On January 1, 2011, the Ministry of Finance released Circular No. 184 imposing a 10 percent export tax on gold material of purity under 99.99 percent and gold jewelry of above 99 percent. Other types of gold are exempt from the new tax. A couple days ago the open market was disordered by information that gold bar trading could be banned. It seems that the Government is gradually restricting the gold market in an effort to support transactions in Vietnam dong (VND) and to stabilize the macro-economy.
The accompanying chart compares the gold price in Vietnam and the world price and shows a relationship between the demand for gold in Vietnam and the anticipated devaluation of the VND. It seems a plausible argument that when year-end inflation was increasing, and a devaluation was expected, demand for gold increased so significantly that it resulted an inversion between the gold prices in Vietnam versus global the price. This is significant because it signals a lack of faith in the VND – creating a quandary for the State Bank of Vietnam (SBV) as it tries to reign in inflation and stabilize Vietnam’s macro-economy.
Despite the benefits for the country as whole, the policy was immediately opposed by those who derive benefit from trading gold.
Unhappy locals
The 10 percent tax on gold jewelry of above 90 percent closes a loophole that allowed gold exporters from changing gold bars of 99.99 percent purity into rough jewelry, and exporting it exempt of limitations imposed by the SBV. Mr. Do Minh Phu, Vice President of the Vietnam Gold Trading Council and CEO of Doji Gold & Gems Group, told Vietnam Financial Review that the tax policy does not keep up-to-date with movements in the jewelry market, in which gold jewelry has no longer been only gold alloy under 75 percent as defined by the Directorate for Standards Metrology and Quality ten years ago.
A recent trend, especially in light of an unstable world economy, is that demand for high-content gold jewelry is increasing, as it is not merely jewelry but also used for speculation. The new tax will cut the competitive capacity of Vietnamese gold jewelry companies in the world market, Mr. Phu said. “We understand that the Ministry of Finance does not encourage gold exports, but we strongly believe that the tax should be levied on gold material only and that gold jewelry exports are actually encouraged,” he said.
Foreign quandary
Olympus Pacific Minerals, the only foreign mining company currently exploiting gold in Vietnam, has been considered a test case for the participation of foreign companies in Vietnam’s mining industry. The company started its business in Vietnam in 2005, with two operating mines and three advanced exploration properties. As per the company’s investment licenses, 100 percent of its unprocessed gold is to be exported in form of bars and, accordingly, is subject to the new tax.
A new gold processing plant at Phuoc Son mine is planned to be commissioned and expand Olympus Pacific Minerals’ gold production capacity in the second quarter of 2011. However, in December last year, when the new tax on gold exports was proposed, the company announced that it would delay plans to invest US$100 million in Vietnam.
“Excessive taxation causes tremendous difficulties for the company and the immediate concern is the financial viability of operating in Vietnam when we have to forfeit such a large percentage of our revenues to the Government,” said Mr. James Hamilton, Vice President, Investor Relations at Olympus Pacific Minerals. “Investment decisions to proceed in Vietnam would have been unlikely or delayed for many years had we known these dramatic shifts in Government policy to the mining sector. ” There are reasons both Vietnamese gold trading companies and foreign mining interests are criticizing the feasibility of the policy.
For instance, since operations began at Olympus, royalties have escalated pro- gressively from 3 percent to 15 percent. With the addition of the new 10 percent export tax, Vietnam’s mining taxes rank among the highest in the world.
However, Mr. Hamilton did confirm that the company is proceeding cautiously and plans to slowly increase production over the next four years in Vietnam. The company has not revealed how it is going to do this, whether proposing it is given exempt status or trying to refine gold inside Vietnam. But, for now, it seems the pull from the nearly doubling of gold prices in the last two years still creates enough business incentive to continue operation.
Tax policy refined
In the proposal to the Ministry of Finance (MoF), the Vietnam Gold Association is proposing a 0.5 percent tax based on the calculation that if the tax is above 1 percent, Vietnamese gold jewelry companies will face difficulties in competing with others in the region. It would seem reasonable that MoF conduct a survey of the gold jewelry market in the world to determine the market share of types (purity) of gold jewelry so that Vietnam’s gold jewelry companies will not be negatively affected.
Olympus Pacific Minerals has stated their support of the Vietnam Gold Association’s efforts to reduce the export tax on gold and have argued that they should have exempt status because “Olympus has never speculated in the Vietnamese gold and foreign exchange markets,” Mr. Hamilton said. “We mine gold and ship it overseas for refining (as permitted in our investment license) and repatriate the funds to Vietnam, earning valuable foreign currency for the country. We also employ 1,200 people and pay significant annual taxes.”
This is a sound argument, especially if the Government’s taxation goals are to stabilize the market for foreign currency with an eye on the macro-economy. However, it is easy to recognize that in order to garner support for the VND, somewhat drastic steps might be needed, and placing barriers on gold trade may, at least in the short-run, be the most effective way.
Vietnam Financial Review
