The new Ordinance onForeign Exchange took effect on June 1, updating Viet Nam's foreign exchangecontrols to embrace core IMF principles, completing one more step in Viet Nam'sefforts to join the World Trade Organisation.

However, the ordinanceonly provides general principles for conducting foreign currency transactions inViet Nam without setting down specific details. In order to guide theimplementation of the ordinance, the State Bank of Viet Nam has circulated forpublic comment a draft decree regulating foreign exchange control.

The draft decree isarranged in accordance with principles expressed in the ordinance, covering (i)liberalisation of rules on current transactions; (ii) loosening capitaltransactions in direct or indirect investment; (iii) limiting the use of foreigncurrency within the territory of Viet Nam; (iv) developing the foreign currencymarket, foreign exchange rates and management of gold import and export; and (v)intensifying State administration of foreign exchange. The draft decreeconsolidates previous provisions regarding foreign exchange and provides furtherregulations.

In accordance with theprinciple of freedom of current transactions stipulated in Article VIII of theIMF's Articles of Agreement, the draft decree simplifies the licensingrequirement for current transactions. That means that residents or non-residentswho have demand for foreign currency for payments relating to import and exportand money transfer are not required to obtain the permission of local State Bankbranches as before. They can purchase, transfer or remit foreign currency aslong as they can prove reasonable and actual demands and produce documentationfor credit institutions that are permitted to conduct foreign exchangetransactions.

Credit institutions inViet Nam are still required to verify supporting documents for foreign exchangetransactions to ensure that the remittance of foreign currency is for anauthorized purpose and in accordance with the law. However, the requirement toproduce documents evidencing fulfillment of tax obligations, which caused manydifficulties in the past, has been eliminated.

Under the draft decree,foreign currency must be remitted through accounts at permitted banks andpayments by cash can only be conducted in special situations if permitted by theState Bank.

This new regime willprevent individuals and organisations from laundering foreign currency and helpsthe State Bank control foreign exchange within Vietnamese territory. However itis uncertain whether this provision will affect set-off arrangements andfinancially settled derivative transactions. It may be appropriate for the StateBank to consider exempting such transactions.

As under currentregulations, foreign investors will be required to maintain a foreign currencyaccount for direct investments and a Vietnamese dong account for indirectinvestments.

Entities resident in VietNam will be required to obtain approval from the State Bank when they want tomake offshore indirect investments such as the purchase of securities outsideViet Nam and all income earned from such indirect investments must be remittedto Viet Nam within two months of the end of a fiscal year, unless otherwiseapproved by a relevant authority and then registered with the State Bank.

For the first time in VietNam, resident individuals can obtain a loan from offshore lenders provided thatthe loan is approved by the State Bank.

This wish is reflected inboth the ordinance and the draft decree. Both generally forbid transactions,payments, quotations and advertisements from being made in foreign currency.Currently, many companies quote prices in foreign currency in their contracts,with the actual payment being made in the local currency. It is not entirelyclear if this practice would continue to be permissible.

Under the draft decree,there are nine circumstances in which foreign currencies can be used in localtransactions. These include transactions with permitted banks and contractors,receipt of foreign currency by insurers for offshore re-insurance, receipt offoreign currency through import/export agents, internal remittance within asingle company and its branches, receipt of foreign currency by duty-free shops,receipt of salaries, allowances, and bonuses by foreigners whether resident ornon-resident from non-resident organisations, and collections of visa fees atresident customs offices or non-resident embassies and consulates.

Unlike existingregulations, the draft decree would not allow foreigners working forforeign-invested companies to receive pay in foreign currency, nor would itallow foreign-invested offices buildings to collect rents in foreign currency.

Finally, the draft decreewould give the Government authority to protect State monetary and financialsecurity when it deems necessary by restricting the conversion, delivery,remittance and payment for the current and capital transactions; by forcing thesale of foreign currency; and by other measures.

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