The rapid growth of European Foreign Direct Investment (FDI) in Vietnam over the years has marked a compelling story of economic cooperation and opportunity. This article delves into the history, trends, and the dynamic landscape of European FDI in Vietnam. We will explore the three distinctive periods of European investment in Vietnam, examining the pivotal role played by key agreements and partnerships in shaping this significant economic relationship.

European FDI in Vietnam: 1988-2010

Early European Investment (1988-2000s)

The initiation of Vietnam's Doi Moi (Innovation) policy in the late 1980s opened the doors to foreign investors, with the first European capital trickling into the country. However, in the first years from 1988 to 1994, the registered capital of European countries in Vietnam remained rather modest. As reported by the Foreign Investment Agency (FIA), a substantial surge was witnessed in 1995, with European investments experiencing remarkable growth. Investments from Europe skyrocketed from a modest $15 million in 1988 to an impressive $707 million in 1995. This period saw the Netherlands and France taking the lead with the highest number of investment projects, primarily focusing on the processing and manufacturing industry. Notably, in 1999, direct investment capital from the UK saw a remarkable increase, spiking from 0.99% in 1995-1997 to 8.43% in 1998-1999, further solidifying the EU's foothold in the Vietnamese market.

Growth and Challenges (2000s-2010)

The 2000s witnessed a transformative phase in European FDI in Vietnam. The country's accession to the World Trade Organization (WTO) in 2007 further heightened its appeal to European investors. As per the FIA's records, during the early 2000s, from 2000 to 2005, Dutch FDI saw substantial growth, increasing its share to 20% of total direct investment capital. Simultaneously, investment from the UK continued its upward trajectory. Collectively, the European Union (EU) became a prominent investor in Vietnam, contributing approximately 38% of the total registered FDI capital.

However, there were notable fluctuations in European FDI. From 2002 to 2004, the European FDI share dropped significantly from over 40% of total registered FDI in Vietnam in the 1998-1999 period to just 16.8% in the 2002-2004 period.

The year 2005 marked a resurgence for EU FDI capital flows into Vietnam, with investments totaling $1.7 billion. European investors showed a particular focus on the manufacturing and processing industry, accounting for 32% of their investments with 573 projects and $6.29 billion in capital. Manufacture and distribution of electricity came next with 19 projects and $3.5 billion in capital, constituting 17.8% of the EU's investments. Real estate activities also gained traction during this period.

In the face of the worldwide economic downturn in 2008, which left its mark on European investments, Vietnam's registered FDI managed to surge by $2.3 billion. Although the subsequent year witnessed a notable decline, 2010 marked a remarkable resurgence, with European FDI reaching $2.6 billion. These fluctuating patterns during the early 2000s highlight the remarkable resilience and flexibility displayed by European investors in Vietnam's dynamic market.

European Investment in Vietnam: 2011-2019 (PCA Vietnam - EU)

The Partnership and Cooperation Agreement (PCA)

The Partnership and Cooperation Agreement (PCA) brought forth a multitude of opportunities for Vietnam, enhancing its access to the lucrative European Union (EU) market. The agreement paved the way for closer consultation, more effective utilization of Generalized System of Preferences (GSP) incentives, and provided Vietnam with unique treatment. The EU's endorsement of the PCA marked the inception of a comprehensive, substantive, and fruitful collaborative partnership between Vietnam and the EU.

Expanding Trade and Investment (2011-2019)

Based on research conducted by the Vietnam Academy of Social Sciences (VASS), during the period spanning 2011 to 2019, bilateral trade between Vietnam and the EU experienced remarkable growth, surging from 24.4 billion USD in 2011 to an impressive 56.44 billion USD in 2019, reflecting an increase of 2.3 times. By the end of December 2019, the EU had initiated a total of 2,375 projects in Vietnam, representing an increase of 182 projects compared to 2018. These investments originated from 27 out of 28 EU member states and amassed a combined registered investment capital of $25.49 billion. This accounted for 7.70% of the projects in Vietnam and constituted 7.03% of the nation's overall registered investment capital.

As indicated by VASS, data on the capital's source highlights the Netherlands as the primary contributor, boasting 344 projects and a substantial investment of 10.05 billion USD. This accounts for a significant share of 39.43% of the total EU investment capital in Vietnam. Following closely was the UK, with 380 projects and an investment of 3.72 billion USD, making up 14.48% of the total. France secured the third position with 563 projects and an investment of 3.60 billion USD, contributing 14.13% to the EU's total investments in Vietnam.

These investments extended across a wide spectrum of industries, spanning 18 out of 21 sectors. The processing and manufacturing industry was at the forefront, absorbing 36.3% of the total investment capital. Notably, it included subsectors such as coke and refined petroleum products (11%), textiles (6.94%), electronics (6.4%), food products (5.6%), and motor vehicles (5.2%). Additionally, the EU demonstrated interest in other fields like manufacture and distribution of electricity and gas (20.7%), real estate (11%), and information and communication (6.6%), underscoring the diversity and significance of EU investment in Vietnam during this period.

European Capital Flows in Vietnam: 2020-2022 (EVFTA & EVIPA)

The EVFTA and EVIPA's Impact on European FDI

The European Union (EU)-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement (EVIPA) have emerged as pivotal drivers of European Foreign Direct Investment (FDI) in Vietnam. Since they took effect in August 2020, these groundbreaking accords have not only reshaped the business landscape but also fortified the economic bonds between the EU and Vietnam.

One of the most significant outcomes of the EVFTA has been the removal of approximately 99% of tariffs on Vietnamese exports to the EU. This historic trade pact has fueled heightened commerce between the two parties and granted European companies a competitive edge in accessing Vietnam's thriving consumer market and robust supply chains. These advantageous trade provisions have not only stimulated exports but have also catalyzed a surge in European investments within Vietnam, diversifying their scope from high-tech industries to encompass service sectors, clean energy, supporting industries, food processing, and high-tech agriculture.

On the other hand, the EVIPA has equipped European investors with essential safeguards and legal assurances while operating in Vietnam. This agreement establishes a comprehensive framework for safeguarding investments and expeditiously resolving investment disputes. These provisions have instilled a heightened level of confidence among European investors in Vietnam's business environment, fostering an environment of trust and reliability.

Recent Trends and Opportunities (2020-2022)

Per statistics provided by the Ministry of Planning and Investment (MPI), the year 2020 witnessed European Foreign Direct Investment (FDI) in Vietnam reaching a total registered capital of $1.38 billion USD, representing a marginal decrease of 8.6% compared to 2019. Although experiencing a slight dip, it still accounted for a noteworthy 4.8% of the total FDI capital influx into Vietnam during the year.

The year 2021 saw a reversal in this trend, with the total FDI capital attracted surging to $1.41 billion USD, an impressive growth rate of 2.15%. As of the end of 2021, the European Union (EU) solidified its position as Vietnam's 6th largest investment partner, ranking just behind prominent players like Korea, Japan, Singapore, Taiwan-China, and Hong Kong-China. The cumulative registered capital from the EU reached $22.47 billion USD, corresponding to 5.51% of Vietnam's total FDI capital.

By August 2022, the EU had made substantial investments in Vietnam, with a total of 2384 projects and a registered capital of $27.6 billion USD. This sum accounted for 6.42% of the overall registered capital in Vietnam, affirming the EU's growing presence and engagement in the Vietnamese business landscape.

When analyzing the source of capital, we observe the participation of 25 out of 27 EU member countries, each contributing to 2274 FDI projects in Vietnam in 2021. Notably, the Netherlands stands at the forefront with a total registered capital of $10.47 billion USD, constituting 46.6% of the EU's investment in Vietnam. Following closely are France with $3.61 billion USD and Germany with $2.29 billion USD.

In terms of the investment landscape, European capital flows have permeated a multitude of economic sectors, spanning 18 out of 21 sectors. While the manufacturing and processing industry retains a significant share, other industries including manufacture and distribution of electricity and gas, real estate, information and communication have all become focal points. There's also a notable shift towards service industries such as telecommunications, finance, office rental, and retail. Furthermore, the focus has expanded into supporting industries, food products, agriculture, high-tech, and pharmaceuticals. This diversification underscores the versatility of EU investments, contributing to Vietnam's development across various sectors.

Final Thoughts

Throughout the historical progression of European FDI in Vietnam, the impact of EU capital flows has been significant, shaping the trajectory of foreign investment in Vietnam. From the early stages to the landmark EVFTA and EVIPA agreements, the evolution of European investment has been instrumental in Vietnam's economic growth. As the landscape continues to evolve, staying informed about the intricacies of EU capital flows becomes crucial. Partnering with Viettonkin offers tailored expertise, enabling seamless navigation of the dynamic Vietnamese market. Discover how EU FDI can thrive with Viettonkin's dedicated support and comprehensive resources, ensuring a successful investment journey in Vietnam.

The emergence of the Global Minimum Tax (GMT) has triggered a significant paradigm shift in the realm of international taxation, particularly affecting Foreign Direct Investment (FDI) in Vietnam. Understanding the implications of GMT is crucial in navigating the evolving landscape of taxation. With its profound impact on various aspects of the global economy, GMT's significance in the context of Vietnam's taxation landscape cannot be overstated. This introduction sets the stage for a comprehensive exploration of the intricate effects and implications of GMT on foreign investment in Vietnam.

The Effects of GMT on FDI in Vietnam

GMT's Impact on Vietnam: Reshaping Taxation and Foreign Investment

The introduction of the global minimum tax (GMT), also known as the Pillar 2 solution, carries significant implications for Vietnam's tax landscape. In December, the European Union officially ratified a directive, stipulating that companies must adhere to a minimum tax rate of 15% starting in 2024. Countries with substantial foreign investments in Vietnam, such as South Korea and Japan, are set to implement new tax policies or announce draft tax reforms, marking a shift towards GMT for the fiscal year 2024.

In Vietnam, the state budget revenue from Corporate Income Tax (CIT) in the years 2020-2022 ranged from 18% to 21%. Foreign Direct Investment (FDI) enterprises contributed between 7.5% and 8.5% of this revenue. If the global minimum tax is not applied, Vietnam may introduce top-up CIT for FDI enterprises currently enjoying lower tax rates, thus bolstering state budget revenue. However, if GMT is applied, revenue eligible for tax incentives will be redirected to the budgets of more developed nations. Furthermore, when GMT is applied to local enterprises engaged in offshore investment with subsidiaries in other countries and paying CIT below the minimum threshold, Vietnam can collect top-up CIT, thereby augmenting state budget revenues.

Vietnam's alluring corporate income tax incentives have been pivotal in attracting FDI, with around 335 projects in the processing and manufacturing industries enjoying tax rates below 15%. These projects collectively represent 30% of the total FDI inflow, estimated at $131.3 billion. The country houses 619 multinational enterprises (MNEs) with 1,017 subsidiaries that reported consolidated revenue exceeding 750 million euros in 2021. As of 2024, if GMT comes into effect, 112 MNEs in Vietnam will be directly affected, with South Korea and Japan collectively collecting over $462.5 million in additional taxes.

As of March 20, data provided by the Ministry of Planning and Investment reveals that Vietnam currently has 1,625 offshore investment projects, among which 141 state-invested enterprises constitute a significant portion, accounting for 53.3% of the nation's total investment. The application of GMT could lead to additional tax obligations for local enterprises involved in offshore investments.

GMT Impact on Tax Incentives and Strategies for Attracting FDI

First and foremost, the adoption of GMT measures is set to nullify the very tax incentives that have consistently piqued the interest of significant foreign investors. Presently, numerous corporations in Vietnam benefit from tax incentives ranging from 2.75 to 5.95 percent, considerably lower than the stipulated 15 percent tax rate. The looming application of GMT in 2024 will necessitate tax rate adjustments for at least 1,015 Foreign Direct Investment enterprises operating within Vietnam.

Discussion surrounding the global minimum corporate tax reveals the potential adverse impacts on multinational companies, including those actively investing in Vietnam. In response to this impending change, experts suggest that Vietnam should formulate an investment policy geared towards attracting strategic foreign investors.

To mitigate the implications of global minimum tax (GMT) on foreign enterprises, Vietnamese tax officials are actively exploring tailored support mechanisms. The General Department of Taxation (GDT) under the Ministry of Finance is engaged in discussions concerning resources that can be allocated to assist Foreign Invested Enterprises (FIEs) impacted by the impending GMT regulation, slated for implementation in early 2024. Vietnam's extensive list of foreign partners, hailing from 142 countries and territories, with a significant concentration in East Asia, underscores the importance of these support measures. The forthcoming support is designed to align with each enterprise's unique characteristics, helping them compensate for the tax incentives affected by the GMT regulation. Enterprises will have access to this support mechanism through registration procedures, following the fulfillment of their tax obligations. Proactively participating in the GMT implementation process is crucial for Vietnam's international integration efforts, tax system reforms, and overall economic and social development.

Implications of GMT from the Tax Administration Perspective

Implications of GMT under Tax Administration

The implementation of GMT has far-reaching implications for tax administration in Vietnam, including:

• Impact on Revenue: GMT introduces a minimum global tax rate that corporations must adhere to. This adjustment can positively impact Vietnam's tax revenue as companies may find themselves paying higher taxes, thereby bolstering the state budget.
• Changes in Taxation: Tax authorities in Vietnam are tasked with adapting to the new tax regulations, aligning them with global standards, and ensuring that multinational enterprises (MNEs) comply with GMT rules. This adjustment may necessitate changes in tax codes and policies to maintain conformity with evolving international tax standards.
• Monitoring Foreign-Invested Enterprises: Vietnam's tax administration will need to intensify monitoring of foreign-invested enterprises (FIEs) to assess their tax liabilities under the GMT framework. FIEs, which often benefit from various tax incentives, may experience changes in their tax obligations, necessitating a reassessment.
• Policy Reforms: The introduction of GMT in Vietnam is poised to expedite policy reforms and intensify the country's international integration efforts. Tax administration plays a pivotal role in implementing and enforcing these reforms to ensure effective compliance with global standards.

In summary, the implications of GMT under tax administration in Vietnam encompass changes in revenue, adaptations in taxation policies, heightened monitoring of FIEs, and the imperative need for policy reforms to harmonize with evolving global tax standards.

Recommendations for Foreign Investors in Vietnam

As foreign investors navigate the evolving tax landscape shaped by GMT, several strategic considerations come to the forefront:

• Policy Follow-Up and Advocacy: Foreign investors should closely follow the development of GMT regulations and advocate for policies that align with their business objectives. Staying informed and actively participating in policy discussions can help businesses adapt effectively.
• Proactive Impact Assessment: Each business needs to proactively assess the impact of GMT, particularly at the group level, to prepare for impending policy changes. Understanding how GMT affects their tax obligations and operations is instrumental in developing strategies to manage this new tax era effectively.

Final Thoughts

In summary, the advent of Global Minimum Tax (GMT) heralds a transformative era in international taxation and its far-reaching effects on foreign direct investment (FDI) in Vietnam. This new global tax landscape carries implications for both local and foreign companies, from revenue changes to policy reforms. Navigating this shift in tax rates and administration is complex, making expert guidance and compliance support vital. Viettonkin is your partner in successfully managing taxation and compliance matters in the GMT era, ensuring that your foreign investment ventures in Vietnam thrive.

Foreign investment in Vietnam has reached unprecedented levels, making it a red-hot destination for global investors. This Southeast Asian gem boasts a thriving investment climate, driven by robust FDI statistics and a strategic position for investing. With the government's investor-friendly policies and a booming economy, FDI in Vietnam is surging, creating significant opportunities for those seeking to capitalize on the country's growth story. In this article, we'll explore the factors underpinning the foreign investment boom and delve into the statistics, industries, and incentives that are attracting investment to Vietnam. Join us as we unravel the reasons behind this surge and why investing in Vietnam is becoming increasingly attractive for global players.

The Surge in Foreign Investment

Surging Foreign Direct Investment (FDI)

Foreign investment in Vietnam has experienced an extraordinary surge in recent years, firmly establishing the country as a magnet for global capital. The statistics tell a compelling story: In the first nine months of 2023, FDI in Vietnam reached an impressive $20.21 billion, reflecting a remarkable 7.7% increase compared to the same period in the previous year. This surge is not an isolated event; it's part of a broader trend of increasing investor confidence in Vietnam.

Notably, the records for foreign investment have been consistently broken in Vietnam. In 2022, the country achieved an all-time high in terms of FDI disbursement, eclipsing the previous record by a substantial margin. This attests to the mounting confidence international investors place in Vietnam's economic potential.

Diverse Industry Involvement in Foreign Investment

The surge in foreign investment is distributed across various industries and sectors. Processing and manufacturing, in particular, has emerged as a magnet for foreign capital. For instance, as of September 20, 2023 this sector saw a 15.5% increase in foreign investment year-on-year. Additionally, real estate, banking and finance, wholesale and retail have all experienced substantial inflows, contributing significantly to Vietnam's economic growth.

Global Investors' Foothold in Vietnam

It's important to note that these investments originate from a range of countries, including but not limited to Singapore, Japan, South Korea, China, and the United States. For example, Singapore-based companies have poured substantial investments into Vietnamese manufacturing facilities, while Japanese firms have shown great interest in research and development centers, highlighting Vietnam's appeal as a technology hub.

To illustrate the tangible impact of this surge in foreign investment, consider the case of the Samsung Electronics Complex in Thai Nguyen province. This mammoth project, with an impressive investment of $7.5 billion, has become a symbol of Vietnam's attractiveness to investors. It's not only a substantial source of employment, providing jobs to over 38,500 workers, but also a crucial contributor to Vietnam's export growth.

Factors Driving Foreign Investment Growth

Proactive Government Policies

The remarkable surge in foreign investment in Vietnam can be attributed to a confluence of factors that make the country a magnet for global investors. One key driver is the Vietnamese government's proactive stance in facilitating foreign investment. Over the years, Vietnam has consistently improved its business environment through a series of legislative and policy reforms. These efforts have simplified administrative procedures, reduced bureaucracy, and enhanced transparency, providing a friendlier ecosystem for investors.

Government initiatives such as key economic zones (KEZs) have also played a pivotal role. These designated zones offer tax incentives, streamlined regulatory processes, and superior infrastructure, luring foreign investors seeking favorable conditions for their businesses.

Strategic Location and Gateway to ASEAN

Vietnam's strategic location in Southeast Asia further bolsters its appeal. Situated at the crossroads of key trade routes, the country serves as a gateway to the ASEAN market of over 600 million consumers. This strategic advantage has made Vietnam a preferred destination for companies looking to establish regional hubs, access regional markets, and participate in global value chains.

Skilled Workforce and Vocational Training

Vietnam's abundant, skilled labor force is another significant factor. The country boasts a youthful and tech-savvy population, making it an ideal destination for companies seeking a well-educated workforce. Moreover, the government has continually invested in vocational training programs to ensure a steady supply of skilled workers.

Robust Infrastructure and Efficient Supply Chains

The robust infrastructure in Vietnam, including modern ports, highways, and logistics facilities, has been a critical driver of investment. This infrastructure supports efficient supply chain management and reduces operational costs for businesses, further enhancing the country's attractiveness.

Global Economic Trends and Supply Chain Diversification

Global economic trends have played a role in the surge of foreign investment in Vietnam. The reconfiguration of supply chains due to factors like the US-China trade tensions and the COVID-19 pandemic has prompted companies to diversify their production bases. Vietnam, with its stable political climate and growth prospects, has emerged as a preferred alternative for many companies.

The Impact of Foreign Investment on Vietnam's Economy

Robust GDP Growth and Economic Resilience

The surge in foreign investment in Vietnam has left an indelible mark on the country's economy. A primary indicator of this impact is the robust growth in Vietnam's GDP. The influx of foreign capital, coupled with an expansion of industries, has contributed significantly to Vietnam's economic development. In recent years, Vietnam has consistently maintained impressive GDP growth rates, making it one of the fastest-growing economies in Southeast Asia. According to a report by the Singapore-based United Overseas Bank (UOB), Vietnam's GDP growth rate is anticipated to reach 6.6% in 2023, and it is expected to remain above 6% in the coming years, largely driven by foreign investment.

Diversification of Investment across Industries

One notable effect of increased foreign investment is the diversification of industries and regions that benefit from it. Traditionally, foreign investment was concentrated in processing and manufacturing and export-oriented sectors. However, as Vietnam's economy matures, investors are now exploring a broader range of industries. This diversification has led to increased economic resilience, as the country is less dependent on a single sector. For instance, the service sector has seen a significant uptick in foreign investment, with the retail and e-commerce industries witnessing substantial growth.

Foreign-invested enterprises (FIEs) have made significant contributions to Vietnam's export landscape, utilizing the country's favorable conditions to excel on the global stage. Take the case of Nestlé, the Swiss multinational food and beverage company, which expanded its operations in Vietnam. By establishing production facilities in the country, Nestlé not only met the surging demand for its renowned products but also bolstered Vietnam's reputation as an export hub for top-quality food and beverages. This strategic investment has substantially added to Vietnam's export earnings and highlighted its capacity to serve as a trusted and efficient source for consumer goods.

Embracing Sustainable and Responsible Investment

The surge in foreign investment is aligned with the principles of sustainable development and environmental, social, and governance (ESG) criteria. Foreign investors are increasingly mindful of ESG factors, and they are integrating sustainable practices into their operations in Vietnam. The LEGO factory in Vietnam, for instance, is committed to sustainability by using renewable energy sources and implementing waste reduction initiatives. This not only benefits the environment but also aligns with Vietnam's goals for a greener future.

Beyond short-term gains, the surge in foreign investment is expected to bring long-term economic benefits and sustainability. As the business environment in Vietnam continues to improve and investors expand their presence, the country is likely to witness further economic transformation. This includes the transfer of technology, knowledge, and expertise to the local workforce, which can enhance productivity and competitiveness while promoting sustainable development.

The remarkable surge in foreign investment in Vietnam signifies the nation's position as a highly attractive destination for global investors. Foreign direct investment (FDI) in Vietnam has reached unprecedented levels, propelling economic growth and development. Our exploration of investing in Vietnam has revealed that factors such as strategic location, government initiatives, and a skilled workforce have fueled this investment boom. As we've seen through examples, Vietnam's allure as an investment hub is evident. With a strong commitment to sustainable development, Vietnam's partnership with foreign investors is poised to foster long-term economic prosperity. For expert guidance and support in seizing the wealth of investment opportunities in Vietnam, look no further than Viettonkin. Connect with us today to embark on your investment journey in Vietnam.