July 16, 2020
EU-Vietnam Free Trade Agreement enters into force as of 1 August 2020
The European Union (EU) and Vietnam signed a Free Trade Agreement (FTA)1 and an Investment Protection Agreement on 30 June 2020. The FTA enters into force on 1 August 2020 and will liberalize the majority of the import duties imposed by the EU and Vietnam for goods originating from the other country. The EU will liberalize 71% of its imports from Vietnam at entry into force and 99% after seven years. Vietnam will liberalize 65% of its imports from the EU at entry into force and the remaining trade – with the exception of a few products – will be liberalized after 10 years.
This Alert summarizes the upcoming application of the FTA and more information about how to benefit from the tariff preference under the FTA.
Key elements of the Free Trade Agreement
Trade in goods
The FTA is mostly aimed at duty free trade. It contains full dismantling of nearly all tariffs except for a few tariff lines that are subject to duty-free tariff rate quotas. On importation into Vietnam of products originating in the EU, sectors that will benefit from the immediate removal of tariffs are machinery and appliances, pharmaceuticals, chemicals, textiles and fisheries (salmon, halibut, trout and rock lobster). Tariffs on car parts, motorcycles, frozen pork meat, food preparations, wines and spirits will be dismantled over 7 years; tariffs on cars, chicken and beer will be dismantled over 10 years. Vietnam will maintain existing World Trade Organization tariff rate quotas for refined sugar, salt and eggs, albeit with a reduction of the in-quota rate to zero over 10 years.
Further, the EU grants market access preferences to several Vietnamese industries. Import duties imposed in the EU on textile apparel will have dismantling periods ranging from five to seven years for the more sensitive items and three years and at entry into force for less sensitive goods. The EU offered mostly duty-free tariff rate quotas for Vietnamese rice exports. Other goods which received improved market access via duty-free tariff rate quotas include sweet corn, garlic, mushrooms, sugar and high-sugar-containing goods, manioc starch, surimi and canned tuna. Non-processed shrimps will be liberalized as of entry into force and pangasius will be liberalized in three years.
Trade in services
The FTA will provide access to a wide range of services fields of business, computer, postal, social, higher education, environmental, distribution services, financial services, maritime transport services, air transport services and telecommunications.
The trade agreement will also present new opportunities for firms wanting to establish a commercial presence, by improving market access in services and many non-services sectors such as manufacturing. This means new opportunities to attract investment for instance for industrial production.
The FTA promotes a number of rules on e-commerce regarding the prohibition of customs duties on electronic transmissions, discussing issues related to the provisions of e-commerce services, liability exemptions for online intermediaries, treatment of spam and cooperation on e-commerce matters.
Removal of regulatory barriers
Non-tariff barriers are addressed by the FTA as well, which facilitates the access of Vietnamese companies to the highly regulated EU market and the other way around. The EU and Vietnam will enhance customs cooperation to simplify, harmonize, standardize, and modernize trade procedures so as to cut transaction costs for companies. These enhancements will affect technical regulations, standards, conformity assessments, transparency and market surveillance.
On top of the removal of customs duties and non-tariff barriers for trade in goods and services, it contains important provisions on intellectual property protection, investment liberalization, public procurement, competition and sustainable development.
Preferential origin and origin documentation
Obtaining preferential origin
The FTA provides, on a reciprocal and mutually advantageous basis, benefits for companies involved in supply chains between the EU and Vietnam. The following conditions must be met for goods exported from the EU to benefit from preferential treatment at the Vietnamese border or vice versa, goods must:
Exporters using inward processing schemes for subsequent export to Vietnam or to the EU may benefit from suspension or reimbursement of duties applied to non-originating inputs used in the manufacture, if they have complied with the Product Specific Rules (e.g., duty drawback is allowed).
Origin documentation under the FTA and GSP
Products originating in the EU shall, on importation into Vietnam, benefit from the tariff preference of the FTA upon submission of statements on origin made out by registered exporters (e.g., registration in the REX system) or by any exporter for consignments the total value of which does not exceed €6 000. Certificates of origin EUR.1 and origin declarations will not be issued or made out in the EU to benefit from the preferential tariff treatment in Vietnam.2
Under the FTA, Vietnamese exporters can apply for EUR.1 certificates for the first two years after the FTA enters into force on 1 August 2020. Thereafter, origin declarations can be made out under the "Approved Exporter" mechanism. Approved exporters can make use of self-certification, which is comparable to the REX system. Upon application of the "Approved Exporter" system, Vietnam has to inform the EU. Vietnamese exporters are also allowed to continue using the Generalized Scheme Preferential (GSP) duties if these are more favorable up to two years following the upcoming entry into force of EVFTA (e.g., until 1 August 2022). To benefit from the GSP duties, exporters should comply with the preferential origin GSP rules and make out a statement on origin. Only a registered exporter (e.g., registration in the REX system) is allowed to make out a statement of origin. Form A certificates are no longer issued by the Vietnamese customs authorities as of 1 July 2020, except for exceptional cases (e.g., the exporter's REX registration is pending approval) in case additional requirements should be fulfilled.
The principle of non-alteration applies to determine the origin of the goods, which means that the goods can transit through third countries, as long as they have not been altered, transformed or subject to operations other than preserving them in good condition or adding/affixing marks, labels, seals or any other documentation to ensure compliance with specific domestic requirements of the importing countries. Storage of goods or consignments may take place provided they remain under customs supervision in the country or countries of transit. The splitting of consignments may take place where carried out by the exporter or under his responsibility, provided they remain under customs supervision in the country or countries of splitting.
If there is any doubt, the importing party may request the declarant to provide evidence of compliance, which may be given by any means, including:
The FTA provides for bilateral cumulation. Further, the FTA provides cumulation with South Korea in relation to fabrics used for producing garments after complying with certain administrative requirements. Vietnam will also benefit from cumulation with ASEAN countries with which the EU has an FTA in force for two fishery goods: squid and octopus. A review clause foresees the possibility of agreeing to extended cumulation for more goods and/or more countries with which both parties have an FTA in the future.
Binding Tariff Information and Binding Origin Information
If materials and components used in the manufacturing process originate from multiple countries, it can be difficult for companies to determine the right origin. Companies who simply want legal certainty before goods arrive in the EU, may apply for an "advanced ruling" from the customs authorities, such as the Binding Origin Information (BOI) or Binding Tariff Information (BTI) decision, which, if granted, will provide certainty for three years.
Binding Origin Information
If it can be proven that the goods originate from Vietnam, a BOI decision provides certainty with respect to the origin of a product or a product category. BOI applications can be submitted electronically and where such system is not available, it can be submitted in paper form. The BOI application must include several elements, including:
The existence of a BOI decision does not exempt the importer from the requirement to provide proof of origin upon the arrival of the goods in the EU.
Binding Tariff Information
?Companies can file for a BTI decision to obtain certainty regarding the applicable tariff for a good or a category of goods. BTI applications have to be filed electronically through the EU Customs Trader Portal (note that a few countries host a national portal). The BTI application must include several elements, including:
Although it is generally the responsibility of the applicant to provide all information, a laboratory analysis may be used to determine the correct classification, due to the technical and complex nature of some goods.
Actions for businesses
To benefit from the preferential duty treatment under the FTA, companies must align their origin management with the conditions stated in the FTA. Businesses should work with their local tax professionals to:
1 Free Trade Agreement between the European Union and the Socialist Republic of Viet Nam, OJ L 186/3, 12.6.2020, p. 3-1400.
2 Notice to exporters concerning the application of the REX system in the European Union for the purpose of its Free Trade Agreement with Vietnam, OJ C 196, 11.6.2020, p. 16–16.
For additional information with respect to this Alert, please contact the following:
EY Global Trade
PDF version of this Tax Alert