VZCZCXRO4048
PP RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHHI #0738/01 1721019
ZNR UUUUU ZZH
P 201019Z JUN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8055
INFO RUEHHM/AMCONSUL HO CHI MINH 4880
RUEHGP/AMEMBASSY SINGAPORE 2620
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000738 
 
SENSITIVE 
SIPDIS 
 
SINGAPORE FOR TREASURY 
TREASURY FOR SCHUN 
USTR FOR DBISBEE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EIND EINV VM
SUBJECT: FOCUS ON U.S. BUSINESS IN VIETNAM: DISTRIBUTION RIGHTS; 
LUXURY TAXES ON AUTOMOBILES 
 
REF: A) Hanoi 358 
      B) Hanoi 451 
      C) AmCham Vietnam June 19 Letter to Secretary Gutierrez 
      D) Hanoi 475 
      E) Hanoi 297 
 
HANOI 00000738  001.2 OF 002 
 
 
¶1. (U) This cable is sensitive but unclassified.  For official use 
only, not for dissemination outside USG channels or posting on the 
internet. 
 
¶2. (U) This cable is the first in a series focusing on issues on the 
U.S. private sector and business agenda in Vietnam. 
 
¶3. (SBU) Summary: The issue of distribution rights has been one of 
the most contested areas between the Government of Vietnam (GVN) and 
the private sector here.  After the GVN addressed this issue earlier 
this year, the American Chamber of Commerce (AmCham) in Vietnam has 
now zeroed in on a subjective "economic needs test" ("ENT") that 
weighs over prospective retailers.  Despite the potentially broad 
scope of this test, the GVN has applied it narrowly thus far. 
Another issue is taxes on automobiles.  Ford and GM have criticized 
the GVN for the instability caused by flip-flops on tariffs and 
proposed hikes in luxury taxes.  Embassy Hanoi is working with the 
private sector and the GVN to promoted transparency.  End summary. 
 
DISTRIBUTION: PREMATURE FEARS OF BEING PUT TO THE "TEST" 
--------------------------------------------- ---------- 
 
¶4. (U) The issue of distribution rights has dominated the U.S. 
business agenda for most of the last year (Ref A).  After MOIT 
lifted the restriction on the choice of distributors in April 2008 
(Ref B), some in the business community have turned their sights on 
a distribution sector clause commonly known as the "economic needs 
test" ("ENT").  AmCham is concerned that the GVN could misuse ENT to 
restrict market access.  Thus, ENT concerns were at the top of 
AmCham's agenda at the May Vietnam Business Forum and featured in a 
June 19 letter to the Secretary of Commerce (Ref C). 
 
WHO IS COVERED BY THE ECONOMIC NEEDS TEST? 
----------------------------------------- 
 
¶5. (SBU) According to existing Vietnamese regulations, prospective 
foreign businesses must get specific approval based on the size, 
location and "impact" (or need) of second and subsequent "retail 
outlets." ENT does not apply to a first establishment.  Ambiguities 
in the law as to what this test on impact or needs entails and who 
it applies to are at the center of U.S. business concerns.  AmCham 
has asked the GVN to narrow the scope of ENT by excluding industrial 
sales and other instances that could be considered retail (Ref C). 
The GVN, so far, appears currently to be applying an even narrower 
interpretation of the ENT.  The Ministry of Industry and Trade 
(MOIT), which drew up the regulations, has told post (most recently 
on June 10) that the ENT only applies to shopping malls and large 
retail stores (like supermarkets and department stores). 
 
WHAT THE TEST ENTAILS 
--------------------- 
 
¶6. (SBU) The issue of what ENT entails poses another problem.  The 
MOIT has told post and USTR that it approaches ENT from a zoning 
point of view, to deal with such issues as requirements for 
sufficient parking space, bathroom facilities and the like.  TMOIT 
showed us a second store application from Malaysian retailer 
Parkson, however, which required it to show the "social and economic 
impact" that its new outlet would have.  Existing regulations also 
state that applications will be considered on a "case by case basis" 
and require applicants to demonstrate how the second outlet fits in 
with a region's "master plan," even though there are provinces and 
cities that do not have one.  The country representative from an 
American investment consultant brushed aside fears from this 
subjective test.  "Investment applications have the same 
requirement, and it's never been a problem," he told us.  "Sure, 
it's subjective and sometimes provincial authorities don't 
understand it, but in the end they always do the right thing and 
issue the permit." 
 
¶7. (U) Post is working with AmCham on how best to address its 
members' concerns, and has raised them numerous times with the GVN. 
For example, at the December 2007 TIFA, Econoff and USTR 
counterparts urged the GVN to switch to a zone-based system and 
discard the ENT.  We continue to press this point or to at least get 
 
HANOI 00000738  002.2 OF 002 
 
 
the GVN to commit to the narrowest application of the test. 
 
NO NEW REGULATORY SCHEME 
-------------------------- 
 
¶8. (U) Another question posed by U.S. businesses interested in 
entering the distribution sector is what type of regulatory scheme 
does the GVN intend to introduce in 2009, when the sector opens up 
for fully foreign-owned businesses.  (Vietnam opened the sector to 
majority foreign businesses-owned joint ventures in January 2008). 
The answer is none.  MOIT's Office of Planning and Investment, which 
prepares enacting regulations, told us that the regulatory scheme in 
place sufficed for the time being and that they did not envision new 
regulations to open up the market in 2009. 
 
THE AUTO INDUSTRY SEEKS REGULATORY STABILITY 
-------------------------------------------- 
 
¶9. (U) In August 2007, the GVN lowered tariffs on auto imports twice 
in the space of three months, bringing them down from 80 to 60 
percent (Refs D and E).  Subsequently, car imports shot up by 70 
percent from October 2007 to March 2008.  Foreign automakers in 
Vietnam started importing completely-built units (CBUs) to cash in 
on the rush and make up for lost price competitiveness on their 
locally-made models.  Then, in March 2008, the GVN did an about 
face, and brought tariffs up again to 70 percent and then to 83 
percent in April. 
 
¶10. (SBU) Moreover, in May 2008 the GVN announced that it would also 
hike up luxury taxes on locally-made cars and on parts which the 
foreign automakers import to assemble cars here.  Taxes on popular 
models, like General Motors' Captiva and Ford's Everest (both SUVs), 
would double to 60 percent.  The GVN plans to introduce legislation 
to raise luxury taxes (known in Vietnam as the Special Consumption 
Tax) in the next legislative session in October 2008. 
 
¶11. (SBU) The general managers of GM and Ford, both based in Hanoi, 
told post that they support Vietnam's Auto Manufacturer's 
Association stance against changes in the luxury tax regime, but 
that what is most important to them is to have stability in tariff 
and tax policy.  Ford and GM are concerned that the see-saws on 
tariffs and taxes are hindering their ability to adopt and follow a 
mid-term business plan in Vietnam.  They say that their businesses 
could digest the proposed luxury tax regime, as long as the GVN 
holds firm to its promise to introduce them in 2010. 
 
¶12.  (U) In addition to liaising with GM and Ford, post has been in 
close contact with the Ministry of Finance, which is drafting the 
luxury tax legislation, and other relevant ministries on this issue. 
 For example, when earlier in May 2008 the automakers became 
concerned that the GVN would introduce luxury taxes in the June 
legislative session, the Ministry of Finance told the Ambassador 
that the plan would not be rushed.  The U.S. automakers are also 
engaged with the GVN and are optimistic that their concerns will 
eventually be factored in into whatever scheme the GVN eventually 
decides to enact. 
 
¶13. (SBU) Comment:  Vague regulations have not helped the 
understanding of distribution rights in Vietnam (Refs A and B).  The 
ENT is an issue that, at least in practice, so far appears to weigh 
exclusively over department stores and supermarkets, which are 
dominated by non-American investors.  The Europeans do have 
department stores and supermarkets, including multiple outlets -- 
but our EU colleagues tell us that they have not faced problems with 
ENT and that it is not at the top of their agenda.  While concerned 
about tariff and tax instability, the auto industry remains 
optimistic.  Car sales remain strong, rising 106 percent in May from 
the same period in 2007.  In the meantime, we will continue to press 
the GVN on regulatory stability and transparency and encourage it to 
abandon the economic needs test.  End Comment. 
 
MICHALAK 
 
 
 
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