MOF doesn’t agree to offer tax incentives to auto industry

In its official reply to the Ministry of Industry and Trade’s (MOIT) drafted automobile industry development program by 2020, the Ministry of Finance (MOF) states that there will be no tax incentives to the strategic car line.

The “encouraged” or “important” industry?

MOF believes that it would be better to consider automobiles as an industry which needs the encouragement to develop, not an “important industry” as suggested by MOIT. Vietnam once protected the automobile industry for a long time, but the industry’s development remains far below the expectations. Automobile joint ventures have not made investment to increase the locally made content ratios in products, but they just simply make the assembling or import products for local consumption.

According to MOF, statistics show a gloomy picture of the automobile industry. There are 397 enterprises in the industry, including 51 assembling enterprises (13 state owned, 23 private and 15 foreign invested), 40 enterprises that make chassis, 210 car part makers and 97 car repair enterprises. The industry has the total designed capacity of 458,000 cars per annum. 46.9 percent of assembled vehicles are trucks, 43 percent are the cars with up to 9 seats, while the remaining are passenger cars and specific vehicles.

The average investment capital of a car assembling enterprise is 531.9 billion dong, of a car part manufacturing enterprise is 74.5 billion dong, or a chassis company is 51.2 billion dong. Most of the enterprises just import parts to assemble domestically, while they do not make car parts in Vietnam to increase the localization ratios of products.

Toyota Vietnam, established in 1995, the biggest auto joint venture in Vietnam, is considered the manufacturer which has the highest localization ratios of between 17 and 37 percent.

Vina Motor is considered one of the biggest names among 100 percent domestic owned automobile enterprises. However, it only can assemble buses and trucks with the output accounting for 10 percent of the market share. Truong Hai, a non-state owned enterprise, is now the only domestic enterprise which is capable to assemble different products from buses, trucks to cars with the output accounting for 20 percent of the market share.

Trying to develop the industry with reasonable taxation mechanism

MOF has pointed out that the overly high protection over the domestic auto industry has led to the fact that cars are much more expensive in Vietnam than other countries.

Therefore, the ministry thinks that the taxation mechanism needs to be designed in the way which can help the automobile industry obtain some most important goals: 1) the car prices have to go down to the reasonable levels 2) the locally made content ratios in products increase, and 3) the volume of cars put into circulation is at reasonable level.

In the draft strategy on the automobile industry development, MOIT suggests a lot of tax incentives, including the 50 percent luxury tax, ownership registration tax and VAT tax reduction. Especially, MOIT believes that it is necessary to offer the corporate income tax exemption for four years, the 50 percent tax reduction in the next 9 years, and import tax exemption on the equipments for fixed assets, and the zero import tariff on the car part imports which cannot be made domestically.

However, MOF believes that the suggested tax incentives relating to the strategic car line would not come in line with the rules of the WTO.

According to Deputy Minister of Finance, Do Hoang Anh Tuan, Vietnam once defined the import tariffs based on the CKD (complete knock down) and IKD (incomplete knock down) in the years before it joined WTO. However, the taxation mechanism has been removed since 2004 by the Prime Minister after it showed many problems. Therefore, it would need thorough consideration about whether to resume the taxation scheme as suggested in the draft strategy before making decision.