Could Trump's US tax overhaul hit FDI inflow in Vietnam?

The U.S. House of Representatives gave its final approval to a sweeping, debt-financed tax bill at the end of 2017, representing the biggest overhaul of the U.S. tax code in more than 30 years.

The changes include the country's corporate income tax rate falling from 35 percent to 21 percent, as of January 1, 2018.

 "We've become competitive all over the world. Our companies won't be leaving our country any longer because our tax burden is so high," CNBC quoted President Donald Trump as saying at a recent cabinet meeting.

The president called it "above all else a jobs bill", contending that changes to the business tax structure would encourage more companies to relocate their operations to the U.S. and hire more workers.

But what Trump claims to be positive for the U.S. could have negative implications for its foreign partners.

“The overhaul could have negative impacts on U.S. backed investment in Vietnam. U.S. businesses are likely to review their investment strategies in overseas markets, including Vietnam,” economist Nguyen Tri Hieu said.

They could withdraw their profits from Vietnam to relocate their operations back home, instead of expanding their investments in Vietnam, he added. “This is a concern for our economy.”

However, what is more worrying is that some countries could offer tax incentives to persuade U.S. companies to stay, local media quoted Vu Viet Ngoan, head of the economic advisory group for Vietnam’s Prime Minister Nguyen Xuan Phuc, as saying.

This could affect Vietnam’s competitiveness in attracting foreign investors, he said, citing the case of China.

“China has already taken measures following Washington’s overhaul of the U.S tax code,” he said.

The world's second largest economy recently announced it would temporarily exempt foreign companies from paying tax on their earnings in a bid to stop U.S. businesses from taking their profits out of China.

To be eligible, foreign companies must invest those earnings in sectors encouraged by China’s government, including railways, mining, technology and agriculture, the New York Times quoted a statement from China’s Finance Ministry as saying. The measure is retroactive from January 1 this year, the ministry said.

The move would “promote the growth of foreign investment, improve the quality of foreign investment and encourage overseas investors to continuously expand their investment in China,” the ministry said.

Ngoan said Vietnam should closely follow what other countries are doing so that it can adapt to the situation.

Tran Dinh Chieu, a member of the National Assembly’s Finance and Budget Committee, told local newspaper Tuoi Tre that Vietnam should be cautious about the wave of tax cuts in other countries.

Although corporate income tax in Vietnam is only 20 percent, lower than the new rate of 21 percent in the U.S., business costs are still high due to “informal payments”, he said.

Many firms say they are harassed during administrative procedures, and lose large parts of their revenues to “informal payments”.  Informal charges account for more than 10 percent of many enterprises’ revenues, he quoted the Vietnam Chamber of Industry and Commerce as saying.

Vietnam should cut through its administrative procedures and try to minimize corruption and informal charges paid by enterprises, Chieu added.

Chairman of the Vietnam Association of Foreign Invested Enterprises Nguyen Mai said it will take more time to fully assess the impacts of Washington’s policy in Vietnam. However, Vietnam should not be too concerned about U.S. companies withdrawing their investments because tax is just one of many issues considered by foreign investors. The business environment, human resources and other factors play important roles in the decision-making process, he said.

In a recent report on Vietnam’s business environment, the American Chamber of Commerce (AmCham) said the country is becoming more attractive to investors, and up to 36 percent of surveyed U.S. firms said they wanted to expand their operations in Vietnam, compared to 21 percent in Thailand and 19 percent in Malaysia.

As of late October 2017, the U.S. had poured $9.4 billion into Vietnam, ranking it 9th of the 100 countries and territories with investments in the southeast Asian nation.

The U.S. corporate income tax cut is not all bad news for Vietnam, said economist Hieu. The new policy is expected to boost U.S. growth and consumer spending, resulting in an increased demand for goods, including those imported from Vietnam.

“This is a good opportunity for us to boost our exports to the market,” he stressed.

Vietnam's exports to the U.S. rose 8 percent last year as the country's overall exports increased 21.1 percent to a record $213.7 billion.