US embassy cable - 05HANOI585

UNCLAS  HANOI 000585 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR EBRYAN 
STATE ALSO FOR E, EB AND EAP/BCLTV 
STATE ALSO PASS USAID FOR CHAPLIN/ANE 
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO 
USDA FOR FAS/ITP/SHEIKH 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, VM 
SUBJECT: Vietnam:  Implementation of BTA Customs Valuation 
Obligation 
 
 
Sensitive but Unclassified -- Please protect accordingly. 
 
Ref (A) 04 HANOI 980 
 
1. (SBU) Summary:  The GVN has made strong efforts to 
implement the U.S.-Vietnam Bilateral Trade Agreement (BTA) 
obligation to adopt a system of customs valuation based on 
the transaction value of the imported merchandise - in 
accordance with the WTO Customs Valuation Agreement (CVA). 
The GVN is now applying the CVA to more than 90 percent of 
its imports, on goods from more than 50 countries, including 
the United States.  The few complaints Mission has heard 
from companies about non-application of CVA appear to be 
isolated incidents.  However, just over a year after 
implementation began, GVN Customs officials are struggling 
to address concerns regarding declining revenues and under- 
invoicing.  Corruption and lack of human and technical 
capacity within Customs remain serious problems. The World 
Bank is planning a USD 75 million loan for customs 
modernization. End summary. 
 
GVN Implements Transaction Value 
-------------------------------- 
 
2. (SBU) According to the terms of the BTA, the GVN was 
obligated by December 10, 2003 to adopt a system of customs 
valuation based on the transaction value of the imported 
merchandise (rather than arbitrary reference or minimum 
prices), in accordance with the Agreement on Implementation 
of Article VII of the GATT 1994 (i.e. the Customs Valuation 
Agreement or CVA).  A June 2002 Government Decree (60), a 
December 2003 Ministry of Finance (MOF) Circular (118) and 
multiple official letters have effectively established the 
legal framework for implementing the CVA.  Although 
initially Vietnam only planned to apply CVA to goods 
originating from the United States and ASEAN, the GVN has 
phased in application of CVA to goods from 52 countries 
including China on a reciprocal basis over the last year. 
Currently, according to the General Department of Customs 
(GDC), Vietnam applies CVA to about 90 percent of all 
imports.  Also, although in early 2004 the MOF decided to 
continue using minimum prices to determine customs duties 
for seven categories of goods (reftel A), this decision was 
reversed in March 2004.  No minimum prices for goods remain. 
 
Declining Revenues 
------------------ 
 
3. (SBU) GDC Officials from Hanoi told Econoff in mid- 
February that CVA implementation had resulted in a decline 
in the amount of customs revenues collected.  While reticent 
to state a specific figure, the Deputy Director of the Tax 
Collection Department estimated implementing the CVA has 
resulted in a 15 to 20 percent reduction in revenues.  For 
Vietnam, import and export taxes contribute about 12 percent 
of total revenues (Note:  This is a MOF estimate. Other 
estimates indicate this figure could be as high as twenty 
percent.  End Note.) 
 
The Search for Real Prices 
-------------------------- 
 
4. (SBU) GDC officials also emphasized their concern that 
under the CVA, there is widespread under-invoicing of high 
value goods, including imports from the United States. 
Under the current system, customs officials accept the 
declared value of shipments at the port, but can then seek 
clarification of the declared value from the importers 
within 15 days.  However, GDC officials complained, Vietnam 
has limited information to verify the accuracy of the 
importers' declared prices.  Customs has been working to 
upgrade its reference "price bank" but is having difficulty 
getting good information on a number of products such as 
wine, automobiles, cosmetics and motorcycles.  Customs 
officials noted that the values of U.S. goods imported into 
Vietnam via third countries are particularly difficult to 
assess.  According to the GDC, some U.S.-origin goods 
shipped via third countries have been imported into Vietnam 
with invoice prices up to 50 percent lower than the "real 
prices."  GDC officials acknowledged that Vietnam's "fairly 
high" duty rates encourage importers to under-invoice. 
 
 
5. (SBU) In November 2004, the GDC issued a decision (1361) 
outlining procedures for requesting consultations with 
importers regarding declared invoice prices.  Soon after, 
Customs began issuing written requests for consultations to 
companies importing high-value items.  (Note:  These 
consultations were essentially unnecessary prior to CVA 
implementation because Customs applied import duties based 
on reference or minimum prices.  End Note.)  According to 
the Director of the Tariff Valuation Section of HCMC 
Customs, factors such as shipment size, value of the 
imported goods and significant differences between declared 
values and reference prices are factors that trigger a 
request for consultations.  Officials from HCMC Customs, 
which handles about 60 percent of all of Vietnam's imports, 
estimated that they have requested consultations with 
approximately ten percent of importing companies in the last 
few months.  In about two percent of the cases, the 
companies failed to substantiate the declared invoice 
prices.  Fifty cases have been referred to the Post- 
Clearance Audit Section for further investigation. 
 
6. (SBU) Econoffs spoke with a number of importers to 
discuss implementation of CVA in Vietnam.  For the most 
part, importers concur that the legislative framework the 
GVN put in place a year ago has established a solid 
foundation for applying CVA in Vietnam.  However, importers 
expressed concern over Customs' recent efforts to improve 
verification of declared invoice prices, highlighting the 
lack of training of customs officials.  Importers also 
acknowledged that CVA implementation has not made a 
significant impact on the level of corruption within 
Customs.  Most importers (or the importing agents they hire) 
still routinely pay "facilitation fees" at each stage of the 
clearance process. 
 
7. (SBU) The Director of Tan Khoa Trading Company, a HCMC 
wine and spirits importer, told Econoff that HCMC Customs 
has asked for consultations on every container his company 
has imported since January.  Each time, HCMC Customs asked 
Tam Khoa to provide documentation supporting the declared 
invoice price for his shipments, including copies of bank 
documents, contracts, written price confirmations from 
suppliers, and invoices for sale of the goods in Vietnam. 
At least two of these requests for consultations have been 
on repeat shipments of the same kind of goods.  To date, 
Customs has concurred with Tan Khoa's declared invoice 
prices and not required payment of additional duties. 
However, according Tam Khoa's Director, these consultations 
are a drain on the company, as his employees have to spend 
significant time copying the documents and meeting with 
customs officials. 
 
8. (SBU) HCMC Customs has also requested consultations with 
Thicopha Co., a Vietnamese private company that imports U.S. 
processed food (including products from Hershey, Sunmaid, 
Keebler, Post, and Welch's.)  However, Customs has only 
requested consultations on three of Thicopha's shipments. 
These shipments contained chocolate and raisins, which are 
considered higher valued goods.   HCMC Customs has not 
focused on Thicopha's other shipments of "lower-value" goods 
including cereal, tortilla chips, and juice.  After 
consultations on the declared value of the three disputed 
containers, HCMC Customs determined that Thicopha's declared 
invoice price was too low and calculated that the company 
owes about USD 100,000 in import duties and VAT taxes on the 
three containers.  (Note:  One of these containers had a 
declared invoice value of just over USD 13,000 or USD 1.5 
per kilo.  Thicopha paid about USD 8,700 in customs duties 
and VAT on this container.  However, HCMC Customs claims the 
real invoice price should be USD 6 per kilo plus VAT and 
that Thicopha owes about USD 33,000 in taxes and tariffs on 
this container.  End Note.)  Thicopha is currently waiting 
for a written request from HCMC Customs for payment of the 
additional taxes and duties.  The Chairman of Thicopha plans 
to contest the decision.  At the same time, the company has 
delayed shipment of additional containers of chocolate and 
raisins until its issues with Customs are resolved. 
 
9. (SBU) While the directors of both Tan Khao and Thicopha 
said they did not feel they have been singled out by 
 
 
Customs, both were clearly very unhappy with the 
consultation process.  The Director of Tan Khoa expressed 
frustration that his company's good record with HCMC Customs 
has not resulted in fewer requests for consultations.  Tan 
Khoa, a private domestic company that has been in business 
since 1986, pays about VND 21 billion (more than USD 1.3 
million) in taxes each year.  For several years, HCMC 
Customs has commended Tan Khoa for being a good taxpayer. 
However, on shipment after shipment, Tan Khoa is required to 
provide additional documentation on its declared invoice 
prices.  The Director believes that Customs officials need 
additional training and information on the products they are 
dealing with so they are better prepared to handle clearance 
of shipments.  The chairman of Thicopha noted that while he 
has not been asked for a bribe, he speculated that if he 
offered to pay off the officials in charge of his case, his 
tax bill would disappear. 
 
Post Clearance Audit 
-------------------- 
 
10. (SBU) According to officials from HCMC Customs, when 
disputes over declared invoice prices are not resolved 
through the consultation process, they are referred to the 
Post Clearance Audit (PCA) office for investigation and 
resolution.  If the local PCA office cannot resolve the 
dispute, it is then referred to the central PCA office at 
the GDC in Hanoi.  Article 32 of the Customs Law and a 
December 2001 Government Decree (102) provide the existing 
legal framework for conducting post-clearance audits. 
(Note:  The Customs Law was promulgated in late 2001 and 
went into effect in 2002.  End Note.)   Customs has about 
200 officials assigned to handle post-clearance audits in 
Hanoi and in post-clearance units in provincial customs 
offices throughout the country.  They are tasked with 
inspecting possible violations of the Customs Law at any 
time within five years of the date goods clear customs.  The 
PCA does not operate on a risk management basis; audits are 
not conducted randomly and are not used to deter fraud. 
Rather, post-clearance inspections only take place if 
Customs has reason to suspect that a violation of the 
regulations has taken place. 
 
11. (SBU) According to Customs officials and a variety of 
technical assistance providers, reforming Vietnam's post- 
clearance audit system is one of the primary objectives of 
GVN efforts to revise the Customs Law.  The National 
Assembly is currently scheduled to approve amendments to the 
Customs Law at its May 2005 session.  However, it appears 
very likely that this date will slip to November 2005. 
Vietnam is receiving significant technical assistance revise 
the Customs Law, including from the USAID-funded Support for 
Trade AcceleRation (STAR) project, Japan International 
Cooperation Agency (JICA) and the World Bank (WB). 
 
Other Customs-Related Obligations 
--------------------------------- 
 
12. (SBU) In addition to CVA implementation, the BTA has 
several other customs-related obligations such as 
implementing and enforcing border measures to protect 
intellectual property rights (IPR).  Articles 57-59 of the 
Customs Law authorize Customs to protect IPR at the border. 
A December 2003 Circular (101) and a December 2004 Circular 
(129) provide more detailed guidance on border enforcement. 
However, IPR enforcement at the border (and generally 
throughout Vietnam) remains weak. 
 
13. (SBU) The BTA also obligates Vietnam to establish 
procedures to review administrative decisions, including on 
customs issues.  According to the BTA, these procedures must 
include an opportunity to appeal to an administrative body 
and then, if necessary, to a judicial body.  Vietnamese law 
currently does not support this obligation because cases 
that are appealed administratively cannot subsequently be 
appealed judicially.  The GVN, with assistance from STAR, is 
currently considering how to bring the Law on Complaints and 
Denunciations into conformity with BTA obligations on 
administrative review. 
 
Customs Modernization 
 
 
--------------------- 
 
14. (SBU) In March 2004, the MOF approved a "Strategic Plan 
for customs Reform and Modernization for 2004-2006." (Note: 
some of the goals and objectives of this plan extend out to 
2010.  End Note.)  The Strategic Plan document acknowledges 
shortcomings in customs operations including:  the low level 
of skills and expertise of customs officials, obsolete and 
insufficient information technology systems, corruption, and 
insufficient post-clearance audit procedures.   The 
Strategic Plan focuses on five primary areas for reform: 
institution building; upgrading information technology and 
equipment, reforming organizational structure, training and 
human resource development and upgrading facilities and 
infrastructure. Some of the specific goals cited in the 
strategy document include:  moving to a management system 
based on risk management techniques; reforming and 
standardizing customs procedures; automating customs 
procedures for 95 percent of goods; reforming personnel 
management including recruitment, training and retention of 
staff.  An advisory committee, chaired by a Vice Minister of 
Finance and including representatives of the MOF, GDC and 
related line ministries, is overseeing the customs reform 
effort. 
 
15. (SBU) The World Bank is currently finalizing plans to 
provide an approximately USD 75 million dollar loan to the 
GVN for customs modernization.   The "Vietnam Customs 
Modernization Project" (VCMP) will be implemented over five 
years, from June 2005 to December 2010 and will seek to 
strengthen the capacity of Customs by 1) introducing modern 
systems and procedures based on international practices; 2) 
improving the organizational structure and strengthening the 
human, financial, and physical resource capacity of the GDC 
and 3) updating the GDC's information and communication 
technology systems.  World Bank representatives have worked 
closely with USAID, JICA, the IMF, the Asian Development 
Bank and the EU to develop the project proposal. 
 
16. (SBU) Comment:  The GVN should be praised for its 
efforts to put in place a solid legal framework for 
implementing the CVA.  With the help of significant 
technical assistance from a variety of donors, the GVN is 
moving forward with broad customs modernization and reform 
and should be encouraged in these efforts.  Mission will 
continue to look for opportunities in which the USG can 
provide additional assistance. 
 
MARINE 
 
 
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