Free trade agreements at certainty to Vietnam business environment

The free trade agreements (FTAs) signed by Vietnam have added charm to its business environment. Dr. Oliver Massmann, General Director of Duane Morris Vietnam LLC, analyzes notable provisions under two major FTAs, CPTPP and EVFTA, that could help foreign investors acquire more legal certainty when investing in Vietnam.

Despite the complicated Covid-19 situation in Vietnam that resulted in almost nationwide lockdown, foreign direct investment in the country during 2021 reached $31.15 billion, an increase of 9.2% year-on-year, according to the General Statistics Office.

In 2022, with all Covid-19 restrictions removed, Vietnam is ready to fully welcome foreign investors. As of March 2022, the processing and manufacturing industry led the chart of attracting the most foreign direct investment. Other fields offering investment opportunities to foreign investors include generation and distribution of electricity, mining, logistics and textile.

Beside government-issued incentives like reduced land levy, tax, and allowance for 100% ownership, foreign investors must make use of benefits available for them under bilateral and multilateral agreements. As of now, Vietnam has concluded 15 FTAs, the most recent being the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA).

Some notable provisions under the CPTPP and EVFTA that foreign investors should know are as follows.

Government procurement

Vietnam has one of the highest ratios of public investment-to-GDP (gross domestic product) in the world, 39 per cent annually from 1995. However, until the enforcement of the EVFTA, Vietnam has not agreed to its government procurement being covered by the Government Procurement Agreement (GPA) of the World Trade Organization (WTO).

Vietnam’s commitments on Government procurement mainly deal with the obligation to treat EU bidders, or domestic bidders with EU investment capital, equal to Vietnamese bidders when the Government purchases goods or requests a service worth over the specified threshold.

The country undertakes to follow the general principles of National Treatment and Non-discrimination. The EVFTA also requires its parties to assess bids based on fair and objective principles, evaluate and award bids only based on criteria set out in notices and tender documentation and create an effective regime for complaints and settling disputes.

These rules require parties to ensure that their bidding procedures match the commitments and protect their own interests, thus helping Vietnam to solve its problem of bids being won by cheap but low-quality service providers.

Investment dispute settlement

In disputes regarding investment (for example, expropriation without compensation or discrimination of investment), an investor is allowed to bring the dispute to the The International Centre for Settlement of Investment Disputes. To ensure the fairness and independence of the dispute settlement, a permanent tribunal will be comprised of nine members: three nationals each appointed from the EU and Vietnam, together with three nationals appointed from third countries. Cases will be heard by a three-member tribunal selected by the chairman of the tribunal in a random manner. This is also to ensure consistent rulings in similar cases, thus making the dispute settlement more predictable.

In case either of the disputing parties disagrees with the decision of the tribunal, it can appeal to the appeal tribunal. While this is different from the common arbitration proceeding, it is quite similar to the two-level dispute settlement mechanism in the WTO (panel and appellate body). We believe that this mechanism could save time and costs for the whole proceedings.

The final settlement is binding and enforceable from the local courts regarding its validity, except for a five-year period following the entry into force of the EU-Vietnam Investment Protection Agreement (EVIPA).

Vietnam’s obligations on trade in services and investment under CPTPP

- Minimum standard of treatment: Each party shall accord to covered investments treatment in accordance with applicable customary international law principles, including fair and equitable treatment and full protection and security.

- Expropriation: When necessary, for example, for a public purpose, government of one country has the right to expropriate foreign investors. Nonetheless, such right must be applied on a non-discriminatory manner and on payment of prompt, adequate and effective compensation in accordance with due process of law and provisions of CPTPP.

- Transfer: Foreign investors have the rights to freely transfer their capital contributions or profit of investment. Nonetheless, in some cases, governments of CPTPP member countries can prevent or delay such transfers of foreign investors for the purpose of capital control in case of balance of payment crisis or economic crisis.

- Not impose “performance requirement” (PR): One country shall not maintain performance requirements as a condition for investors to gain investment licenses or other preferential investment treatment.

- Not impose requirement on appointing senior management position (SMB): One country shall not require an enterprise to appoint to a senior management position a natural person of any nationality.

Free trade agreements create sustainable growth and mutual benefits for parties involved, and foreign investors should understand what they are entitled to under the agreements to achieve the maximum level of legal certainty when investing in Vietnam.