Tax and infrastructure benefits of manufacturing in Vietnam, Malaysia and Thailand

Companies and enterprises considering moving their production facilities out of China should evaluate alternatives by the balance of cost and benefit. One of the most significant overheads for any business setup is the local tax regime in the manufacturing region. ASEAN countries are expanding their manufacturing sectors, promoting themselves as “future ready” for manufacturing in South East Asia. According to the World Economic Forum, ASEAN is projected to become one of the largest economies by 2020.

 

Vietnam, Malaysia and Thailand are emerging manufacturing regions that attract large investment while developing local infrastructure and advanced manufacturing capacity. The governments of these three countries have set taxation and investment policies designed to attract foreign direct investment in the manufacturing sector. Decisions should be made by weighing the location and current level of infrastructure against the local tax regimes. Tax rates should be evaluated alongside incentives when comparing the benefits of regional tax regimes during the planning stages of doing business in ASEAN countries

 

Vietnam

 

Vietnam offers a corporate income tax of 20% on local profits for companies operating locally. Value added tax is set at three brackets, 0, 5%, and 10% with most companies paying 10%. Personal Income Tax is set at 35%, for senior management, and 5-10%  for ordinary labour. Vietnam’s government offers preferential rates and tax holidays to encourage manufacturing setup in the country and aid the development of selected regions. The preferential rates offered, depending on the company’s activities and structure, are 10% for the duration of the project, 10% for 15 years after the first year of income, 17% for the entire project, and 17% for 10 years after the first year.

 

Vietnamese laws also allow for tax holidays: an exemption for 4 years, with 50% less tax amounts for next 9 years, tax exemption for 4 years, with 50% reduction of tax for 5 years, 2 years exemption with a 50% reduction for the next 4 years.

 

The Vietnamese government also provides incentives for investments in selected locations, industries and investment zones. These incentives vary by region according to the level of development and requirements in the area. There are two classifications of these types of areas: “disadvantaged” and “very disadvantaged”, with different levels of preferential tax rates and tax holidays available to investors. These regions lack infrastructure and skilled labor, and therefore require substantial investment. Industry based incentives are provided for the coffee industry, which is expected to eventually overtake Brazil’s as the world’s largest, as well as the automotive, electronics, pharmaceutical and e-commerce industries.

 

There are three categories of prioritized business lines that qualify for investment incentives – High-Tech, Large Scale and Socially Important. I.T, new materials, automation, software development, biotechnology and scientific research are classified as high tech prioritized business lines. Manufacturing enterprises with a minimum investment of VND 6,000 billion (equivalent to around USD258 million) qualify under the large scale category while investments in education, culture, healthcare, sports and environmental protection are considered socially important. Enterprises with interests in any of the prioritized business lines or incentivized industries can benefit considerably from the tax regime in Vietnam.

 

Malaysia

 

Malaysia’s taxation laws follow the territorial principle, only assessing income earned in the country. The tax rate is set at 24% and 17% for the first 500,000 RMT earned by small and medium enterprises. Companies with income growth of 5% or more in one year can claim a lower tax rate on some of their income, usually 1-4% reduction from the standard rate. The Malaysian Government provides exemptions and incentives in the following sectors: petrochemicals, logistics, financial services,  biotechnology, education, sustainable/renewable energy projects and information/communications technology.

 

Malaysia grants a 5 year partial exemption from income tax to companies granted pioneer status by meeting certain conditions while participating in promoted industries, such as high technology, hotel operators, heavy equipment and machinery, and vocational training. Investors can also take advantage of an Investment tax allowance of up to 60% of capital expenditure in first 5 years- this would include the setup cost for production facilities, including factory premises and equipment.

 

Companies should contribute to social security- known as SOCSO in Malaysia- at the rate of 1.75% for each employee, Employee Provident Fund contribution requirements are 11% for the employee, and 12/13% from employer. There is no Capital Gains Tax or Inheritance Tax, except from disposal of real property, which is taxed at 30% if sold within the first three years, and at 20% and 15% in the fourth and fifth years and 10% if sold after six years.

 

Thailand

 

Companies are considered resident if incorporated in Thailand and registered with the Ministry of Commerce. Residents are taxed on worldwide income, while non residents are taxed on local Thai sourced income only. The corporate tax rate is set at 20%, with lower rates set for some small and medium enterprises. Profits from international banking facilities are taxed at 10%. Payroll tax is automatically remitted to the tax authorities, and real property tax is set at 12.5% of the appraisal value of the property. Foreign company branches are taxed like limited companies, and corporate income taxes are payable on net taxable profits. Capital gains are subject to normal corporate income tax.  Dividends paid between Thai companies are potentially exempt from corporate income tax, although usually 50% of the dividends are subject to normal corporate income tax rates.

 

Thailand seeks to develop itself as a high tech manufacturing hub, targeting the Robotics, Advanced Manufacturing, Advanced Material Technology, Aviation, and Digital Technology sectors. The government actively seeks investment in high tech sectors and offers many incentives particularly targeted at offsetting relocation and setup costs. A 15 year corporate tax exemption is granted  for some industries. Water supply, transport and electricity costs are eligible for double deductions while some research and development expenditures can be deducted up to 300%. Intellectual property acquisition and licensing fees are deductible up to 200%. Some manufacturing equipment is eligible for exemptions on import duties, and some infrastructure expenses are tax deductible within its Industrial and Special Economic Zones.

 

Make your choice

 

When choosing between Vietnam, Malaysia and Thailand and comparing tax rates across ASEAN countries, consider the incentives and liabilities. Thailand’s high tech development initiatives are particularly aggressive, although set up expenses, depending on the existing infrastructure and available workforce, can potentially amount to the equivalent of years of tax. All variables depend on individual circumstances, with some regions being more beneficial than others depending on the industry and level of manufacturing infrastructure required. Don’t hesitate to contact us with any questions about taxation or business setup. With our expertise in tax services and business advisory, we can identify the ideal configuration of incentive and infrastructure for your manufacturing and production strategies in 2019 and beyond.

 

An overview and comparison of the rates as follows:

 

 

Corporate Tax Rate

Capital Gains Tax

                     Allowances

Vietnam

20%

None

Preferential rates and tax holidays in selected regions and industries:

Potentially as low as 10% for duration of project in extremely disadvantaged areas

Malaysia

24%

None

5 year partial exemption of income tax for companies with pioneer status in selected industries; Investment tax allowance up to 60% of capital expenditure in first 5 years

Thailand

20%
(Lower rates for SME)

Capital Gains subject to Corporate Tax

15 year tax exemption in some industries; Some Research and Development deductible up to 300%, I.P acquisition deductible up to 200% (mainly in High-Tech sectors)
Import duty exemptions on manufacturing equipment, infrastructure expenses tax deductible in Special Economic Zones

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