Grant Thornton: Private Equity Investment in Vietnam Remains Strong

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April 13, 2016

Vietnam Advisors Exclusive Interview with Ken Atkinson, Executive Chairman Grant Thornton Vietnam Ltd.

ken atkinson private equity vietnam grant thornton chairman

Vietnam ranks second in the world for Private Equity Investment due to the enhanced business and entrepreneurial environment and a steadily growing middle class. Demand for global goods and services remains strong in this country of 90 million people. Ken Atkinson has been at the helm of Grant Thornton Vietnam for 25 years.

Ken’s goal is to help clients achieve their objectives by developing effective plans and strategies with options such as business startup and expansion, mergers and acquisitions, new investment, financial restructuring, turnaround and divestiture.

Can you share with our readers your background and how you arrived in Vietnam?

I started my career in banking in London. In 1977, I was seconded to Asia to help set up a deposit taking company in Hong Kong. I continued to work in Asia mainly in the PRC between 1979 and 1983. I fell in love with Asia and instead of settling back in the UK I set up my own business in Hong Kong in 1983. One of my European clients whom I was assisting in China asked me come to Vietnam to do a feasibility study for a project in 1989. I spent a week in Vietnam and was so impressed with the people and the potential of the country I moved my business to Vietnam over a three year period.

What are the scope of operations of Grant Thornton in Vietnam?

Grant Thornton Vietnam is a full member firm of Grant Thornton International, one of the major global accounting networks. In Vietnam we have offices in Hanoi and Ho Chi Minh City with over 240 full time staff and 15 partners. We provide a full range of services including assurance, tax compliance and advisory, including advisory transaction support, operational advisory, business process improvement

Private Equity investment in Vietnam remains a significant driver behind Vietnam’s economic growth. Can you tell us about the current sentiment of PE investors?

In the 14th survey on the Private Equity sector carried out by Grant Thornton between December 2015 and January 2016, a majority of respondents have maintained their positive views towards Vietnam’s economy (though the proportion of positive views was 11% less than that 6 months ago). In the Survey Q4-2015, the results indicate significant changes in the sources of transactions, where most of participants are expecting more transactions from “SOE’s equitization” rather than from “Private/Family owners”. 86% of respondents forecast that the level of investments will increase in the next 12 months. Although the results were unchanged in comparison to that of Q2-2015, the number of participants citing “significant increase” has risen from 7% to 11%.

When asked about the level of investment attractiveness of Vietnam in comparison to other neighboring countries, the country has been ranked second by 25 percent of  respondents. The first spot still belongs to Myanmar which has been considered as a new investment destination, especially after its successful general election in which the democratic party has finally taken over the control of power from the military.

What are some of the factors you see as having contributed to the appetite for increased investment?

The outlook has been supported by various developments, including the two legislative changes allowing private sectors to participate in the government’s infrastructure projects and increased foreign ownerships limits in listed companies, AEC and TPP. In particular with the latter two, Vietnam ranked second among AEC members and ranked first among TPP members to receive more investments after joining, according to the assessment of the American Chamber of Commerce.

With regard to the AEC, it is expected that Vietnam will receive more FDI on the back of the AEC removal of non-tariff barriers and the reduction to zero of 90% of the goods currently subject to tariffs, and a reduction in the others between now and 2018. In connection to TPP, the participation will help Vietnam integrate into the global supply chain and also increase its trade volume with major economies such as Japan and the US.

From the Grant Thornton Survey what were the sectors most attractive to PE Investors?

The Retail sector and the Food and Beverage (F&B) sector are considered the two most attractive industries for PE transactions as selected by 51% and 41% participants, respectively. Recently, Vietnam has been considered as one of the most promising consumer markets in Asia, benefiting from a large population, rapid growth of income per capita, and increasing urbanization.

According to A.T.Kearney, a well-established global consulting firm headquartered in Chicago, the attractiveness of Vietnam’s retail sector was ranked 28 globally. Though fast growing in recent years (c.9% in 2015) the sector is considered as in the early development phase with modern trade channels only accounting for 20% which is fairly low compared to other regional countries. The large population with a growing middle class, together with the a growing urbanization that will cause changes in shopping habits, which will provide solid supports to facilitate faster growth rates, expected at CAGR 13% in 2015-2018. Such attraction has lured both large international and domestic investors such as BerliJucker (Thailand), Aeon (Japan), Vincom (VN) etc., creating a fierce competition in this industry. With the opening up for investments in the retail sector as a result of Vietnam’s WTO commitments, it is expected there will be more PE transactions in this sector in 2016.

Having similar key drivers to the retail sector, the demand of F&B sector is increasing fast. The increase in disposable income levels caused a diversified demand from low-to-high end products, changes in lifestyles, and the habit of drinking and eating out particularly in major cities, it is expected that the growth rates of beverage sub-sectors and packaged/fast food sub-sectors are in range of 7-11% for 2016 and 3%-9% p.a between 2015-2020 respectively. With CPI remaining relatively low and lower import tariffs, F&B items would be more affordable to the mass population. Currently, both domestic and foreign manufacturers have been expanding their capacities and introduced more new products. Together with a growing number of food retail channels, the F&B sector is promising to grow rapidly to meet the strong demand of consumers.

In the context of the many tax regimes you have been exposed to, where would you rank the Vietnamese corporate tax codes? Can you give us someexamples?

Compared to other developed countries such as the UK or Singapore, the Vietnamese tax system (tax rates, tax incentives) seemed complicated. The Law on Tax requires too many generic supporting documents and includes too many specific rules that cause many limitations for businesses in processing working papers on tax. Secondly, the Vietnamese Tax authority is the only authority that can explain and resolve issues when tax disputes occur. Moreover, the officers here have unlimited rights in evaluating all supporting tax documents relevant to the Law on Tax. Finally, the Vietnamese tax system is developed separately from an accounting system.

Take as an example tax deductible expenses for advertising and promotion (A&P). The Tax authority has all the power to evaluate and consider whether or not the expenses are relevant for the business and the operation. If the company fails to convince the authority, the A&P expense will not be deductible for tax purposes.

What changes do you anticipate happening with the Vietnamese tax code in the next several years?

The Vietnamese authorities tend to adapt and apply automatically international tax rules such as DTA or Duty-Free in the future. At this moment, these regulations are not popularly implemented by the Tax Authority although these regulations have been applied internationally in many countries. Businesses still have to register for the international tax incentives to the Tax Authority. This has caused many obstacles for the taxpayer when submitting documents and it takes a long time to evaluate these supporting documents. Hopefully, with the participation in TPP and other free trade agreements like the EU – VN FTA in the coming times, the Tax Authorities will quickly apply the latest international regulations so that paying tax or submitting tax documents are not a burden for businesses in Vietnam.

What are some pitfalls foreign companies should be aware of, from a taxation standpoint?

Firstly, tax incentives are a good example. In order to be entitled to tax incentives, the investor must declare in an explanatory letter on business scope as well as explanation of the proposed legal representative’s technical experience when establishing a company. They must prove their business operations are in line with those stated in the license to the Tax Authority. Secondly, foreign businesses should comply with the requirements from Tax Authority’s officer regarding tax deductible expenses. As I mentioned above, the officers here have unlimited rights in evaluating all supporting tax documents relevant to Law on Tax. So if they comply with specific requirement from the authority, it is easy for them to convince the officer who processes their supporting tax documents.

Can you share with us benefits of the Vietnamese tax code that are not generally appreciated by foreign businesses?

Firstly, Tax Refund is the first benefit that is not appreciated by foreign businesses. The main reason is due to the complicated procedure that takes a lot of time for companies to prepare supporting documents. Tax Loss Carried Forward is another unappreciated advantage that is available to foreign enterprises. This cannot always be utilized by the investor because of unfavorable assessment from the local Tax Authority even when the business operation of the company does not generate any profit. Another one is Tax exemption under DTA. Due to the lack of experience of the local Tax Authority in some cities in Vietnam, who do not know or understand the application of the latest Tax regulations, exemptions are refused and then rulings have to be sought from the General Department of Taxationif the investor wishes to pursue this.Moreover, the inconsistency in explanation and guidance between the General Department of Taxation and local Tax Authority also causes many obstacles when processing the submitted documents so that the local Tax Authority tend to deny the DTA registrations.

What advice do you have for global business executives about how to think about Vietnam relative to other developing markets?

I do not think that there are too many differences from a business perspective in that the rule of law is still very weak, there is still a lack of transparency in many business dealings and a different few on ethics in business. However, with a population of over 90 million and growing by more than 1% per year Vietnam is not a market to be overlooked or just passed by.

Vietnam is a dynamic country which has achieved high levels of GDP growth since the influx of foreign investment starting in the early 1990’s. The population is young, well educated, and ambitious  with an ability to learn quickly and is generally hard working.

The Vietnamese are very brand conscious as consumers and have a strong preference for foreign brands and the middle class is growing quite quickly with an increasing level of disposable income.

However, what is different is that Vietnam is culturally quite different from the rest of Asia and it is important to understand the culture and get under the skin a little when doing business here. The people are warm and friendly and have very much a party spirit in the non-political context! There is still a noticeable difference in the culture between North and South with the north being far more conservative and where it takes much longer to build relationships which do however tend to be longer term.

“Go west, young man, and grow the country” was the common advice to young men in the US in the 19th century.  What would you tell young foreigners looking at Vietnam today?

Vietnam is a great place to live but a challenging environment to work in. Nearly all young people I know fall in love with Vietnam and the people and want to stay or return here.

It is important to learn and understand about the culture and if possible to learn something of the language which is very difficult unless you can invest time in language training and total immersion is recommended for the first few months.

If you are thinking of starting a business here be prepared for it to take longer and cost more than you budget for, and also you need to have a plan to stay focused as it is very easy to get distracted chasing rainbows.

Thank you, Ken, for your time today and all you do to move forward the investment environment in Vietnam. We look forward to hearing more from you in the future. For our readers who would like to find out more about Grant Thornton or to contact Ken directly, please click on the Grant Thornton banner on homepage for details.


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