Nov 13, 2012

Vietnam - Retail sector still ticking the boxes

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Vietnam’s rich retail potential is being tapped with many firms pocketing healthy profits. Nguyen Thi Oanh, a senior DFDL legal and tax advisor, reviews Vietnam’s legal system and emphasises the need to perfect current regulations.

With a young population and bright long-term economic prospects, Vietnam remains an attractive destination for foreign retailers. One sign is how familiar names such as Parkson, BigC and Lotte have been continuously expanding their activities in Vietnam, while other large international chains like Aeon (Japan) and BerliJucker (Thailand) have been preparing to enter Vietnam.

For the first six months of 2012, foreign investment in wholesale, retail and maintenance ranked third highest in investment capital contributions among foreign-invested sectors, after manufacturing-processing and real estate sectors.

The Vietnamese retail market remains appealing to foreign investors because of Vietnam’s demographics - a population of about 90 million people, 60 per cent of whom are in the high-consuming ages from 20 to 59. Along with rich demographics, comes an accelerating change in consumer habits, as shoppers move from traditional outlets to commercial centers or more convenient stores.

Moreover, the lower capability of domestic investors, both in terms of financial capacity and experience, represents a significant advantage for foreign investors in this sector.

Economic Needs Test (ENT)

Vietnam opened its retail market to foreign investors in the form of a wholly foreign-owned enterprise on January 1, 2009, subject to certain conditions being met. For instance, an application for an ENT is made in relation to each successive retail outlet intended to be established beyond the initial outlet.

ENT as an exception to GATS

ENT is widely used by World Trade Organization members, including Vietnam, as an effective and flexible tool in managing market access.

The General Agreement on Trade in Services (GATS) (Article XVI) requires a WTO member, in sectors where market access commitments are undertaken and unless otherwise specified in its Schedule [of Specific Commitments in Services], not to maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, inter alias, limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test.

Vietnam’s Schedule of Specific Commitments in Services requires an ENT procedure to be pre-established and publicly available, and approval to be based on objective criteria. Main criteria include the number of existing service suppliers in a particular geographic area, the stability of the market and geographic scale.

ENT under internal regulations

Following the entry into effect of its Schedule of Specific Commitments in Services in 2007, the government has promptly promulgated regulations guiding foreign investment in retail services, namely Decree No. 23/2007/ND-CP dated 12 February 2007 (Decree 23) and Circular No. 09/2007/TT-BTM dated 17 July 2007 (as amended on 14 April 2008) (Circular 09).

Under these regulations, the establishment of retail outlets in addition to the first outlet shall be considered on a case by case basis and shall depend on the number of retail outlets, market stability, population density in the province or city where the retail outlet(s) is/are to be established, and consistency of the investment project with the master development plan of such province of city.

The addition of the requirement of compliance with provincial master development plans when compared with the Schedule of Specific Commitments in Services is understandable, however can only be fairly applied when such plans are published and publically available, which at the current time they generally are not. Importantly, these regulations remain silent on the “objective criteria” (the number of retail outlets, market stability and population density), and as such leave the provincial People’s Committees and the Ministry of Industry and Trade (MoIT) a very large discretion in their examination process.

In addition, the definition of retailing as ‘the activity of selling goods directly to the final consumer’, as contained in Decree 23, is very broad, thereby also covering the sale of production equipment, machines, and/or production inputs to business end-users, even though such sales should not form part of any ENT, based upon geographic scale and population density, undertaken to determine retail-sector/market viability

Seeking to perfect the regulations

These are not new issues. There have been suggestions and recommendations to clarify the ENT criteria to better facilitate a transparent investment environment. The MoIT, for example, presided over the composition of a draft decree pertaining to the management of retail activities including ENT regulations and organised conferences to discuss the same toward the end of 2010.

This draft has not been pursued. Accordingly, after almost 6 years since Vietnam began opening its retail market to foreign investors, the vague and questionable provisions of Decree 23 and Circular 09 as cited above remain unimproved.

There remains a need to more precisely detail ENT criteria (geographic scale, number of retail outlets, market stability, population density and consistency of the investment project with the local master development plan). There is also a need to review the definition on retailing (to exclude sales to business entities). These are in order that an equitable and transparent licensing procedure is established, that a more favourable investment environment is created for foreign investors in particular, and in order to ensure fair competition between investors in general.

The powers of the local authorities and the MoIT in regard to ENT should also be comprehensively spelled out in order to more fully comply with the spirit of the GATS.

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