Dao Nguyen

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OUTSOURCING IN VIETNAM ISSUES TO CONSIDER
Presentation to ABA Section of International
Law Asia-Pacific Committee 2005 Spring Meeting

• Dao Nguyen
• Partner
• 15 April 2005

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Issues

• Background
• Choice of Entity
• Tax
• Intellectual Property
• Labour
• Foreign Investment
• Foreign Exchange Control
• Other Issues

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1. Background

• Outsourcing in Vietnam is primarily in the
  manufacturing sector and there are specific
  regulations in this regard.
• Outsourcing of services on a large-scale basis is
  still uncommon. Some outsourcing in IT sector
  (software development, programming, etc.). This
  is an area especially encouraged by Government
  and a number of incentives are available in this
  sector. No call centres, data processing centres
  etc. have been established.
• However, because outsourcing means the creation
  of employment of local Vietnamese, this is a
  sector the Government encourages and licensing
  formalities should not be a problem.

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1.Background

• Outsourcing in Vietnam include
• A U.S. Company signs an Outsourcing Services
  Agreement (OSA) with a service provider already
  established in Vietnam (Option 1)
• A U.S. Company setting up its own subsidiary to
  provide outsourcing services (Option 2).
• Response will consider both options where
  relevant.

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2. Choice of Entity
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3. Tax
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3. Tax
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3. Tax
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3. Tax
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3. Tax
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3. Tax
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3. Tax
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3. Tax
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4. IP

• Applicable to Both Options 1 2
• Enforcement is a problem.
• Licence of IP Objects (such trademarks
  industrial designs, etc.) must be registered
  with NOIP (National Office of Industrial
  Property).
• Technology transfer must be registered with
  Ministry of Science, Technology Environment
  (MOSTE).
• Note re technology transfer Unless approval is
  obtained from MOSTE, the contract cannot include
  restrictive clauses that seek to force the
  licensee to purchase or receive from the licensor
  or a third party designated by the licensor
  equipment, production means, the use right of IP
  objects, etc. Further, the contract may not
  prohibit the licensee from conducting research
  and development of transferred technology or to
  receive similar technologies from other sources
  or exempt the licensor from liabilities in
  respect of his/her faults or machinery or
  equipment supplied by the licensor if it fails to
  meet the quality provided for in the contract.
• No cap on licensing or technology transfer fees.

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4. IP

• If technology transfer contract includes elements
  of transfer of IP objects (such a trademarks),
  such transfer must be independent registered with
  NOIP. Thus, should have 2 separate contracts for
  technology transfer licensing of works.
• Whether work product is property of customer or
  service provider must be set out clearly in
  contract.
• (The Civil Code, states the owner of a work
  product is the person that creates such work,
  except work created pursuant to a contract or
  within the scope of his/her delegated
  responsibilities the person/entity that signs a
  contract with the creator of the work product
  based on terms of contract).
• See our Guide to the Protection of Intellectual
  Property Rights in Vietnam available at our
  website www.jsm.com

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5. Labour

• 3 types labour contracts definite, indefinite,
  seasonal
• No at-will employment relationship.
• Very difficult to terminate a contract (must
  follow specific disciplinary measures allowed by
  law and for specific reasons).
• Definite term contracts can only be signed and
  extended once. Thereafter, must sign indefinite
  contracts. If at end of term, no new contract is
  executed employment is continued term
  contracts automatically converted to indefinite
  term contract.
• Labour rules regulations must be registered if
  more than 10 employees.

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5. Labour

• 3 limit on expats forced localisation.
• Must register salary scales.
• Overtime may not exceed 200 hrs/years (300 in
  special cases) or 4 hours/day.
• Some new changes
• direct recruitment of employees permitted
• bonuses are optional
• pre-printed form labour contracts no longer
  required.
• Minimum wage US 50/month for HCMC Hanoi
  US 35-45/month in other cities.

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6. Foreign Investment

• RECENT IMPROVEMENTS
• Foreign Investment Law
• Decentralisation of Licensing
• Changes in Investment Policies
• Simplification of Formalities
• Flexibility regarding Investment Structures
• Govt committed to take action to further
  encourage FDI aims to attract US 4.2 billion of
  FDI in 2005 (further decentralisation and
  simplication of procedures, promote
  implementation of FIE projects issue list
  of natl projects calling for investment)

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6. Foreign Investment

• US-VN BTA
• Became valid 10 December 2001.
• Reduces import tariff for goods exported to US.
• Opens VN market for over 50 services sectors
  (e.g. wholesale/retail 3 years after 10
  December 2001, JVs (51VN, 49US) may be
  established 6 years after 51 - 49 restriction
  will be lifted 7 years from 10 December 2001,
  100 US invested cos. may be set up).
• IP protection.
• Transparency.

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7. Foreign Exchange

• Fairly straightforward.
• Law sets out long list of permitted forex
  transactions (including right to remit profit
  which can be done quarterly, semi-annually
  (based on estimated profits) or annually (after
  tax is finalised).
• As long as proper documents are provided to banks
  to evidence proper purpose, a forex transaction
  can be carried out (for example, to remit
  profits-must submit to bank evidence that corp.
  income tax has been paid decision to distribute
  dividends by Board).
• Offshore loans (including shareholders loans
  over 1 years) must be registered with the Central
  Bank (State Bank of Vietnam) prior to
  disbursement).
• Good news previous requirement that
• companies must sell 40 of their foreign
• exchange receipts has been abolished.

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8. Other Issues Contract Law

• Three separate bodies of law
• Civil Code
• Ordinance on Economic Contract
• Commercial Code
• Important to classify contracts
• Different limitation periods, different levels of
  damages available depending on types of
  contracts.
• Important to properly set rights obligations
• in contract.

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8. Other Issues Common Issues to be aware of

• Know your counterparty
• Operating costs
• costs have fallen in recent years including
  telecoms costs, tax for local employees etc.
• some element of dual pricing in utilities,
  advertising and other areas remains.
• Government committed to abolish dual pricing by
  end of 2005.
• Dispute resolution
• the court and arbitration procedures are not
  reliable and the system ill equipped to deal with
  complex commercial disputes.
• consider alternative dispute mechanisms in your
  arrangements, securing your counterpartys
  commitments when possible and so on.

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8. Other Issues Pitfalls to avoid

• Documentation
• must be carefully checked.
• executed by a valid and authorised representative
  and be accurately translated.
• Consents and approvals
• for any proposed business transaction, ensure
  that the law is followed.
• Allow sufficient time to set up business in
  Vietnam
• delays in securing approvals, and negotiating,
  etc. are common.

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QA
and Thank you
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JSM contacts in Vietnam
Eleven years in Vietnam Advising in Asia since
1863 Ho Chi Minh City Hanoi Contact Dao
Nguyen Hoang Anh Nguyen Tel [phone]
8244316 Fax [phone] Email da
o.nguyen_at_jsm.com
hoanganh.nguyen_at_jsm.com