Transparency of the Regulatory System
The 2016 PCI report found that regulatory risks were the primary concern for foreign companies investing in Vietnam. The two biggest issues cited were the amount of time complying with business regulations (taxes, social insurance, and customs procedures) and the high number of regulatory inspections in 2016. The American Chamber of Commerce (AmCham), in a report on the business environment released in March 2017, noted that AmCham members face significant challenges with inconsistent regulatory interpretation, irregular enforcement, and unclear laws. The report also noted that a survey of AmCham members in the Association of Southeast Asian Nations (ASEAN) region found that more than in any other ASEAN country, American companies perceive a lack of fair enforcement of laws in Vietnam, which heavily impacts their ability to do business in the country.
The PCI report also found that a significant issue facing companies is post-entry regulations (regulations businesses face after they start operations). Time spent complying with business regulations (taxes, social insurance, and customs procedures) and regulatory inspections were found to be the two biggest burdens. All regulatory processes are done by the government and there are no informal regulatory processes managed by NGOs or private sector associates.
Laws are approved by the national assembly, and ministries draft circulars in order to implement laws. Regulatory authority exists in both the central and provincial government, and foreign companies are bound by both central and provincial government authority. Vietnam has its own accounting standards to which publicly listed companies are required to adhere to.
The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements to be published online for comments for 60 days, and published in the Official Gazette before implementation. Business associations and various chambers of commerce regularly comment on draft laws and regulations. However, when issuing more detailed implementing guidelines, government entities sometimes issue circulars without public notification or with little advance warning or opportunity for comment by affected parties. In several cases, authorities just receive comments for the first draft and make subsequent draft versions unavailable to the public. The centralized online location where key regulatory actions are published can be found here online .
The Ministry of Justice (MOJ) is in charge of ensuring that government ministries and agencies follow administrative processes. The Ministry has a Regulatory Management Department, which oversees and reviews legal documents after they are issued to ensure they comply with the whole legal system.
Over the course of 2016 and early 2017, the government issued three primary resolutions to improve the business environment, increase national competitiveness and productivity, and reform the economic growth model.
- Resolution 27, issued in February 2017, set out main economic targets for the five year period of 2016-2020. The main targets included inflation of less than 5 percent per year; budget deficit reduction to less than 3.5 percent of the GDP in 2020; public debt will not exceed 65 percent of GDP; government debts will account for less than 54 percent of GDP; and foreign debts will account for less than 50 percent of GDP by 2020. Also, the resolution set the target that by 2020 at least one million new businesses will be created, and stock market capitalization will reach 70 percent of GDP.
- Resolution 19, also issued in February 2017, set out the very ambitious goal that Vietnam will rank among the top four ASEAN countries in the World Bank’s Doing Business index in 2017 by improving the country’s ranking in various metrics, including reducing the time required to pay taxes and social insurance payments, deal with construction permits, get water and electricity, customs clearance, contract enforcement, and resolving insolvency.
- Resolution 35, which pertains to supporting and developing enterprises until 2020, set out a goal that by 2020 at least one million new enterprises will be established, labor productivity to increase by 5 percent per year, and the private sector will contribute to 49 percent of the national GDP.
Regulatory reform efforts announced in prior years have either been fully implemented or are in process.
Ministries draft laws and circulate for review among related ministries. Once the law is cleared through the various ministries, the government will post the law for a 60 day comment period. During the comment period or ministry review, if there are major issues with the law, the law will go back to the ministry that drafted the law for further revisions. Once the law is ready, it is submitted to the Office of Government for approval, and then submitted to the National Assembly for a series of committee and plenary-level reviews. The National Assembly during its review can send the law back to the drafting ministry for further changes. Laws are also submitted to the Communist Party’s Politburo for review via a separate process.
In Vietnam, enforcement across the board is weak. While the legal framework might comply in international norms in some areas, the biggest issue continues to be enforcement. For example, while anti-money laundering statues comply with international standards, there has yet to be a prosecution. So while all state agencies participate in reviewing the regulatory enforcement as per their mandate, regulatory review and enforcement mechanisms continue to be weak.
Drafting agencies often lack the resources to conduct adequate scientific or data driven assessments. In principle, before being issued, regulations go through an impact assessment. The quality of these assessments varies, however.
International Regulatory Considerations
Vietnam is a member of ASEAN, a 10-member regional organization working together to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN is the ASEAN Economic Community (AEC ). While the AEC’s goal is to establish a single market across ASEAN nations (similar to the EU), it has a long way to go to achieve this goal. To date, the greatest success of the AEC has been tariff reductions. As a result, more than 70 percent of intra-ASEAN trade is tariff-free, and less than 5 percent is subject to tariff above 10 percent. According to ASEAN, by 2025 the AEC will achieve five goals: 1) an integrated and cohesive economy; 2) a competitive, innovative, and dynamic ASEAN; 3) enhanced connectivity and sectoral cooperation; 4) a resilient, inclusive, people-oriented, and people-centered ASEAN; and 5) a global ASEAN.
Vietnam has been a member of WTO since January 2007. The government has to notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
Legal System and Judicial Independence
The legal system is a mix of customary, French, and Soviet civil legal traditions. Vietnam generally follows an operational understanding of the rule of law that is consistent with its top-down, one-party political structure and traditionally inquisitorial judicial system. Contracts are regulated by various laws and regulations, with each type of contract subject to specific regulations.
If a contract does not contain a dispute resolution clause, courts will have jurisdiction over a possible dispute. Vietnamese law allows dispute resolution clauses in commercial contracts explicitly through the Law on Commercial Arbitration. The law follows the United Nations Commission on International Trade Law (UNCITRAL) model law as an international standard for procedural rules, and the lawmakers’ intention is indeed arbitration-friendly.
Under the 2005 Civil Code, all contracts are “civil contracts” subject to uniform rules. In foreign civil contracts, parties may choose foreign laws as a reference for their agreement, provided that the application of the law does not violate the basic principles of Vietnamese law. When the parties to a contract are unable to agree on an arbitration award, the dispute can be brought to a court.
Commercial contracts between businesses are regulated by the 2005 Commercial Law. Specific regulations provide specific forms of contracts depending on the nature of the deals. The hierarchy of the country’s courts is: (1) the Supreme People’s Court; (2) the High People’s Court; (3) Provincial People’s Courts; and (4) District People’s Courts. The People’s Courts operate in five divisions: criminal, civil, administrative, economic, and labor. The People’s Procuracy is responsible for prosecuting criminal activities as well as supervising judicial activities.
Vietnamese courts will only consider recognition of civil judgments issued by courts in countries that have entered into agreements on recognition of judgments with Vietnam or on a reciprocal basis. However, with the exception of France, these treaties only cover non-commercial judgments.
Vietnam lacks an independent judiciary, and there is a lack of separation of powers among Vietnam’s branches of government. For example, Vietnam’s Chief Justice is also a member of the Communist Party’s Central Committee. According to Transparency International, the risk of corruption in judicial rulings is significant, as nearly one-fifth of surveyed Vietnamese households that have been to court declared that they had paid bribes at least once. Many businesses therefore avoid Vietnamese courts.
Along with corruption, the judicial system continues to face additional problems. For example, many judges and arbitrators lack adequate legal training and are appointed through personal or political contacts with party leaders or based on their political views. In addition, extremely low judicial salaries engender corruption. Finally, judges are appointed for just five years, and must be reappointed by the Communist Party, further binding the judiciary to the Party.
Regulations or enforcement actions are appealable, and they are adjudicated in the national court system. Through a separate legal mechanism, individuals and companies can file complaints against enforcement actions under the Law on Complaints.
Laws and Regulations on Foreign Direct Investment
In November 2016, the National Assembly passed Law 03 amending the Investment Law, which revised the list of 267 conditional business lines down to 243. The 2014 Investment Law aimed to improve the investment environment. Previously, Vietnam used a “positive list” approach, meaning that foreign businesses were only allowed to operate in a list of specific sectors outlined by law. Starting in July 2015, Vietnam implemented a “negative list” approach, meaning that foreign businesses are allowed to operate in all areas except for six prohibited sectors.
Under the 2014 Investment Law, businesses must apply for an investment license when establishing a new company, and update their business license when they: 1) make significant changes to an ongoing enterprise, such as increasing investment capital; 2) restructure the form of investment or investment ratios between foreign and domestic partners, 3) change the foreign management structure, or 4) add new business activities. The law also requires foreign and domestic investors to be treated the same in cases of nationalization and confiscation. However, foreign investors are subject to different business licensing processes and restrictions, and Vietnamese companies that have a majority foreign investment are subject to foreign investor business license procedures.
There is no “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors. Investment procedures for seven provinces can be found here .
Competition and Anti-Trust Laws
The Vietnam Competition Administration (VCA) of the Ministry of Industry and Trade (MOIT) reviews transactions for competition-related concerns. In 2015 (the latest available year for which data is available), the VCA conducted pre-litigation investigations in 46 unfair competition cases, and 28 cases were initiated. Of the 28 initiated cases, the Director General of the VCA issued settlement decisions in 21 cases, and 7 cases are on-going. In addition, two cases that were initiated in 2014 were brought to settlement.
The unfair competition cases investigated in 2015 were mainly regarding providing false or misleading advertisements, as well as direct comparison advertisements and illegal multilevel sales.
According to PCI report, more than 38 percent of businesses surveyed stated that “the favoritism of provincial authorities towards state owned enterprises caused difficulties to their firm’s business operation”. Moreover, more than 42 percent of businesses agreed with the statement “the provincial authorities seem to prioritize FDI attraction to domestic private sector development”.
Expropriation and Compensation
Under Vietnamese law, the government can only expropriate investors’ property in cases of: emergency, disaster, defense, or national interest. Under the law, if a property is expropriated, the government is required to compensate investors. Under the U.S.-Vietnam Bilateral Trade Agreement, Vietnam must apply international standards of treatment in any case of expropriation or nationalization of U.S. investor assets, which includes acting in a non-discriminatory manner with due process of law and with prompt, adequate and effective compensation. Currently the U.S. Embassy is monitoring two U.S. investment expropriation cases without just compensation. Expropriation of U.S. entities’ property is rare, and there has not been a new expropriation case in several years.
ICSID Convention and New York Convention
Vietnam is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards rendered by a recognized international arbitration institution should be respected by Vietnamese courts without a review of cases’ merits. Only a limited number of foreign awards have been submitted to the MOJ and local courts for enforcement so far, and almost none have successfully made it through the appeals process to full enforcement.
As a signatory to the New York Convention, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with very few exceptions. However, in practice, this is not always the case.
Investor-State Dispute Settlement
Vietnam has not yet acceded to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID). The Ministry of Planning and Investment (MPI) has submitted a proposal to the government to join the ICSID, but this is still under consideration.
The government is not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized, and has yet to sign a Bilateral Investment Treaty or Free Trade Agreement with the United States.
Although the law states that the court should recognize and enforce foreign arbitral awards, Vietnamese courts may reject these judgements on the grounds that the award is contrary to the basic principles of Vietnamese laws. In 2014, the Ho Chi Minh City Economic Court recognized and enforced an arbitral award in Vietnam against an SOE, and the ruling was upheld on appeal.
In 2012, dozens of Vietnamese companies signed purchase contracts with U.S. cotton suppliers but failed to execute the contracts when world cotton prices fell. In compliance with standard contract provisions, international cotton traders referred the defaults to the International Cotton Association (ICA) for arbitration. The ICA rendered arbitration awards for the defaults valued at USD $76 million, but Vietnamese courts have not recognized the validity of these awards. Vietnam does not have a history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
Vietnam’s legal system remains underdeveloped and is often ineffective in settling commercial disputes. Negotiation between concerned parties is the most common means of dispute resolution. The Law on Arbitration does not allow a foreign investor to refer an investment dispute to a court in a foreign jurisdiction, Vietnamese judges cannot apply foreign laws to a case before them, and foreign lawyers cannot represent plaintiffs in a court of law.
In February 2017, the government issued Decree No. 22/2017/ND-CP (Decree 22) on commercial mediation, which comes into effect on April 15, 2017. Decree 22 spells out in detail the principle procedures for commercial mediation. More information on Decree 22 can be found here .
The Law on Commercial Arbitration took effect in 2011. At present, there are no foreign arbitration centers in Vietnam, though the Arbitration Law permits foreign arbitration centers to establish branches or representative offices. Foreign and domestic arbitral awards are legally enforceable in Vietnam, although in practice, it can be very difficult.
As a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Vietnam is required to recognize and enforce foreign arbitral awards within its jurisdiction, with very few exceptions. However, in 2012, dozens of Vietnamese companies signed purchase contracts with U.S. cotton suppliers but failed to execute the contracts when world cotton prices fell. In compliance with standard contract provisions, international cotton traders referred the defaults to the International Cotton Association (ICA) for arbitration. The ICA rendered arbitration awards for the defaults valued at USD $76 million, but Vietnamese courts have not recognized the validity of these awards.
There are no readily available statistics on how often domestic courts rule in favor of SOEs. In general, the court system in Vietnam works slowly. International arbitration awards, when enforced, may take years from original judgment to payment. According to the PCI report, 19 percent of businesses chose to avoid the Vietnamese court system during disputes in 2016 due to concerns related to potential bribery during the process.
In 2014, Vietnam revised its Bankruptcy Law to make it easier for companies to declare bankruptcy. The new law clarifies the definition of insolvency as an enterprise that is more than three months overdue in meeting its payment obligations. The new law also provides provisions for when creditors can commence bankruptcy proceedings against an enterprise, and created for the first time, procedures for credit institutions to file for bankruptcy. According to the World Bank’s 2017 Ease of Doing Business Report, it takes on average five years to conclude a bankruptcy case in Vietnam, and the recovery rate is just 22 percent.