The Ministry of Finance recently rejected a demand from Samsung Electronics for a 50 percent tax reduction for three more years for its two plants in the provinces of Thai Nguyen and Bac Ninh.
The two received special incentives -- no income tax for the first four years of operations and 50 percent tax for the next nine.
The Thai Nguyen facility has a 10 percent tax discount for the following 30 years, while for the Bac Ninh plant, the discount will be for life.
The corporate income tax rate in Vietnam is 25 percent.
The ministry ruled that the demand is not in line with the country’s laws.
The Korean company is the largest foreign investor with over $12.6 billion in registered capital, and could increase its investment to $20 billion by 2017 if things go smoothly, according to a government report.
Vietnam seems to be more wary about offering incentives to foreign investors after a lot of criticism that it has been too generous.
Nguyen Quang Thai, general secretary of the Vietnam Economic Science Association, said the ministry is right to reject the demand: “With the budget being tight, we should not offer tax breaks for too long.”
In fact, the incentives offered to potential investors are too generous and foreign companies are treated better than domestic ones, he said.
“Foreign-backed firms are exempt from corporate tax and have occupied thousands of square meters of free land in industrial parks for years. On the other hand, local firms find it hard to get even 100 square meters for their plants.”
Economist Nguyen Ngoc Son concurred saying there is no reason to comply with demands that are not in line with the laws. Special incentives might help Vietnam attract more FDI, but also threaten the fair competition between foreign and local private companies, he said.
The rejection shows that Vietnam wants fair competition in the market more than FDI, he said.
Bui Kien Thanh, another economist, said: “No country offers incentives to foreign investors like Vietnam. We should cut overly-generous incentives."
"Foreign investors should have been offered specific incentives based on what they can bring to the country, such as jobs and value-added products.”
Many provinces now compete to attract FDI by offering incentives without considering whether or not the projects are actually useful, he said.
Renowned economist Pham Chi Lan said investment incentives should be offered more selectively since it is a very expensive strategy, and recklessly offering incentives would affect the tax system and the government’s revenues.
“We should review which sectors need foreign investors and which could function with local firms operating with appropriate incentives.”
Nguyen Mai, chairman of the Vietnam Association of Foreign Enterprises, said, “It is quite normal for foreign investors to ask for incentives; Vietnam can accept or reject their demand.”
But there is a wrong perception that foreign investors would crush local private firms if we do not carefully consider incentives, he said.
Local private firms can develop in a competitive environment. The local market has many segments and foreign and local firms can participate in different segments, he pointed out.
Streamlining administrative procedures, improving infrastructure and reducing corruption would better serve Vietnam in attracting foreign investment than tax breaks, he said.
Tax incentives enhance but do not substitute competitiveness, according to many foreign investors, he added.
Gaurav Gupta, chairman of the American Chamber of Commerce (Amcham) in Vietnam, said corruption and a murky legal system continue to bemuse American businesses in Vietnam.
Initial interest from potential foreign investors often does not materialize due to continued problems with corruption, human resource constraints, and the country's overly complicated, restricted, and unclear licensing and regulatory environment, he said.
Mai said Vietnam could attract many foreign investors seeking to take advantage of free trade agreements, including the Trans-Pacific Partnership.
This recent free trade agreement between 12 Pacific Rim countries has renewed US investors' interest in Vietnam, but any hope of a significant increase in their investment would depend on reforms to improve the country’s business environment, according to analysts and officials.
Many US giants like Nike and Mast Industries plan to move a major part of their manufacturing operations to Vietnam, the Foreign Investment Agency said, pointing out that some like tech behemoths like Microsoft and Intel have already made the move here from China, where labor costs have shot up.
Besides major companies in key sectors like oil and gas and aviation, small and medium US firms in manufacturing and light industries are also interested in investing in Vietnam, according to the agency.
Around 57 percent of US companies operating in Southeast Asia consider Vietnam the most attractive investment destination, it said, citing a survey by the American Chamber of Commerce in Singapore.
Economists said the situation allows Vietnam to cherry-pick good FDI projects.
Minister of Planning and Investment Bui Quang Vinh said Vietnam would carefully select FDI projects to ensure they benefit the country.
Many cities and provinces have tried to attract FDI at any cost without a careful assessment of projects, resulting in many of them becoming delayed due to the poor financial strength of investors or causing pollution.
Vinh recently instructed Quang Ninh Province to reject a Hong Kong-invested dying project because of pollution concerns. The plant, if licensed, would have operated without a waste treatment system, he said.
Vietnam's foreign direct investment inflows topped US$4.02 billion in the first three months, more than twice the figure for the same period last year, according to the Foreign Investment Agency.
South Korea was the top investor, accounting for more than a fifth of the investment.