VJEPA

Considering the volume of Vietnam’s trade with Japan (exports $1.75 billion and imports $1.33 billion*), it made sense for both countries to negotiate an Economic Partnership Agreement. VJEPA negotiations between Vietnam and Japan started on October 19, 2006 and were concluded after only nine rounds of talks in September, 2008 and the VJEPA was officially signed by both countries on December 25, 2008.

According to the agreement’s text, the VJEPA will enter into force on the first day of the second month following the month in which the governments of Vietnam and Japan have exchanged diplomatic notes informing each other that their respective legal procedures necessary for entry into force of the VJEPA have been completed. Initially both countries agreed to finalise their domestic legal procedures in May, 2009. 

However, this timeline was not met and Vietnam and Japan have now agreed to complete all of their domestic legal procedures in August, 2009. Japan and Vietnam’s ministries of Foreign Affairs will exchange their diplomatic notes during August, 2009 in order for the Agreement to enter into force on October 1, 2009.

From Vietnam’s side, before announcing that all its domestic legal procedures have been completed, certain legal documents had to be finalised and issued by the ministries of Trade and Industry (MoIT) and Finance (MoF). Circular No 10/2009/TT-BCT on the implementation of the VJEPA rules of origin was already issued by the MoIT dated May 18, 2009. However, the circular on the implementation of the special treatment on import tariff of trade in goods under the VJEPA is still being finalised by the MoF and is expected to be issued soon, at least before the end of August, 2009.

Once the VJEPA comes into force approximately 92 per cent of goods trade between Vietnam and Japan will be exempted from import duties within a period of 10 years. Vietnam-originating products such as agricultural and aquatic products as well as garments will be exempted under the VJEPA when imported into Japan, whereas Japan-originating industrial products such as automotive spare parts and certain electronics can be imported into Vietnam exempted from import duties or with reduced import duty rates.

Can my products benefit?

First and foremost, it is important to identify whether your products can actually benefit from the VJEPA, ie: whether there are any duty rate reductions provided under the VJEPA for your products. Annex 1 to the VJEPA outlines the preferential tariff reductions schedules of Japan and Vietnam. In order to determine what the potential benefits are for your company, you need to ascertain the customs classification of your products and the current import duty rate you are currently paying in the destination market (Japan or Vietnam). Once you have determined this, you can basically determine the margin of preference, which is the difference between the standard Most Favoured Nation tariff rate and the lower preferential VJEPA tariff rate and subsequently determine the potential customs duty savings that can be achieved from the VJEPA.

It is important to emphasise that where there are no duty reduction benefits for your company under the VJEPA, it should be considered from a duty savings perspective whether the benefits of using the VJEPA outweigh the costs.

Similar to the AANZFTA and other FTAs that Vietnam has concluded, although the VJEPA can be a source of significant customs duty savings, these savings are not granted automatically. In order to benefit, a trade flow must originate from Vietnam or Japan and adhere to the various qualifying and compliance rules of origin as specified in the Agreement. 

Under the VJEPA, goods are considered as originating in Vietnam or Japan where goods are wholly obtained or produced in Vietnam or Japan. Examples of goods that are wholly obtained or produced are plants, plant products grown and harvested, picked, or gathered in Vietnam or Japan, live animals and goods obtained from animals, minerals and other naturally occurring substances and sea-fishing and other marine products.

Where goods are not wholly obtained or produced, basically for manufactured products, they are considered to be originating if the meet the following main categories of rules of origin under the VJEPA.

Product specific rules

The product specific rules under the VJEPA, listed in Annex 2 to the VJEPA, may vary from a change in tariff classification at a chapter level (two digits), a tariff heading level (four digits), a subheading level (six digits) to a local value content to a combination of these rules. Also, specific manufacturing or processing operations (eg: for certain textile and textile fabrics) or the “wholly obtained-criteria” maybe applicable to certain products.

Which specific rule ultimately applies depends on the customs classification of the product. Where product specific rules do not apply (ie: the product is not listed in Annex 2 to the VJEPA), the product may qualify under the below mentioned local value content or change in tariff classification rule.

Local Value Content (LVC)

Under this rule, the total value must be at least 40 per cent of the Free on Board (FOB) value of the finished product and the final production process must have taken place in Vietnam or Japan. The LVC is basically calculated by deducting the value of the non-originating materials (VNM) from the FOB value. A change in the tariff heading, at a four digit level, taking place in Vietnam or Japan between the end product and all non-originating materials that are used in the production, subject to certain conditions and relaxations.

So, what is next?

After you have determined that there are potential duty savings and your product can be considered as originating in Vietnam or Japan-based on the above described rules, the next step is to apply for a certificate of origin in order to demonstrate to the customs authorities in either Vietnam or Japan that your product is originating. The relevant certificate of origin under the VJEPA is called the “Form VJ”. An example of this Form VJ is attached to Circular No 10/2009/TT-BCT.

The authorised agencies in Vietnam where companies can apply for a Form VJ are basically all the “Import-Export Offices” in the 16 main regions (including Hanoi, Ho Chi Minh City, Danang, Dong Nai, Haiphong, Binh Duong and Vung Tau). The list of all offices authorised to issue the Form VJ is attached to Circular No 10/2009/TT-BCT.

What supporting documents need to be submitted when applying for the Form VJ, depends on the applicable qualifying rule of origin as this depends on a product by product basis (eg: a production cost statement where the Local Value Content of 40 per cent applies, or the classification rationale of raw materials and finished products in case the Change in Tariff Classification rule applies). 

Compliance with the applicable rules of origin of the Agreement (even after the Form VJ has been issued) is key for companies to have a supportable claim for the lower import duties which are provided for under the VJEPA. Therefore, a review of the relevant costs, manufacturing process and/or or tariff classification of a company’s products should be part of the opportunity assessment before making a claim under the VJEPA (e.g. a later change in the tariff classification of the finished product may revoke the duty benefits where the Change in Tariff Classification rule was applied and the Form VJ had been issued on this basis).

In addition to FTAs that are currently in force in Vietnam and the recently concluded AANZFTA where savings opportunities could be available to Vietnamese manufacturers that export their products to Australia and New Zealand, Vietnam is on the verge of implementing its first major bilateral Economic Partnership Agreement with Japan. This VJEPA is expected to provide companies in Japan and Vietnam with substantial savings opportunities when exporting their products to both countries. 

As such, companies in Vietnam that export products to Japan should prepare themselves and assess whether leveraging on the VJEPA could benefit them and whether their products would meet the relevant rule of origin. Preferably, companies should perform this assessment before the scheduled implementation date of October 1, 2009 so that once the VJEPA enters into force, they can already start using the benefits that are provided by the Agreement.

Finally, it is important to note that Vietnam, as part of ASEAN, also has a multilateral Economic Partnership Agreement with Japan, the ASEAN-Japan Economic Partnership (ASEAN-Japan EPA). Depending on your products and/or existing supply chain or business model, it might as well be possible that the VJEPA is not more beneficial to use than the ASEAN-Japan EPA (eg: different rule of origin may apply or lower import duty reductions for your product).