On-the-spot import-export mechanism to be revived

Since its introduction way back in 1998, Vietnam’s on-the-spot (OTS) export and import scheme, allowing for export and import processes to occur in-country, has become a key component of its annual trade turnover, benefiting both foreign and domestic enterprises.

The Ministry of Finance (MoF) and the General Department of Vietnam Customs have recently been revising Decree No. 59/2018/ND-CP, which amends provisions of Decree No. 08/2015/ND-CP concerning customs procedures. One major change being proposed is the removal of the OTS export and import regulation outlined in Article 35 of Decree No. 08. This has, however, raised significant concerns among businesses involved in foreign trade in Vietnam.

Speaking at the “On-the-spot exports and imports: Opportunities and challenges” seminar, held on January 8 in Hanoi, former Deputy Minister of Industry and Trade Tran Quoc Khanh pointed out that the scheme, introduced in late 1998, was designed to boost the competitiveness of domestic enterprises in the export supply chain. While the government has set ambitious growth targets for the future, this mechanism not only supports export growth but also creates added domestic value, raising questions as to why it isn’t being fully leveraged.

Building domestic supply chains

Mr. Nguyen Hai Minh, Vice Chairman of EuroCham Vietnam, said OTS exports and imports accounted for more than 18.8 per cent of Vietnam’s annual trade turnover in 2022, reflecting its significant contribution to the country’s trade activities.

The mechanism has also notably helped businesses save substantial sums on logistics costs. Instead of transporting individual product components overseas for assembly or importing raw materials for production, parts used to assemble an export product can be manufactured and moved within a closed domestic supply chain to various local businesses before being shipped overseas. This approach not only enhances national competitiveness but also facilitates seamless supply chain management for foreign traders by consolidating the process from raw materials to finished goods within a single country.

Another critical advantage of the OTS scheme is that it does not impose additional tax burdens on any of the parties involved in the transaction. This further underscores its importance in fostering cost efficiency and supporting both domestic and foreign enterprises engaged in Vietnam’s supply chain.

Mr. Truong Van Cam, Vice Chairman and General Secretary of the Vietnam Textile and Apparel Association (VITAS), emphasized that the OTS mechanism has been crucial in developing Vietnam’s textile and garment industry. He noted that new-generation free trade agreements (FTAs), such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), require production processes from yarn to fabric to garment manufacturing to qualify for a 0 per cent tax rate on exports to member markets. Similarly, the EU-Vietnam FTA (EUVFTA) mandates domestic production from fabric to garment to access preferential tax rates. “If materials are imported and only garment manufacturing is done domestically, the added value remains minimal, and Vietnam loses the advantages in FTAs it has negotiated,” Mr. Cam said.

The mechanism has also fostered the growth of supporting industries for raw material production in the textile sector. While Vietnam once relied heavily on fabric imports, it now produces 3 billion sq m of fabric annually, with 2.6 billion sq m exported in 2024, generating $2.6 billion. Additionally, over 50 per cent of the 4 million tons of yarn produced annually is exported, yielding $4.4 billion in revenue.

Adding to this, Ms. Phan Thi Thanh Xuan, Vice Chairwoman and General Secretary of the Vietnam Leather, Footwear, and Handbag Association (LEFASO), emphasized that thanks to mechanisms encouraging the development of domestic supply chains, the leather and footwear industry has significantly reduced its reliance on imports, from 70 per cent of raw materials in the past to only $4 billion in imports compared to total export turnover of approximately $27 billion in 2024. Domestic material supply now meets 55 per cent of the industry’s demand, equivalent to a value of around $4.8-5 billion.

Loopholes to close

While the OTS export and import mechanism has contributed significantly to Vietnam’s supply chains for key export products, it has also exhibited certain shortcomings. The first is the loss of State budget funds. According to Vietnam Customs, OTS export turnover reached $31 billion in 2022, while imports totaled $52 billion, with a $21 billion surplus remaining untaxed. “Revenue from these activities has contributed about VND10 trillion ($393.9 million) to the State budget,” said Mr. Nguyen Bac Hai, Deputy Director of the Customs Control and Supervision Department at Vietnam Customs. “A 20 per cent corporate income tax on the $21 billion surplus could generate approximately VND106 trillion ($4.2 billion), meaning that over VND95 trillion ($3.7 billion) is being lost,” This is one reason why Vietnam Customs and the MoF are seeking amendments to Decree No. 08, including removing Article 35.

He also noted that the abolition of the provisions in Article 35 would bring significant benefits to both customs authorities and businesses. For enterprises, for example, it would streamline administrative procedures, reducing time and cost.

Mr. Minh, meanwhile, argued that abolishing Article 35 would have negative impacts on Vietnam’s import and export activities, particularly in the absence of a clear mechanism for invoices and VAT declarations after converting OTS export and import transactions into direct domestic transactions. Additionally, the removal of the mechanism would eliminate the ability of foreign traders to coordinate supply chains, which is a key driver in the formation of these chains in Vietnam.

“Over the past 15 years, thanks to the OTS mechanism, Vietnam has developed a great deal in the production of raw materials, which has given the country a major competitive edge,” according to Ms. Claudia Anselmi, Vice Chairwoman of EuroCham Vietnam and General Manager of the Hung Yen Knitting and Dyeing Co. For example, 95 per cent of Hung Yen Knitting and Dyeing’s products were exported to China 15 years ago, while now, 70 per cent goes to Vietnamese companies working under contract for foreign customers, generating revenue and creating jobs.

“If this mechanism disappears, European companies will be concerned about whether they can continue to do business in Vietnam, as costs will increase, while returning to the model of importing materials from China is no longer viable because the global market is heading towards sustainability, which requires a vertical supply chain to save costs, protect the environment, and expedite the manufacturing process,” she explained.

Nevertheless, she also highlighted certain areas requiring improvement in the implementation of the OTS import and export mechanism, as it can indeed create challenges for businesses. For instance, the current requirement to store goods in bonded warehouses during transit between domestic enterprises disrupts delivery schedules and imposes unnecessary logistics costs.

Improve not replace

Experts and business association representatives unanimously agree that Vietnam should focus on improving implementation instead of abolishing the OTS import and export mechanism. This approach would maintain the State’s role in oversight and revenue collection while fostering an environment for businesses to build domestic supply chains that support exports.

Mr. Hong Sun, Chairman of the Korean Chamber of Commerce and Industry in Vietnam (KOCHAM), said nearly 80 per cent of South Korean businesses in Vietnam operate in the manufacturing sector, with most of their products serving the global market. He suggested that rather than removing the OTS mechanism, the Vietnamese Government should create incentives to encourage use. One necessary solution, he added, is to expedite the tax refund process for businesses engaging in on-the-spot imports and exports, enabling them to access capital to expand their operations in Vietnam.

In addition to improving tax refund procedures to enable businesses to reinvest, experts also suggest that the government amend the Commercial Law to include provisions specifically governing on-the-spot imports and exports. This would facilitate management by customs authorities and the MoF. Furthermore, stricter oversight is necessary to ensure that final products in the supply chain are genuinely exported abroad, preventing businesses from exploiting the on-the-spot import and export mechanism to benefit from preferential tax policies. Businesses also recommend that government agencies remove the clause requiring foreign traders to lack a physical presence in Vietnam to participate in OTS export and import activities.