Recently, the Vietnamese government issued Decree 70/2020/ND-CP prescribing registration fees for domestically manufactured and assembled automobiles by 31 December 2020 (“Decree 70”) which took effect on 28 June 2020.  Under Decree 70, the registration fees for automobiles which are domestically manufactured and assembled will be reduced by 50 per cent until 31 December 2020.

Decree 70 is the Vietnamese government’s response to the proposals made from the various stake holders in automobiles industry, for instance, Vietnam Automobile Manufacturers’ Association, that such tax reduction would help automobile factories in Vietnam which are facing the risk of reducing production, suspending or even closing its operation due to the heavy impact of the COVID-19 pandemic.  Under Decree 70, automobile manufacturers in Vietnam will enjoy 5 to 6 per cent (of the car price) registration fees instead of 10 to 12 per cent.  Local car makers benefit from Decree 70 such as Truong Hai (Thaco), Thanh Cong (TC Motor), VinFast, Toyota, Honda, Hyundai, Ford, Mercedes.  Accordingly, consumers will get a 50% reduction of registration fee when purchasing certain models from brands owned by these enterprises.

Discirimination against Foreign Car Manufacturers?

Since this registration tax cut only applies to cars manufactured or assmbled in Vietnam, foreign automobile brands with no manufacture base in Vietnam have been hit hard by Decree 70.  It has been already reported that auto dealers are witnessing significant increase of car buyers after Decree 70 took effect.  These dealers also said that even within a same automobile brand the number of transactions for locally manufactured/assembled cares suddenly increased while imported models show almost no change at all.  For the automobile brands that do not enjoy the tax cut under Decree 70 whether fully or partially, such tax cut might be seen as treating them in an disriminatory and adverse manner.

In response to this concern, the European Chamber of Commerce in Vietnam (EuroCham), in its White Book 2020, has proposed that imported cars are also given the same 50 per cent reduction in registration fees as locally produced cars.  EuroCham says that tax cut under Decree 70 is discrimination favouring locally assembled vehicles and is not casting the intended positive light for Vietnam with the European Union when the EVFTA is expected to enter into force soon.

Breach of Trade Agreement?

As an active member of the World Trade Organisation (WTO), Vietnam has established special relation with other members, many of which are major automobile manufacturing countries such as the U.S, Japan, Korea, Germany, France, through several regional trade agreements. In particular, Vietnam committed to reduce tax to 0% applied on automobile from its trade partners, however, the process for tax reduction is quite slow, usually lasts from 07 to 10 years for most large-scale trade agreements, including CPTPP (10 years from the effective date), VKFTA (11 years from the effective date), VJEPA (11 years from the effective date), EVFTA (07-10 years from the effective date), etc. Vietnam also committed to apply national treatment principle in all of its trade agreements.

Nevertheless, contrary to the negative view of EuroCham, the tax cut under Decree 70 is unlikely regarded breach of Vietnam’s obligation, namely, maintaining national treatment principle. For the reason that most of the abovementioned trade agreements are built based on Vietnam’s commitments under WTO which allow Vietnam to adopt or retain its measures if Vietnam can prove those measures fall within the exceptions of WTO. Specially, under EVFTA, Vietnam will be even able to adopt prohibition or restriction on the importation/exportation/sale for export of right-hand steering vehicles. Therefore, Vietnam can totally apply its regulation under Decree 70 without breaching its obligations in trade agreements if Vietnam is able to satisfy the conditions in such agreements. However, Vietnam might have breached its other international covenants made under investment protection agreements

Potential Breach of Investment Protection Agreement

An Investment Protecton Agreement (IPA) is a type of treaty between countries which addresses issues relevant to cross-border investments, usually for the purpose of protection, promotion and liberalization of such investments.  Countries concluding IPAs commit themselves to adhere to specific standards on the treatment of foreign investments within their territory.  Breaches of such commitments by one of the party states will be grounds for the investors of the other party state to bring Investor-State Dispute Settlement (ISDS) proceeding against the breaching party state before international arbitral tribunals.  Most of the major automobile manufacturing countires (e.g., the U.S., Japan, Germany, South Korea, France, etc.) have entered into IPAs with Vietnam.

These investment protection commitments under IPAs require the host state to treat foreign investors fairly and undiscriminatorily.  For instance, under national treatment, one of the most common kinds the host states’ commitments under IPAs, the host state which grants particular rights, benefits or privileges to its own citizens must also grant those advantages to the investors of other states.  Under most-favoured-nation treatment, another common type of investment protection commitment, the host state must not discriminate the foreign investors compared to other foreign investors who are similarly situated.

The preferential tax cut under Decree 70 might be seen as breach of such commitments.  Although tax cut under Decree 70 seems to bring no direct impact on foreign automobile manufacturers as registration fees remain the same for them, it may still consequently create potentially discriminatory business/investment environment for those makers.  It is not difficult to imagine that these companies’ sales and profits after Decree 70 will decrese significantly to a certain extent.  The damages to them would be beyond the decrease in sales and profits as they might inevitably lose their market shares/powers in Vietnamese automobile market.

Lessons from Feldman v. Mexico

Taxation measures challeged by investors through ISDS proceedings are mostly the host states’ imposition of capital gains tax on the foreign investors’ acquisition of local companies/businesses.  However, preferential tax cut, regardless of whether it was designed intentionally or created consequentially, has been also subject to ISDS proceeding previously.  The most well-known case regarding this issue is Feldman v. Mexico in 2000.

The facts of this case are somewhat complicated; essentially, at all material times Mexico imposed a tax on the domestic sale and production of cigarettes, but did not impose and tax on cigarettes export. Domestic producers and re-sellers of cigarettes were still required to pay the tax, but were entitled to a rebate on export.  Due to industry agreements in the domestic market, the company that the claimant, a U.S. citizen owned in Mexico, was not able to buy cigarettes directly from producers but was forced to purchase them from bulk sellers such as Walmart. The cigarettes that the cliamant’s company purchased included the amount of the domestic tax, but the claimant was not always able to obtain the rebate on export because the invoices it supplied did not separately identify the amount of the tax. This led to a long-running dispute with the Mexican government: at various times the company was paid rebates notwithstanding the deficient invoices; at other times it was not. The law always remained the same but the enforcement of it changed from time to time. Finally, in December 1997, the law was amended to bar rebates to cigarette resellers such as the claimant’s company, limiting rebates to the “first sale” in Mexico.

The Tribunal found in the claimant’s favor on the national treatment claim and awarded $9,464,627.50 Mexican pesos in damages, plus interest.  The Tribunal found that there were domestic resellers in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates at a time when the claimant was refused them.  The Tribunal ruled that:

• Mexico is of course entitled to strictly enforce its laws, but it must do so in a non-discriminatory manner, as between foreign investors and domestic investors.
• Mexico’s treatment of its own citizens, particularly its waver for domestic cigarette reseller/exporters on invoice requirement, but not for foreign investors, amounts to de facto discrimination.
• Even de factor difference in treatment alone is sufficient to establish a denial of national treatment.

In legal English,  de facto means a state of affairs that is true in fact, but that is not officially sanctioned.  In contrast, de jure means a state of affairs that is in accordance with law.  Thus, de factor discrimination is a lower level of discrimination than de jure discrimination, and in the Tribunal’s view de facto discrimination alone was sufficient for them to rule that Mexico treated foreign investors discriminatorily.

With respect to tax cut under Decree 70, it seems to be regarded de jure discrimination towards certain groups of foreign investors.  Discriminatory conduct in ISDS proceedings includes not only actions directly damaging foreign investors or bringing directly adverse impact on them, but also measures favouring particular groups only which may indirectly cause damages to investors who are excluded from such benefits. It should be noted that EuroCham’s proposal would not be the end but the beginning of legal actions against Vietnam in accordance with its commiments made under various IPAs.

DISCLAIMER

This LBN newsletter are NOT legal advice. Readers are advised to retain a qualified lawyer, should they wish to seek legal advice. VCI Legal are certainly among those and happy to be retained, yet VCI Legal is not to be hold responsible should any reader choose to interpret/apply the regulations after reading this LBN without engaging a qualified lawyer.