Mazars' article on the Connect Magazine Issue #5 | September 2018. This document contains intellectual property and material that is proprietary to Mazars, initially for use by CCI France Vietnam and now for dedication to public researches.
Statistics from the Ministry of Industry and Trade show that Vietnam’s annual food consumption is estimated at 15% of GDP. Over the past five years, the average annual consumption of processed food and beverages has grown at 9.68% and 6.66% respectively.
According to forecasts of BMI Research, Vietnam’s food industry is expected to achieve double annual growth in 2015-2020 of 10.9%, which makes it a very attractive field for investors.
Entering Vietnam market
Food industry is poised for huge growth, increasing its contribution to Vietnamese trade in recent years. In Vietnam, the food sector has emerged as a high-growth and high-profit sector due to its immense potential for value addition, particularly within the food manufacturing and F&B industries. According to a research released by MUTRAP EU-Vietnam and VCCI, in 2016, there are about 9,000 enterprises involving in food manufacturing and thousands of small-scale production establishments (excluding direct producers and sellers, retailers and traders of food and beverages).
The Vietnamese government has opened its market to foreign investments to be involved in all activities relating to food industry, from farming, food processing, food manufacturing to setting up a restaurant chain or wholesale/retail activities. It is visible in recent years that numerous international players have been seizing the opportunity to enter Vietnamese market. Establishing a new company is a straightforward approach for foreign investors wishing to engage in this attractive industry in Vietnam. In principle, foreign investors shall follow procedures prescribed in the current legislation: whether setting up a wholly foreign-owned or a joint venture with Vietnamese partners, the required certificates are the Investment Registration Certificate (“IRC”) and the Enterprise Registration Certificate (“ERC”). Besides, other sub-licenses must be satisfied before and during operations (e.g. certificate of food safety are applied to food manufacturers and sellers; veterinary hygiene certificate for fresh and raw food originated from animals, etc.).
Foreign investors may also enter the market through a Merger & Acquisition (“M&A”) case as an alternative option for their investment in Vietnam. In fact, M&A cases in the F&B businesses have contributed significantly to the total M&A transactions. M&A can be a very effective and quick option for market entry by taking over available establishments, infrastructure, markets, clients. Moreover, with regards to administrative procedures, foreign investors are no longer required to apply for the IRC when contributing capital or buying shares of a local company according to the investment regulations. Plus, the sub-licenses already granted to the existing establishments help reducing time spent for the whole licensing process. However, in M&A cases other challenges to overcome such as aligning strategies, corporate culture, compliance standards (health safety environment and quality – HSEQ, accounting & financial reporting, social, tax, etc) between the existing business and the new investor still remain as vital as always.
Food safety and hygiene
Operating in the food industry, food safety and hygiene, among others, is a must of consideration. It is notable for investors to be aware of the fact that this has been an alarming issue in Vietnam for years and the Vietnamese government has been paying a lot of attention to control the situation.
Vietnam issued Law on Food Safety in 2010 (replacing an old Ordinance dated 2003) regulating many aspects of safety on the whole supply chains and including many players participating in the food production and trading business. Proof of the Government’s rising concern about this issue is the recent issuance of Decree No. 15/2018/ND-CP providing detailed guidance for the Law on Food safety with an aim to focus more on the post-inspection procedures applied to the food processing establishments.
Tax and Accounting for Food Industry
One major component in food production business is raw material, which tends to be a very significant cost of operations. While accountants base on the procurement documents and the actual payments when purchasing to record expenses of the business, expenses to be accepted by tax authority would be a different story. Under current Vietnamese regulations, expenses to be recognized for tax purposes (including Corporate Income Tax (“CIT”) and Value Added Tax (“VAT”)) must be related to business activity and supported by legitimate invoices and proper supporting documents. Considering that the food supply in Vietnam still largely depends on individuals and business households, it is a common issue for food processing enterprises to purchase materials not supported by legitimate invoices and/or equivalent supporting documents as required by laws (it should be well noted that not in all cases invoices are required, e.g. when purchasing agricultural products directly from farmers, the company only needs to prepare a list of purchases to be signed by the company’s legal representative). Failure in maintaining proper documentations would result in non-deductibility of such payments/expenses, eventually resulting to higher taxable profits subject to CIT and lower creditable VAT inputs. From an internal control perspective, cash on delivery as a traditional and primary sales channel in Vietnam and especially in this kind of market requires businesses to establish adequate controls to manage fraud risk.
On another topic, expenses related to damaged/spoiled materials should be of concern as well. Most natural foods have limited life and high level of vulnerability. As such, damage and spoilage may occur at any stage along the food processing chain, due to insect damage, physical damage, microbial infections, etc. or improper handling by the applied technology or human. From a business perspective, it becomes a cost for the enterprises if food is not controlled and preserved properly. It might have greater financial impact when such costs are not acceptable for tax purpose. In particular, only losses caused by natural disaster, epidemic or fire, or food spoilage due to expiry or changes in natural biochemical process without compensation will be treated as deductible expenses for enterprises; proper documents must be well documented as required by laws. For instance, required documents for food spoilage due to expiry or change of the natural biochemical process include a written record and explanation on the damaged food; a list of damaged food (specifying value of the damage, causes of the damage, types, quantities, value of recoverable goods (if any), goods input/output report, etc.) signed and sealed by the legal representative; compensation dossier accepted by the insurer (if any) and dossier identifying responsibilities of organizations and individuals obliged to pay compensation (if any). Although there is no cap or limitation on how much such loss would be allowed for tax purpose, the tax authority would have a tendency to be very cautious and request thorough explanations on a case by case basis.
CIT incentives are available, including a preferential tax rate (10% or 17%) and tax holidays (some years of tax exemption and some subsequent years of 50% tax reduction) which are granted to investment projects based on some specific business activities relating to the food industry (including agricultural enterprises applying high technologies; agricultural cultivation, planting of forest trees and aquaculture in geographical areas with difficult socio-economic conditions; production, propagation and hybridization of plant varieties and animal breeds; salt production, exploitation and refinery; etc.) or specific locations (within special economic zones or areas with difficult socio-economic conditions). Some additional CIT incentives are also available for manufacturing enterprises operating with a high ratio of female employees or ethnic-minority employees. Vietnamese Assembly issued a Law on Supporting Small and Medium-sized Enterprises (SMEs), promising special CIT incentives for SMEs including both preferential tax rate and tax holidays for a specific period of time. Specific CIT incentives for SMEs shall be provided in the updated Law on CIT.
Becoming a smart player with competitive advantages and staying in compliance
All in all, food industry has been proving itself to be a very promising area where both local and foreign investors can explore more potential with its competitive advantages. One of the keys to maintain a sustainable development is to be well aware of and keep updated with the various requirements of prevailing laws and regulations for compliance and strategic decision making.
First authors: Do Thanh Tam and Nguyen Thi Hong Hoa
On 18 June 2021, the Ministry of Finance issued Circular 45/2021/TT-BTC (“Circular 45”) providing guidance on the implementation of Article 41 of Decree 126/2020/ND-CP (“Decree 126”) dated 19 October 2020 of the Government on the application of the Advance Pricing Agreement (“APA”) on tax administration for companies having transactions with their related parties.