largely benefit firms within the US, because they can enjoy lower CIT. Regarding US investment in foreign countries like Vietnam, US firms often establish companies in a third country and make overseas investments through them. This will help them circumvent tax obligations easily,” Ha said.

“Moreover, if they wanted to return to the US to expand production, they would have already done so. US firms invest overseas, including in Vietnam, for many reasons. For example, in Vietnam a more friendly business climate is being developed, in addition to lower costs, and skilled labourers,” she said.

Echoing this view, professor Nguyen Mai, chairman of the Vietnam Association of Foreign Invested Enterprises, told VIR that the US’ CIT cut “Will not have a significant effect on the Vietnamese economy.”

“This is a problem of investment in the US, not US overseas investment,” Mai said. “The US wants to lure investments from major groups like LG and Samsung which have been heavily investing in Vietnam and export products to the US at a very high import tax rate.”

“Meanwhile, Vietnam remains a good FDI destination, being home to many global groups planning to expand investment and business in the country. Thus the government should not be worried about the US’ CIT reduction,” he added.

Mai further explained that when deciding on their investments in Vietnam or elsewhere, US investors consider every factor that can impact their investments. Moreover, the US’ reduced CIT rate of 21 per cent is still higher than Vietnam’s 20 per cent, not to mention many high-tech projects enjoying special CIT and other tax incentives in Vietnam.

“Thus I think it will not be easy for US firms to leave Vietnam and return to the US,” Mai said.

According to his estimates, if US investment from third countries is taken into account, the total registered investment capital of US firms in Vietnam is about $12-$13 billion, about $7 billion of which has been disbursed, accounting for about 4 per cent of Vietnam’s total disbursed FDI of $175 billion.

Sesto Vecchi, managing partner of US law firm Russin & Vecchi, also told VIR that the US tax rate reduction is quite large. The high corporate rate in the US has been one of the motivators for American companies to invest abroad. The difference in the rate now puts the US corporate tax rate on par with Vietnam’s.

“It will be hard for American companies to ignore,” Vecchi said, “but taxes are just one component in investment decisions. Geographical proximity to the market, ease of doing business, incentives, opportunity and local costs, among others, are clearly important. If Vietnam continues to take steps to ease business conditions and if it continues to provide opportunities, I believe that American companies will continue to look to Vietnam as a favorable venue for investment.”

Adam Sitkoff, executive director of AmCham Hanoi, told VIR that American businesses and investors applaud reform efforts that help create a more competitive environment where decisions are made faster, procedures are less complicated, rules are fairly enforced, and companies compete on their merits—even for access to capital, land, and opportunities.

“The business climate in Vietnam can best be helped by actions that increase productivity and reduce the costs and risks of doing business here. Government efforts to address the challenges created by the overcomplicated, restrictive, and unclear licensing and regulatory environment here are welcomed,” Sitkoff said.

VIR