Vietnam’s Draft Decree on E-commerce: Impact on Foreign Investors
- Vietnam recently introduced a draft decree which will impact foreign and local businesses involved with e-commerce platforms.
- The regulations are meant to regulate the fast-growing e-commerce sector in Vietnam while improving the government’s ability to impose tax obligations on e-commerce service providers.
- Vietnam Briefing gives an insight on the new draft and how this might affect foreign investors involved in e-commerce activities in Vietnam.
Vietnam’s government introduced a draft decree amending Decree No. 52/2013/ND-CP (Decree 52) regulating e-commerce platforms and activities. This will cover local as well as foreign businesses that conduct e-commerce activities in Vietnam.
While still in the draft stage, Dezan Shira & Associates’ Business Advisory Services Manager Tam Nguyen notes that “the main purpose of making an amendment to the current regulations on e-commerce is for the management of tax collection. Thus, the draft regulations will impact foreign investors directly that are involved in e-commerce activities as well as foreign traders who are e-commerce suppliers and service providers.”
E-commerce activities defined
As per the draft decree, an e-commerce service is defined as any e-commerce activity where the trader, individual or organization provides e-commerce services and sets up an e-commerce website that offers a place for other traders, organizations, and individuals to carry out trade, sales of goods or the supply of service activities.
The definition is more specific and does not includes businesses that are only involved in website and application design and therefore do not directly participate in the business operations of such websites, which is a welcome change.
As per the draft, a website is deemed providing e-commerce services if it provides the following conditions:
- It allows members to open sales booths for displaying and/or promoting goods and services;
- Members can open accounts that provide interaction or transactions with customers; and
- Have services related to the delivery of goods and services with customers.
Social networking websites fall under regulations
Thus, social networks would be liable for regulation as e-commerce platforms if they meet the aforementioned conditions but also make their subscribers directly or indirectly pay a fee to carry out these activities. An example would be the Facebook marketplace.
While foreign businesses are required to comply with Vietnamese laws, Vietnamese e-commerce providers are required to verify the identities of foreign businesses selling goods on their e-commerce platforms. They are also required to do the following:
- Ask foreign businesses to comply with export and import laws for those businesses that have no presence in Vietnam;
- Ask foreign businesses to determine commercials agents in Vietnam; and
- Organize the implementation of import activities regarding goods traded by foreign businesses.
The draft is not clear if these are mandatory requirements and it’s unclear what would happen if the foreign trader does not meet the above requirements.
Thang Vu, Associate Manager, Tax at Dezan Shira & Associates’ Ho Chi Minh City office notes that the new regulations will have an effect on several international e-commerce merchants like Amazon, eBay, Facebook, and Netflix. The purpose of the new law is to impose tax obligations on merchants, whether local or foreign, on Vietnam-sourced income from local individual customers.
The previous withholding tax system could only hold local companies liable for such obligations and the new regulation aims to rectify such billion-dollar-shortfall of tax collection.
Impact on foreign investors
Foreign businesses including those involved with cross-border e-commerce and B2C e-commerce businesses must comply with local laws. As per the draft decree foreign traders engaged in e-commerce activities is defined as:
- Those who set up e-commerce websites under Vietnam domain names (for example .vn);
- Those that set up e-commerce websites that are in the Vietnamese language; and
- Those that set up e-commerce platforms that have more than 100,000 transactions originating from Vietnam in a year.
For such, the foreign business will be required to set up a representative office in Vietnam.
In addition, foreign businesses are required to appoint a legal representative or set up a representative office in Vietnam if they carry out the following e-commerce activities:
- Those that set up an e-commerce website using Vietnam domain names;
- Those that set up a website that is in the Vietnamese language; and
- Those that set up e-commerce platforms where the number of transactions or visits or purchase orders by Vietnamese organizations or individuals exceeds a particular threshold.
Under the last bullet point, the Ministry of Industry and Trade (MoIT) in collaboration with the Ministry of Information and Communications, Ministry of Finance and so on, will regulate the threshold for the number of transactions or purchases.
Any imported or exported goods are subject to customs procedures and e-commerce providers are required to cooperate with the relevant authorities to prevent the illegal transaction of goods and services. E-commerce providers must file a report on their business operations and submit to the MoIT by January 15 of every year.
Market access conditions
The draft decree comes under the ambit of the new Law on Investment (LOI), which came into effect in January 2021. Foreign investors are therefore required to carry out investment in e-commerce activities in compliance of the LOI. Additionally, foreign investors that invest in e-commerce businesses must be listed under the ‘internationally reputable technology companies’ as announced by the MoIT.
While how this list is generated is still unclear, exceptions can be given to investors contributing to small and medium-sized startups. If this stipulation is finalized it may have significant implications for Vietnamese e-commerce companies that raise funds from foreign investors as they would have to meet the new requirements.
The draft, however, does not mention that the proposed regulations are retroactive, therefore the new regulations should not affect foreign investment that has already been approved.
The draft also adds companies providing logistics services and other supportive services that will come under the ambit of the decree. Logistic companies will share liability to provide documentation regarding the origin of goods during delivery.
Guaranteed payment system
The draft also mandates a guaranteed payment system where e-commerce websites are required to allow customers to make payments using this system. This means that payments must be kept in an intermediary account for a certain amount of time to settle any claims between customers and sellers.
The draft doesn’t specify the amount of time before the payment can be released to the e-commerce provider but this proposal may hurt small e-commerce companies that depend on revenue and cash flow.
E-commerce activities in Vietnam are on a high growth trajectory thanks to the pandemic and shifting consumer patterns. The proposal is part of the government’s plan to aid this growth while regulating e-commerce activities in Vietnam. The government has set out a target of reaching 55 percent of the population involved in online shopping by 2025.
While the draft decree offers more protection for Vietnamese consumers, it tightens conditions for foreign investment in e-commerce companies in Vietnam. It is, however, important to note that the decree is still in the draft stage and not finalized. The MoIT is expected to submit the decree to the government sometime in the first half of 2021. We will continue to monitor and issue insights regarding any developments related to regulations on e-commerce activities.