As the worldwide economic output pivots towards Asia, Vietnam is in the process of becoming the new “World’s factory” and center for the tech industry. Political stability, economic reforms, and continued economic growth are factors, however, the low cost of operating is one of the most attractive selling points attracting foreign investors to this dynamic young economy.
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Among 9 countries in Asia, Vietnam has the second-lowest operating costs, as published in a report by TMX. It is further indicated in the report that, on average a manufacturing company in Vietnam incurs a minimum of USD 79,280 monthly manufacturing cost, only higher than that of Cambodia’s USD 65,313, according to the report by VnExpress.
However, when compared with neighboring commercially-viable countries, Singapore and Thailand incur a minimum of $366,561 and $142,344 operating costs respectively. The culmination of factors like low wage rates, a business-friendly environment, and favorable investment policies helped by the low operating costs are acting as a stimulant in attracting foreign investors to set up their company in Vietnam.
Cost of Doing Business in Vietnam: Understanding Labor Costs
Apart from having low manufacturing costs, Vietnam provides an inexpensive pool of labor with a minimum wage of only USD 193.44 per month. However, the lack of availability of skilled labor in the country is still a hurdle for foreign companies.
In the overall country competitiveness scorecard, Vietnam ranks fifth in the category of “business environment”. Moreover, the report emphasized that Vietnam is the only country considered in the “high potential” group in terms of lower logistics costs, according to VnExpress.
Manufacturers’ inclination towards hiring labor from Vietnam
The manufacturing sector played a significant role in the upliftment of the U.S. economy. According to Statistica it contributed about 10% to the country’s GDP in 2018. Due to the availability of cheap labor, manufacturers in the U.S. generally hire manpower from China and Mexico. For instance, in the year 2018, China’s manufacturing labor costs were estimated at USD 5.51 per hour, whereas in Mexico it was USD 4.45 per hour. With Vietnam’s USD 3 per hour, on average, pay rate it’s a much more competitive location for American manufacturers to do business in.
Tax Incentives for promoting FDI
Tax incentives are considered one of the most crucial aspects of attracting foreign companies to Vietnam. Both foreign and local investors can leverage Corporate Income Tax (CIT) incentives and can be further classified as follows:
Preferential Tax Rates: As reported by BloombergTax the standard CIT is 20% and usually goes up to 50% depending on the project specifications. However, preferential tax rates of 10%, 15%, and 17% are available to investors, depending on specific provisions. These tax rates can either be applied for the project’s entire tenure or a specific period.
Tax Holidays: On meeting certain criteria, companies can pay 50% of the payable tax or decide not to pay CIT for a specific period of time, depending on local tax regulations. This period is usually four years and begins on the occurrence of either the fourth year of revenue generation or the first year of earning profits, whichever is earlier.
The Vietnamese government has been proactively involved in improving the investment landscape for foreign investors. The economy’s credible performance despite the aftermath caused by the COVID-19 pandemic has instilled confidence to invest in Vietnam.
About UsCekindo is part of InCorp, and is a leading consulting firm of Market-Entry and Corporate secretarial services to clients expanding and operating in Vietnam and Asia Pacific.