General

The effective investment Samsung has made in Vietnam

Trường Lăng

October 18, 2022

General

The effective investment Samsung has made in Vietnam

Trường Lăng

October 18, 2022

Samsung is currently the largest enterprise in Vietnam in terms of revenue, even bigger than PetroVietnam. In total, this group is employing more than 170,000 workers in Vietnam. The enterprise’s production makes Vietnam the second largest smartphone exporter in the world, after China.

However, there are mixed opinions on Samsung’s operation in Vietnam. Are the tax incentives given by the government justified when taking the benefits of Samsung into consideration? Is it really beneficial to have Samsung in Vietnam?

“Favorable tax incentive” to MNC – a case study of Samsung 

Tax contribution and tax incentives

Among its factories in Vietnam, the two units that contribute the most to Samsung’s revenue are Samsung Electronics Vietnam in Bac Ninh (SEV) and Samsung Electronics Vietnam Thai Nguyen (SEVT). The profitability of these two factories is high, ROE of SEV Bac Ninh is 16% while that of SEV Thai Nguyen is 20%; ROA is also at 14% and 17% respectively.

According to the Ministry of Finance, Samsung’s net contribution is higher than the industry average, and accounts for a big portion of the state budget. Even though the revenue is high, the tax expense is ranging around 5-7%, much lower than the average corporate income  tax rate of 20% in Vietnam.

Samsung has been granted many tax incentives, infrastructure leasing, and other benefits by the Government and localities to encourage continuous investment into the country. There was even a time when this Korean corporation asked for special tax incentives beyond the frame.

Some tax incentives that Samsung Vietnam enjoys:

  1. Samsung enjoys the highest tax incentives for investors in Vietnam with the corporate income tax rate of 10% for the entire project implementation process. On top of that, the enterprise has the first 4 years of tax exemption and the next 9 years with a 50%.
  2. For the 2 manufacturing projects in Bac Ninh and Thai Nguyen, the corporate income tax rate will be 10% for 30 years from the first year the company has revenue from the project. 

Exempt from income tax for 4 years from the first year of taxable income and reduce 50% of payable tax for the next 9 years. Samsung has proposed to extend the 50% tax reduction period to 12 years (it is currently unclear whether the extension is approved). 

Many people question the level of preferential policies that the government gives to Samsung. However, it is important to note that these policies serve to attract international investors to Vietnam, and are not only applicable to Samsung. All businesses that meet the government requirements will receive these benefits when investing in Vietnam, according to Government Decision 53/2004/QĐ-TTg.

Prior to 2021, the mechanism behind Vietnam investment incentive is based on 3 factors:

  • By industry ( high-tech industry and high-tech agriculture receive the biggest incentives)
  • By administrative area (projects in poor areas, as well as in economic zones/hi-tech parks  receive bigger incentives)
  • By size of registered capital (larger projects enjoy bigger incentives)

Therefore, it is fair to say that there is no discrimination between FDI (especially MNCs) and domestic enterprises. The most notable example is Vinfast, who enjoys significant tax incentives for its factory project. Currently, the Government has also introduced more transparent standards for FDI projects as well as standards for tax incentives to avoid cases where FDI projects exploit labor, land and capital without contributing anything to the domestic market.

When talking to Investment Newspaper, Prof. Nguyen Mai – former Vice Chairman of the State Committee for Cooperation and Investment – has repeatedly affirmed that it is not correct to just look at the tax amount paid by Samsung and say that it has contributed little to nothing to the business and socio-economic conditions of Vietnam. Because in reality, the spillover effects that Samsung has brought to Vietnam’s economy and society are very large. These effects are in the form of work opportunities, infrastructures, technology transfer, attraction of other FDIs into the country, among others.

Economic reform in local communities – a case study of Samsung in Thai Nguyen and Bac Ninh 

According to Prof. Nguyen Mai, since Samsung, the socio-economic conditions of Thai Nguyen and Bac Ninh have changed. Samsung accounts for 99% of Thai Nguyen’s export turnover and 75% of Bac Ninh’s export turnover. Not to mention other spillover effects on local people’s lives, on transportation services for Samsung, on economic restructuring, and on the cities’ attractiveness to foreign investors. 

Thai Nguyen

In the case of Samsung Electronics Thai Nguyen, in the period from 2013 to 2020, a total of 92 Korean enterprises who are Samsung’s vendors came to Thai Nguyen to shorten the supply chain, creating an unprecedented flow of FDI capital. 

Samsung and its auxiliary businesses in Thai Nguyen have generated outstanding growth in 2014 and 2015. In 2014, GRDP growth rate was at 29.6%, which increased to 33.2% in 2015. This contribution helps the province exceed the economic growth target in the 2011-2015 period, reaching 15.9% on average in 5 years. Particularly, Samsung’s budget payment in Thai Nguyen province from 2013 to the end of May 2020 reached 24 trillion VND, accounting for 32% of the province’s total budget revenue.

Samsung has actively contributed to creating jobs for many local workers and neighboring provinces. In 2020, over 65,491 people are working in the production center in Thai Nguyen, of which more than 1/3 are Thai Nguyen workers, with an average income of 8.5 million VND/person/month.

Bac Ninh

Of the total $19 billion invested by Samsung in Vietnam so far, the investment capital in Bac Ninh accounts for nearly half, reaching more than $9.3 billion.

Most recently, Samsung participated in the signing of a 3-party cooperation agreement between the Ministry of Industry and Trade, Bac Ninh province and Samsung to provide consulting support for local businesses, helping to improve competitiveness. Potential businesses have the opportunity to not only participate in the supply for Samsung, but also for many other multinational companies.

Samsung also contributed greatly to the spectacular change in Bac Ninh. In 2005, Bac Ninh’s GRDP was 1,504 billion VND, but by 2021, the scale of GRDP has increased to more than 227,000 billion VND, ranking 8th among 63 provinces in the country. Even though the area of ​​Bac Ninh is the smallest, with a population of about 1.4 million people. The average income of Bac Ninh people has exceeded 6,700 USD, ranking fourth in the country. 

In terms of industrial scale, GRDP, per capita income, Bac Ninh is considered one of the fastest growing provinces of Vietnam. Despite the COVID-19 epidemic, the industrial production value in 2021 reached nearly 1.5 million billion VND, surpassing Ho Chi Minh City, Binh Duong, and Dong Nai as the highest in Vietnam.

What next to attract more MNCs investors ?

While foreign investors acknowledge the high level of investment potential in Vietnam, they also recognize the drawbacks, and have voiced their concern. Mr. Kim Yong Seok, Director of External Relations at Samsung shared that Vietnam is currently too reliant on tax incentives to attract foreign investors. With the announcement of the global minimum tax rate (proposed at 15%) by OECD, tax incentives offered by Vietnam will no longer work.

Another area of concern for investors is the inadequate infrastructure connecting important economic regions in the country. As a result, enterprises’ logistics works are still slow and costly. 

As it stands, MNCs can’t rely on domestic suppliers for important parts/components in their production chain. In the case of Samsung, there are 50 domestic suppliers in their production chain. However, most of them are foreign suppliers establishing a domestic entity, and not purely domestic. This is because domestic suppliers’ capabilities are yet to meet the high standard set by MNCs. To bridge this gap, the government should find solutions to increase domestic suppliers’ capabilities. One way to do this is through policies/incentives that encourage the technology transfer between foreign MNCs and domestic enterprises. 

When domestic enterprises become competitive in the supply chain of current MNCs, it would attract other MNCs to enter the market. The reason for this is that new entrants to the Vietnamese market will benefit from the already established network of high quality domestic suppliers. New MNCs won’t have to waste time finding, or developing their supply chain from the ground up.

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