Advertising spending cap drags down firms' competitiveness

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Advertising billboards in downtown Ho Chi Minh City

Capping advertising and promotional spending at 10 percent of total expenditure is hindering firms from building their brands both at home and abroad, businesses have complained.

They want it removed to spur consumption at a time when the economic situation remains gloomy.

The Corporate Income Tax Law allows tax deduction of expenses only up to 10 percent, and 15 percent in the first three years of a company's operation.

Dinh Thi My Loan, general secretary of the Vietnam Association of Retailers, said: "The ceiling [is] limiting firms' competitiveness."

"A cap on "¦ advertising spending is applied in only two countries in the world Vietnam and China."

In China it is 15 percent, but on turnover rather than total expenditure, and the unused portion can be rolled over for use the next year, she said.

An economist, who did not want to be named, said the restriction is not an effective measure against tax evasion, and merely hurts firms, especially small and medium-sized ones.

"The regulation will make Vietnamese firms, when expanding abroad, less competitive than foreign ones, which are not subject to the limit.

"The situation can also be seen in the domestic market, where foreign firms with deep pockets, despite the regulation, spend much on advertising to grab a bigger market share.

"So it is necessary to review the regulation to protect local firms."

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The regulation is a hurdle to firms trying to build their brands and image, which require large and sustained investment, he said, and makes it difficult for Vietnam to create big global brands.

Nguyen Quy Son, vice chairman of the Vietnam Pharmaceutical Companies Association, said advertising and promotions are an investment for improving firms' competitiveness. The current limit is irrational, hindering firms' development, he said.

"Advertising can create demand. Without advertisements, pharmaceutical companies find it hard to sell their products. The cap is a barrier to their development."

Doan Minh Dung, director of a confectionery company in Hanoi, said his company wants to spend more on advertising, but cannot. "We use up the 10-percent cap. If we exceed the cap, we have to pay tax, which could increase our prices."

"With the limited advertising spending, our promotion campaigns are restricted mostly to the domestic market. In foreign markets, we often do them for short periods and in a sporadic manner.

"If promoted on a larger scale and for longer periods in overseas markets, our products may be known more, and their sales will be better."

Loan said the cap should be doubled to 20 percent, and any amount in excess should be tax deductible the following year.

The limit should be scrapped altogether when the Corporate Income Tax Law is amended in 2013, she added.

The European Chamber of Commerce, calling for removing the cap, said this would benefit not only Vietnamese firms but also the foreign business community, and could help Vietnam attract more FDI, encourage firms to invest more, and generate more marketing and advertising jobs.

VIETNAM'S AD INDUSTRY DOMINATED BY FOREIGN COMPANIES

Although only some 30 out of 5,000 advertising companies in Vietnam are foreign invested ones, they are dominating the advertising market, accounting for over 70 percent of the market share, according to the Vietnam Advertising Association (VAA).

Foreign firms receive orders from customers, helping them build advertising strategies. Then, they hire local advertising firms to implement the orders, raking in commissions of 10-15 percent of the cost of the orders, said VAA vice chairman Do Kim Dung.

Foreign invested enterprises often choose big foreign advertising firms to cooperate with when they penetrate the Vietnamese market, he said. Vietnam is now home to major foreign advertising companies such as WPP, Omnicom, Dentsu and Interpublic.

Local advertising firms, which have limited experience and financial capabilities, cannot compete with their foreign rivals. Thus, they vie with each other for what little is left of the market share, Dung said.

To bring in orders, some firms have had to offer service rates that are less than 10 percent of their contracts' value, much lower than that the international standard of 17 percent. The low cost has forced them to reduce the quality of services in order to maintain a base level of profit, which has negatively affected the prestige of all local advertising firms, he said.

Turnover in the Vietnamese advertising and communications industry reached US$783 million in 2011, much lower than the average figure of $4 billion for Southeast Asian countries, said Dung.

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