Vietnam considers cost-based incentives to attract more FDI

Vietnam should consider cost-based incentives as it renews policies to attract foreign direct investment (FDI) because those currently in vogue are becoming outdated, says the Ministry of Planning and Investment.

In a draft report on FDI attraction, the ministry notes that Vietnam currently provides incentives related to corporate income tax (CIT), import-export tax and land lease fees. Some other factors are destinations, sectors and project scale, like remote areas and priority industries.

However, these incentives are becoming less effective as income-based support will not fundamentally motivate long-term commitment, while the Global Minimum Tax (GMT) will partly negate Vietnam’s advantages, the report says.

Complicated implementation of preferential tax policies and firms abusing tax policies to conduct transfer pricing are other disadvantages, it adds.

The ministry suggests that relevant agencies consider the introduction of cost-based incentives (based on costs incurred by businesses for various activities like workforce training and research and development) alongside income-based incentives to attract new-generation investors, especially those making “genuine investments.”

It also recommends support related to land and utilities (electricity, water, traffic access), preferential policies for investments in advanced technology and environmental protection, in line with the country’s development path.

In the short term, in order to adapt to the GMT and prevent investors from leaving Vietnam, relevant agencies should come up with draft regulations supporting investments in hi-tech areas, it says.

The report says authorities should learn from foreign experiences, particularly India’s Production Linked Incentive Scheme (PLI) issued in April 2020, Thailand’s National Competitiveness Enhancement Act issued in 2017, Ireland’s Finance Act issued in 2022, and the UK’s Financial Act issued in 2013.

Registered FDI in Vietnam reached $36.6 billion in 2023, up 32.1% year-on-year, the highest ever growth, according to the Ministry of Planning and Investment. Disbursement of FDI rose 3.5% year-on-year to $23.18 billion.

Vietnam closed 2023 with 39,140 valid FDI projects having a cumulative registered capital of $468.9 billion. FDI disbursement reached $297.2 billion, or 63.4% of the total.