Transparency of the Regulatory System
U.S. companies often report that they face significant challenges with inconsistent regulatory interpretation, irregular enforcement, and unclear laws. A 2017 survey of AmCham members in the ASEAN region found that, more than in any other ASEAN country, American companies perceive a lack of fair law enforcement in Vietnam, which heavily affects their ability to do business in the country. The 2018 PCI report found that access to land, taxes, and social insurance were the most burdensome administrative procedures. However, the report also found improvements in the area of post-entry regulations (regulations businesses face after they start operations), and the burden of administrative procedures was declining. In addition, according to that report, corruption has become less prevalent in certain areas for foreign-invested enterprises (FIEs).
In Vietnam, the National Assembly passes laws, which serve as the highest form of legal direction, but which often lack specifics. The central government, with the Prime Minister’s approval, issues decrees, which provide guidance on a law’s implementation. Individual ministries issue circulars, which provide guidance as to how that ministry will administer a law or a decree. 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 (OOG) for approval, and then submitted to the National Assembly for a series of committee and plenary-level reviews. During this review, the National Assembly can send the law back to the drafting ministry for further changes. For some special or controversial laws, the Communist Party’s Politburo will review via a separate process.
Drafting agencies often lack the resources needed to conduct adequate scientific or data-driven assessments. In principle, before issuing regulations, agencies are required to conduct policy impact assessments that consider economic, social, gender, administrative, and legal factors. The quality of these assessments varies, however.
Regulatory authority exists in both the central and provincial governments, and foreign companies are bound by both central and provincial government regulations. Vietnam has its own accounting standards to which publicly listed companies are required to adhere.
The MOF updates the Vietnam Accounting Standards to match IFRS from time to time. In 2013, it set out a road map for public companies to apply 10 to 20 simple IFRS standards by 2020, 30 standards by 2023, and fully comply with IFRS by 2025. However, some companies already prepare financial statements in line with International Financial Reporting Standards (IFRS) in the interest of reporting to foreign investors.
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 compliance with the legal system. The Law on the Promulgation of Legal Normative Documents requires all legal documents and agreements 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 with little advance warning and without public notification, resulting in little opportunity for comment by affected parties. In several cases, authorities receive comments for the first draft only and make subsequent draft versions unavailable to the public. The centralized location where key regulatory actions are published can be found at http://vbpl.vn/.
While Vietnam’s legal framework might comply with international norms in some areas, the biggest issue continues to be enforcement. For example, while anti-money laundering (AML) statutes comply with international standards, Vietnam has prosecuted very few AML cases so far. Therefore, while all state agencies participate in reviewing the regulatory enforcement under their legal mandates, regulatory review and enforcement mechanisms remain weak.
While general information is publically available, Vietnam’s public finances and debt obligations (including explicit and contingent liabilities) are not transparent. The National Assembly set a statutory limit for public debt at 65 percent of nominal GDP, and, according to official figures, Vietnam’s public debt to GDP ratio in late 2018 reached 61 percent, down 0.3 percent from 2017. However, the official public-debt figures exclude the debt of certain SOEs. This poses a risk to its public finances, as the state is ultimately liable for the debts of these companies. Vietnam could improve its fiscal transparency by making its executive budget proposal widely and easily accessible to the general public long before the National Assembly enacted the budget; including budgetary and debt expenses in the budget; ensuring greater transparency of off-budget accounts; and publicizing the criteria by which the government awards contracts and licenses for natural resource extraction.
International Regulatory Considerations
Vietnam is a member of ASEAN, a 10-member regional organization working to advance economic integration through cooperation in economic, social, cultural, technical, scientific and administrative fields. Within ASEAN, the ASEAN Economic Community (AEC) has the goal of establishing a single market across ASEAN nations (similar to the EU), but that goal appears to be long term in nature. To date, the greatest success of the AEC has been tariff reductions. As a result, more than 97 percent of intra-ASEAN trade is tariff-free, and less than 5 percent is subject to tariffs above 10 percent.
Vietnam is a party to the WTO’s Trade Facilitation Agreement (TFA) and has been implementing the TFA’s Category A provisions. Vietnam submitted its Category B and Category C implementation timelines on August 2, 2018. According to these timelines, Vietnam will fully implement the Category B and C provisions by the end of 2023 and 2024, respectively.
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. Various laws and regulations regulate contracts, 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 revised 2015 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, if 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, they can bring the dispute to court.
The 2005 Commercial Law regulates commercial contracts between businesses. 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.
Regulations or enforcement actions are appealable, and appeals 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
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 or business lines. In November 2016, the National Assembly amended the Investment Law to reduce the list of 267 provisional business lines to 243; subsequent amendments will likely further narrow this list, allowing firms to engage in more business areas.
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. Since June 2017, foreign investors can choose to apply for ERC and Investment Registration Certificate (IRC) separately or through a “one-stop-shop” process, which saves time and cost. However, large-scale projects still require a high-level approval before receiving an IRC. This is often a lengthy process. Investment procedures for the seven major provinces of Binh Dinh, Danang, Hai Phuong, Hanoi, Ho Chi Minh City (HCMC), Phu Yen, and Vinh Phuc can be found at https://vietnam.eregulations.org/.
Competition and Anti-Trust Laws
In 2018, Vietnam passed a new Law on Competition, which will come into effect on July 1, 2019. While the 2014 Law on Competition only applied to activities, transactions, and agreements originating inside Vietnam, the new law applies to those originating inside and outside Vietnam that negatively affect competitiveness in Vietnam. The revised law included punishments to minimize impediments to competition created by government agencies and introduced leniency towards firms and individuals, as an incentive to align with international practices and improve the effectiveness of the law.
Unlike the 2014 Law on Competition, which specified that a firm was exercising market power if it had 30 percent or more of market share, the revised law contains more criteria to determine market power, including firm size, financial ability, advantages on technology and infrastructure, etc. The new law does not forbid market concentration for firms with combined market share over 50 percent unless the market concentration significantly constrains competition.
The law charges the National Competition Commission under the Ministry of Industry and Trade (MOIT) with competition management. The Commission will support the Trade Minister on competition management, conduct investigations, and review requests for exemptions.
Expropriation and Compensation
Under Vietnamese law, the government can only expropriate investors’ property in cases of emergency, disaster, defense, or national interest, and the government is required to compensate investors if it expropriates property. 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.
ICSID Convention and New York Convention
Vietnam has not yet acceded to the International Center for Settlement of Investment Disputes (ICSID) Convention. MPI has submitted a proposal to the government to join the ICSID, but this is still under consideration.
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
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 BIT or FTA with the United States. Although the law states that the court should recognize and enforce foreign arbitral awards, Vietnamese courts may reject these judgements if the award is contrary to the basic principles of Vietnamese laws.
According to UNCTAD, over the last 10 years there were two dispute cases against the Vietnamese government involving U.S. companies. The courts decided in favor of the government in one case, and the parties decided to discontinue the other case. The Vietnam government was a respondent state in seven disputes. More details are available at https://investmentpolicyhub.unctad.org/ISDS/CountryCases/229?partyRole=2
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. Since 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 came into effect in April 2017. Decree 22 spells out in detail the principle procedures for commercial mediation. More information on Decree 22 can be found at http://eng.viac.vn/decree-no-.-22/2017/nd-cp-on-commercial-mediation-a487.html.
The Law on Commercial Arbitration took effect in 2011. Currently there are no foreign arbitration centers in Vietnam, although the Arbitration Law permits foreign arbitration centers to establish branches or representative offices. Foreign and domestic arbitral awards are legally enforceable in Vietnam; however, 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.
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 2018 PCI report, 20 percent of surveyed foreign companies had a contract dispute. Only 39 percent of private domestic companies and two percent of foreign firms were willing to use the courts to resolve ongoing disputes in 2018, due to concerns related to time, costs, and potential bribery during the process. Companies turned to other methods such as arbitration or using influential individuals trusted by both parties.
In 2014, Vietnam revised its Bankruptcy Law to make it easier for companies to declare bankruptcy. The law clarified the definition of insolvency as an enterprise that is more than three months overdue in meeting its payment obligations. The law also provided provisions allowing creditors to commence bankruptcy proceedings against an enterprise, and created procedures for credit institutions to file for bankruptcy. Despite these changes, according to the World Bank’s 2019 Ease of Doing Business Report, Vietnam ranked 133 out of 190 for resolving insolvency. The report noted that it still takes on average five years to conclude a bankruptcy case in Vietnam, and the recovery rate on average is only 21 percent. The courts have not improved bankruptcy case processing speed.
The Credit Information Center of the State Bank of Vietnam provides credit information services.