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Plastic bags – a taxing issue

Plastics bags – a taxing issue, Packaging, Asia, Vietnam, Stuart Hoggard
In an abrupt about-turn, Vietnam’s Ministry of Finance is recommending the abolition of an Environmental Tax on the production and sale of plastics shopping bags and, oddly for a finance ministry, proposing the refunding of any and all tax payments made during the last fiscal year.

The Ministry of Finance, concerned that the Hanoi government might have some difficulty achieving its socio-economic targets - due to increasing inflation as the taxes were passed on to the consumer - presented its novel proposal at a recent conference with local administrations to discuss economic targets for 2013.

This reversal comes just a year after the Ministry of Natural Resources and Environment (MONRE) imposed an Environmental Tax on a wide range of pollutants such as pesticides, dirty coal, anthracite, lignite, hydro-chlorofluorocarbon and plastics shopping bags, in line with the publication of a new Environmental Protection Law in late 2010. This replaced the 1995 and 2005 Environmental Protection Laws, which were considered to be too vague to be implemented.

Article 8 of the 2010 Environmental Law’s implementation regulations state that the ‘Absolute rates specified in the tariff’ imposed on plastics shopping bags were ‘VND30,000-50,000 (between US$1.43 and $2.40) per kilo’.

Almost immediately industry began actively lobbying against the tax, pointing out that again it was ‘too vague’ and that what the regulation was enforcing was a tax bracket not an ‘absolute rate’.

Much confusion followed as neither industry, nor tax authorities, could decide whether the applicable tax would be VND30,000 or VND50,000, or some arbitrary pick-a-number point in between. Nowhere do the implementation regulations specify who actually determines the ‘absolute rate’ or how it would be calculated.

What was clear to industry though was that based on the average market price of plastics bags in Vietnam, the tax would represent a punishing 170-200% increase at wholesale, some of which was absorbed by retailers but in reality it translated to a 60% increase in the cost to consumers.

Further adding to the confusion were exemption clauses on pre-packaged items, which led to retailers displaying and selling products already pre-bagged to qualify for exemption.

Also exempt were plastics bags that ‘met certain environmental criteria set by the Ministry of Natural Resources and Environment’. Unfortunately, the criteria were not actually set by the Ministry. In any case, even if the criteria were specified, the country has no testing facilities to determine the composition of the bags.

An example of the confusion that the vague regulations have caused is the case of Vafaco, a packing and bag making company in Ho Chi Minh City, and one of the country’s pioneers in the biodegradable plastics sector.

In 2008, in anticipation of the trend towards taxing or even banning plastics bags outright – as has happened in China, the Philippines and some Malaysian states - long before the new law and implementation regulations, Vafaco developed a degradable bag using the oxo-degradable additive Reverte, from Ontario, Canada-based Oxobioplast.

A sample was tested by Oxobioplast’s manufacturing partner, UK company Wells Plastics Limited, which duly issued a quality certificate in 2010. Vafaco proceeded to launch its product in the market and by the end of 2011 more than 50 retailers in Ho Chi Minh City were stocking the company’s oxo-degradable bags.

However, since Vietnam has no testing or certification facilities, and there is no issued ruling on oxo or even bio-degradable bags, the Ministry slapped Vafaco with a tax of VND40,000 (US$1.92) per kilo.

Despite the controversy as to whether oxo is or isn’t bio-degradable, or is simply degradable, under the law, only bags that can be ‘recognised’ as environmentally friendly products in accordance with the regulations of the Ministry of Natural Resources and the Environment (MONRE) are able to enjoy environment tax exemption. Yet since the country has no procedures to ‘recognise’ what is or isn’t environmentally friendly, no real exemptions have been granted.

Not surprisingly, in order to avoid the tax, many producers have been bringing in supposedly ‘environmentally friendly’ bags, certified in neighbouring countries such as Malaysia, which due to the ASEAN Free Trade Agreement can be imported at zero tariff – with an impact on the domestic plastics package manufacturing sector.

Environment versus economic growth

The announcement by the Ministry of Finance repealing the Environmental Tax reflects the conflict between environmental protection and economic growth that is not confined to the developing world.

The plastics sector has been aggressively promoted by the Hanoi government with the release in 2012 of a blueprint for developing the industry and supporting sectors such as mould-making, plastics recovery and recycling, chemistry and machinery supply.

The objective is to achieve self-sufficiency in the domestic production of raw materials through resin production facilities. Vietnam currently needs about 2.2 million tonnes of raw materials such as polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC) and other chemicals. However, domestic sources can only provide 450,000 tonnes – a shortfall of 1.75 million tonnes.

With more than 1,000 companies mainly located in the South around Ho Chi Minh City and Dong Nai, Binh Duong and Long An provinces, the plastics sector has been enjoying annual export growth in the 20–25% range, making it one of the country’s fastest growing industrial sectors.

According to Vietnam’s General Customs Bureau the most recently published official records show that total export revenue of Vietnam plastics products was US$1.09 billion in 2010, a 30% increase over the previous year. Of the 151 countries that imported Vietnamese plastics and products, Japan was the main customer with sales hitting $259m.

Other incentives include proposals for preferential interest rates applying to 10- to 15-year loans to encourage local production, along with a reduction in corporate income tax to 10% from the current 25% in the first five years of operation after making profits.




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