1 August marks the 4th anniversary of the entry into force of the EU-Vietnam FTA. This is cause for celebration, as this FTA, the second one with ASEAN countries after the EU-Singapore agreement, provides opportunities to increase trade and support jobs and growth on both sides by, inter alia:
For these reasons, spiritsEUROPE has been, and continues to be, a staunch supporter of the agreement.
Unfortunately, when we compare the positive expectations from 2020 with what really happened in the last 4 years, we are forced to recognise that the contribution of the EVFTA has not led to the expected positive results that our sector was eagerly awaiting. Instead, we have seen a reduction of 80.4% of the value of EU spirits' direct exports to Vietnam between 2019 and 2023. How can we explain this challenging situation, in spite of tangible tariffs reduction? While the pandemic had a very negative effect on growth and on tourism, and therefore on consumer spending in Vietnam, the recovery in 2022 did not transpire significantly in our export figures. The reason lies elsewhere.
Vietnam has the second worst rate of unrecorded alcohol consumption in the ASEAN region, after Myanmar: 57% in 2021, according to WHO data. A significant proportion of this unrecorded consumption involves illicit alcohol – which, by definition, is not subject to taxation. Over 2/3 of illicit alcohol in volume in Vietnam are illicit artisanal products (ie, artisanal alcoholic beverages produced for commercial purposes but outside of the regulatory oversight & legal framework of the country of production). These products are not subject to taxes & do not follow strict standards of production, unlike legitimate products. 20% of illicit alcohol in volume in Vietnam are counterfeit & smuggled products. In the absence of strict state regulations and management, these alcoholic beverage products pose serious food safety and health risks to consumers. Besides, as these products are not taxed, they are responsible for significant tax revenue losses for the Vietnamese government. Tax losses caused by home-made liquor were estimated at about US$751.582 million, while tax losses caused by alcohol smuggling were estimated at about US$ 1.722 billion by a 2020 report from Ha Noi Consulting.
Meanwhile, legitimate operators faced 3 consecutive increases of the Special Consumption Tax (SCT) year-on-year on the Ad Valorem (AV) tax rate between 2015 & 2018 – which, for imported products, have largely undermined benefits from tariff reduction. The SCT is now set at 65% ad valorem for spirits, which is particularly prohibitive for premium products. The Ministry of Finance of Vietnam is now suggesting further increasing the SCT to 90% or 100% ad valorem in 2030. This would further penalise premium products and cancel out the benefits of EVFTA and remaining tariff liberalisation for EU spirits – while making illicit products more competitive and attractive than ever. This would in turn create further obstacles for EU exporters and investors – the very opposite of what EVFTA was set out to achieve.
There is still time to abandon these plans and reverse course, using this tax reform as an opportunity to modernise Vietnam’s taxation system, supporting premiumisation and the growth of high-quality tourism in the process, and boosting trade and growth, in the spirit of EVFTA. But there is no time to waste in doing so. Meanwhile, we will continue stressing the benefits of freer trade between the EU & Vietnam, so that both sides may benefit from it.
