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Major Business Structures: Tax & Regulatory Implications Vietnam Supply Chain Congress 2011 By: Than Xuan Thinh, Ernst & Young
Major Business Structures: Tax & Regulatory Implications Vietnam Supply Chain Congress 2011 By: Than Xuan Thinh, Ernst & Young
Page 2 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Discussion outline
► Offshore Principal & Vietnam’s Representative Office
► Offshore Principal & Toll/Contract Manufacturer in Vietnam
► Vietnam’s Manufacturing Subsidiary
► Vietnam’s Trading and Distribution Subsidiary
► Case Study
Page 3 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Offshore Principal & Vietnam’s Representative Office
Advantages: ► Simple setup ► No capital requirement, no
income tax fillings ► Market research, support
to distributor
Principal
Local 3rd party distributor Vietnam’s RO
Distributor’s agreement
Business development, contract support & control
Disadvantages: ► Limited activities ► PE risk ► Increasing scrutiny on
“illegitimate activities” by authorities
Page 4 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Offshore Principal & Toll Manufacturer in Vietnam
Advantages: ► Control the sales, thus
higher profit in a lower-tax jurisdiction
Principal
Distributor Toll manufacturer
Sale of goods
Delivery of goods
Disadvantages: ► Import VAT may not be
recoverable to principal, unless applying “hybrid” status
► 1% withholding tax ► Possible “Trading-in Vietnam”
restriction
Materials / IP Title of goods
Legal title
Physical flow
Page 5 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Offshore Principal & Contract Manufacturer in Vietnam
Advantages: ► No license requirements,
unless setting up the distributor
Principal
Distributor Contract manufacturer
Sale of goods
Disadvantages: ► Limited control over sales ► Higher profit left & taxed in
Vietnam
Materials/IP
Distributor’s agreement
Page 6 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Vietnam’s manufacturing subsidiary
Advantages: ► Common structure in
Vietnam, manufacturing is still encouraged
Principal
Distributor Manufacturing subsidiary
Sale of goods
Disadvantages: ► Headline tax rate of 25%,
possibly higher effective rates
► Capital commitment
Materials/IP
Page 7 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Vietnam’s trading subsidiary
Advantages: ► Allowed since 2009 ► Control import/export and
sales to distributors
Principal
Distributor/supplier Trading subsidiary Sale of goods
Disadvantages: ► Limited tax deduction for
A&P expenses ► HS codes must be stated
in license ► Lengthy licensing process
Sale of Goods
Page 8 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Vietnam’s distribution subsidiary
Advantages: ► Allowed since 2009 ► Control import/sale to end-
users
Principal
End-users Trading subsidiary
Sale of goods
Disadvantages: ► Limited tax deduction for
A&P expenses ► Lengthy licensing process ► ENT for additional retail
outlets
Sale of Goods
Suppliers Sale of goods
Page 9 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Legal title
Physical flow
Services
Services
Ownership of materials
Deliver materials
Deliver goods
Processing and warehousing services
Product sales
Sale of finished goods
Management services
Product development
services Admin services
Functions ► Local market analysis ► Channel management ► Recruitment and training ► Local sales Risks ► Cost control ► Operating efficiency ► Sales effectiveness Returns ► % of sales
Case Study: An MNC with manufacturing facilities in Vietnam looking to restructure its supply chain
Functions, risks and profits are centralized in a Principal Trading company with a low effective tax rate
Headquarters
Suppliers
Shared services Product development
Sales companies
Customers
Principal Trading co’s
Plant
Functions ► Production scheduling ► Quality control ► Recruitment and training ► Local sourcing Risks ► Capital investment ► Operating efficiency Returns ► Cost plus
Functions ► Business strategy and planning ► Marketing strategy and brand management ► Strategic sourcing ► Supply chain management Risks ► Market risk ► Intangibles ► Inventory Returns ► Residual profit
Page 10 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Case study (cont): the challenges
► Regulatory restrictions on Principal’s trading activities in Vietnam: title of goods may not be shifted
► Split of manufacturing and trading functions of the current full-fledged manufacturer
► Commercial rationale for restructuring
► Arm’s length pricing & proper Transfer Pricing Documentation to defend the structure
Page 11 Major Business Structures and Associated Legal/Tax Implications in Vietnam
Q&A
Page 12 Major Business Structures and Associated Legal/Tax Implications in Vietnam
► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Vietnam Limited is a client-serving member firm of Ernst & Young Global Limited located in the U.S.
► This presentation is © 2011 Ernst & Young Vietnam Limited. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young Vietnam Limited. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young Vietnam Limited expressly disclaims any liability in connection with use of this presentation or its contents by any third party.
► Views expressed in this presentation are not necessarily those of Ernst & Young Vietnam Limited.
Disclaimer
Page 13 Major Business Structures and Associated Legal/Tax Implications in Vietnam
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© 2011 Ernst & Young Vietnam Limited. All Rights Reserved. FEA 16000178
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