The textile and footwear industry must pay more attention to the origin and quality of exported products.

Not benefiting from FTA now

According to experts’ analysis, the textile and footwear industry will not benefit in the first years of the EVFTA taking effect. Specifically, according to the WTO Center, for the leather and footwear industry, products to be taxed immediately after the EVFTA takes effect are products that Vietnam has rarely processed or exported to the EU. Therefore,Vietnam is expected to benefit less from this commitment group. The EU product group commits to eliminate tax on a schedule of 3-7 years, including most of the footwear products that Vietnam is exporting to the EU.Currently, this group is enjoying anaverage preferential tax rate of 3-4% under the Generalized Preferential Tariff (GSP). After the EVFTA takes effect, the GSP will automatically end the import tax on footwear will gradually decrease to 0% from the MFN (about 12.4%) according to the 3-7 year schedule. Thus, in the first few years of implementation of the EVFTA, most footwear products will not benefit from deal, and even may be adversely affected (due to the gradually decreasing tax rate from 12.4% will still be higher than 3-4% according to GSP).

For the textile and garment industry, according to analysis of SSI Securities Joint Stock Company, Vietnam benefits from the universal GSP system for developing countries, with preferential tax rates of 9% for a limited number of tariff lines. After the EVFTA takes effect, the most favored nation treatment (MFN) tax rate will automatically replace the GSP tax rate. This means that in the first two years of implementation of the EVFTA, most domestic garments will not benefit from the deal, because the MFN tax rate for these products is actually higher than the tax rateaccording to the GSP, it is now 9%.

Specifically, most Vietnamese exported products to the EU will enjoy the export tax gradually eliminated from the MFN tariff from 12% to 0% within 3 to 7 years after the EVFTA comes into effect. Theproducts toreceive immediate tax reduction are those that are not Vietnam's main exports to the EU, like yarn.

Paying special attention to origin

According to the recommendation of the Ministry of Industry and Trade, to enjoy tax incentives from the EVFTA, businesses must meet the requirements of goods origin.

According to the rules of origin in the EVFTA, the fabrics used to produce the products must originate from Vietnam or the EU, and the stages of tailoring must be done in Vietnam. There are a number of flexible points, such as garments made in Vietnam, from fabrics made in Korea to which the EU has an FTA will also qualify for tax exemptions. However, more than 60% of fabrics imported into Vietnam are from China and Taiwan, with prices much lower than imported fabrics from Korea. This makes it difficult for businesses to take advantage of preferential tax rates. Therefore, in order to take advantage of the tariff preferences in EVFTA on textile and apparel, Vietnam needs to focus on developing the textile and auxiliary industry to meet the strict requirements of rules of origin in the EVFTA. At the same time, take advantage of the exception of Korean-made fabrics to alleviate the pressure on the shortage of supply.

For the footwear industry, if the enterprises have exported to the EU within the framework of the universal preferential tariff (GSP) and are taking advantage of the rules of origin in the GSP, in the EVFTA, the rules of origin will not be much different except for a few items related to the input and output of some product codes need to be different at the 4-digit level and some have specific provisions on shoe soles and uppers. This is a great advantage for the leather and footwear industry when the EVFTA takes effect.

According to information from the Vietnam Leather and Footwear Association (Lefaso), when EVFTA comes into effect, about 37% of the leather and footwear product line will return to 0% immediately, the rest will decrease after three to seven years. Bags are entitled to 0% tax rate if produced and packaged in Vietnam. Export growth to the EU is forecast at 5-10% in the first five years, the export turnover of the whole industry will increase by about 3% per year.

However, according to Mr. DiepThanhKiet, Vice Chairman of Vietnam Leather and Footwear Association, footwear enterprises will only benefit if they can manage raw materials to enjoy low tax rates, businesses will have to meet rules of origin through regional value content (RVC) when using materials from Vietnam and EVFTA member countries. According to incomplete statistics of Lefaso, only 30% of enterprises in this industry are self-sufficient in raw materials, the remaining 60-70% of businesses are mainly outsourcing.

“In addition, after the EVFTA comes into effect, the EU will automatically abolish the GSP universal tariff preference for Vietnam's footwear industry, currently fluctuating below 8%. Thus, businesses that do not meet the provisions of the EVFTA to enjoy low tax rates under the commitment will not be allowed to continue enjoying GSP status,”Mr. Kiet said.

Source: Custom News

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