Industry has always been a top priority for every nation. Nonetheless, in order to foster industrial development, a robust supporting industry is an indispensable factor. Catering to all manufacturing sectors, it assumes a vital and necessary economic function. In cognizance of the pivotal role played by the supporting industry in industrial development, the Government of Vietnam has instituted precise incentives to expedite its growth. How are the current incentive policies for the supporting industry sector being regulated?
Overview of the supporting industry:
What is the supporting industry? Article 3 of Decree 111/2015/ND-CP on the development of supporting industry states that: Supporting industry means the industry that involves manufacturing materials, accessories, components, and spare parts used for assembling finished goods.
In accordance with the above mentioned, a supporting industry is construed as comprising Vietnam-based industries engaged in the production of input materials and industrial supporting products, which serve to support the manufacturing of primary products. Specifically, these encompass components, supplies, spare parts, packaging materials, paint materials, dye materials may also entail intermediate products and semi-processed materials. Alternatively, it can be understood in a narrower sense as the production of components and parts intended to facilitate the assembly of finished products. All sectors contribute to the creation of product components, as well as the production of machinery, equipment, or other tangible elements that contribute to the formation of the product. Each product category possesses distinct characteristics and imposes varying requirements on supporting factors, thereby rendering the supporting industry highly diverse. Industrial supporting products are typically produced on a small scale, undertaken by small and medium-sized enterprises.
The supporting industry is categorized in two dimensions: the first is based on the manufacturing sector and the second is from a business perspective. In terms of the manufacturing sector, it is divided into two main classifications: “hard” industries and “soft” industries. The “hard” industries encompass the production of raw materials and components, while the “soft” industries involve activities such as product design, procurement, international marketing, telecommunications, transportation, energy, and water supply. Additionally, there are industries that cater to domestic demand, such as steel, chemicals, paper, and cement.
From a business perspective, the categorization includes the following: foreign suppliers of components, equipment, and machinery; foreign suppliers of components, equipment, and machinery operating in the domestic market; and domestic suppliers of components, equipment, and machinery.
Incentive policies for the supporting industry are regulated as follows:
Incentive policies pertaining to projects for manufacturing supporting products, as stated on the prioritized list, are outlined in Article 12 of Decree 111/2015/ND-CP. These provisions encompass two main components: general incentives and incentives for small and medium-sized enterprises.
General incentives: This section entails tax, credit, and environmental protection incentives.
- Corporate income tax: The preferential tax treatment is applied in accordance with the provisions of Law No. 71/2014/QH13 dated November 26, 2014, amending, and supplementing a number of articles on the law on taxation. Concerning preferential corporate income tax, Decree 57/2021/ND-CP in 2021 also supplements the regulations on preferential corporate income tax.
- Enterprises with investment projects that manufacture products belonging to the list of prioritized industry products, that have not previously enjoyed preferential corporate income tax on project income, shall be eligible for preferential corporate income tax based on the conditions of the projects for manufacturing supporting products from the tax period in which the local competent authority issues the certification of incentives for these projects.
- Enterprises with investment projects that manufacture products belonging to the list of prioritized industry products, that have already benefited from all available preferential corporate income tax based on conditions other than those for the projects for manufacturing supporting products, shall be eligible for preferential corporate income tax based on the conditions of projects for manufacturing supporting products for the remaining period of the tax period in which the local competent authority issues the certification of incentives for these projects.
- Enterprises with investment projects that manufacture products belonging to the list of prioritized industry products, that are currently enjoying preferential corporate income tax based on conditions other than those for the projects for manufacturing supporting products, shall be eligible for preferential corporate income tax based on the conditions of the projects for manufacturing supporting products for the remaining period of the tax period in which the local competent authority issues the certification of incentives for these projects.
- The remaining incentive period is determined by subtracting the years of tax exemption, reduction, or enjoyment of preferential tax rates according to other applicable incentives from the remaining period of preferential corporate income tax.
- Import tax: commodities that are imported to create fixed assets shall be exempted from import duties as stipulated in the Law on Import – Export Duties and its instructional documents.
- Value- added tax: Value-Added Tax of revenue from supporting products on the list of prioritized supporting products may be declared monthly, quarterly, or yearly. The Ministry of Finance shall provide detailed guidelines on this point.
- Credit: Supporting industrial production projects on the List shall be granted loans at the investment credit rate from the source of investment credit of the State. The loans can be obtained in Viet Nam Dong from credit institutions or branches of foreign banks at interest rates set by the State Bank of Vietnam during each respective period.
- Environmental protection: Supporting industrial production projects on the List shall take loans at the concessional rate from the Vietnam Environmental Protection Fund for pollution treatment and environmental protection elements of the projects.
Incentive for small and medium-sized enterprises: In addition to the general incentives above, small, and medium-sized enterprises manufacturing supporting products under the list of prioritized supporting products are also entitled to the following incentives:
- Investment credit: These small and medium-sized enterprises may take out loans of up to 70% its investment on the basis of a permitted guarantee provided by the organization if it meets all of the following conditions: The total value of mortgage or pledge to the credit organization, excluding mortgage or pledges for other kinds of loans, is at least 15% of the loan; The owner’s equity capitalized in the project is at least 20%, after deducting equity invested in other projects; At the time of guarantee application, the SMEs must not have any outstanding debts owed to the state budget or bad debts at credit institutions and other economic organizations.
- Water surface/land rents: Exempted or reduced land/water space rent as stipulated in the Land Law; With regard to special or large-scale projects which may have significant socio-economic effect and require greater incentives, the Ministry of Finance shall cooperate with the Ministry of Planning and Investment to make a decision on the basis of the proposal of the People’s Committee of the province where the projects are located in accordance with regulations of the law on land.
- Investment incentives based on region: Projects for manufacturing supporting products on the List located in disadvantageous or extremely disadvantageous areas shall benefit from region-based investment incentives.
The industrial capacity of both the broader industrial sector and the supporting industry sector in Vietnam may be currently characterized by underdevelopment. Consequently, the implementation of suitable incentive policies becomes crucial as they serve to safeguard and establish an environment conducive to fostering the growth and advancement of the supporting industry. In turn, this contributes to the overall progress and expansion of the industrial sector within the Vietnamese context. Detailed insights and additional information pertaining to this subject matter will be made available in forthcoming updated articles. We encourage you to stay informed by regularly visiting our website. For more comprehensive and specific guidance, please do not hesitate to contact us at letran@corporatecounsel.vn.