What should pharmaceutical enterprises pay attention to when entrusting the import of drugs in Vietnam?

Import consignment is a popular method in the pharmaceutical industry in Vietnam, helping businesses optimize resources and take advantage of the expertise of entrusted units to import drugs. However, as in the case of the dispute between Vidipha Central Pharmaceutical Joint Stock Company (Vidipha), Nhat Duc Pharmaceutical Joint Stock Company (Nhat Duc), and E.U.R.O.L.I.N.K Pharmaceutical Joint Stock Company (Eurolink) in Judgment No. 105/2024/KDTM-PT dated May 7, 2024[1], the import entrustment may lead to serious legal disputes if not implemented in accordance with regulations fix.

How to entrust the import of drugs?

Drug import entrustment is the process by which an enterprise (the entrusting party) entrusts another unit (the entrusted party) to carry out procedures for importing drugs from abroad into Vietnam. According to Clause 3, Article 165 of the 2005 Commercial Law, the entrusted party is obliged to perform the work according to the instructions of the entrusting party, and at the same time notify and coordinate in resolving arising issues on an equal and mutually beneficial basis. In the pharmaceutical industry, this model is popular due to the strict requirements for import licenses, quality inspection, and customs clearance.

However, as the Vidipha case illustrates, issues related to customs declaration, the application of commodity codes (HS codes), and coordination between the parties can lead to disputes, cause financial losses and affect the reputation of businesses.

Lessons from the Vidipha case

The case between Vidipha, Nhat Duc, and Eurolink relates to the contract for the consignment import of Rowatinex drugs, with the main dispute over the wrong application of HS codes, between codes 3004.90.98 and 3004.90.99, resulting in the collection of import tax arrears of VND 1,656,065,568 for the drug importer. Vidipha, as the trustee, was determined by the court to have violated the following obligations:

Firstly, Vidipha did not declare the name of the trustee on the customs declaration

Vidipha's failure to declare the name of the trustee on the customs declaration when importing drugs has violated the provisions of Circular 38/2015/TT-BTC amended and supplemented by Circular 39/2018/TT-BTC, causing Nhat Duc and Eurolink to lose the right to complain directly to the customs authorities when these agencies believe that the importer applies the wrong HS code when importing drugs leading to errors in the amount of import tax payable to the state.

Secondly, Vidipha arbitrarily signed the inspection record with the Post-Customs Clearance Inspection Department

In the process of post-customs clearance inspection, Vidipha signed the inspection record with the Post-Customs Clearance Inspection Department without consulting or notifying the entrusting party, violating Clause 3, Article 165 of the Commercial Law, causing damage to the rights and interests of the entrusting party.

Third, vidipha refused to authorize the complaint

Vidipha in the process of settling the case has violated the commitment to coordinate explanations in the working minutes and official letters of commitment, losing the legitimate rights of Nhat Duc and Eurolink to complain to the competent authorities.

Fourth, Vidipha did not include important legal documents in the inspection dossier

In the process of being inspected by the competent authority, as the entrusted unit and settling the case, Vidipha did not include document 1655/QLD-KD of the Drug Administration of Vietnam in the inspection dossier, leading to the improper application of HS codes and incurring tax obligations for the trusting unit. As a result, Vidipha had to pay compensation of VND 1,656,065,568 and bear all court costs. This case points out the potential risks in import entrustment if the law is not complied with and there is a lack of close coordination between the parties involved.

Notes for pharmaceutical enterprises when entrusting the import of drugs

(1) Drafting a clear and detailed trust agreement

A trust contract is the legal basis for the relationship between the trustee and the trustee. To avoid disputes, businesses should:

1. Clearly stipulate the rights and obligations of the parties. The contract should clearly state the responsibilities of the trustee in customs declaration, coordinate with the authorities, and handle arising issues. For example, the contract should stipulate that the trustee must consult and obtain the written consent of the trustee before signing any inspection record with the customs authority.
2. (ii) Regulations on authorization to complain. The Vidipha dispute shows that refusal to authorize a complaint can cause serious damage. Therefore, the contract should include a clause that allows the trustee to directly make a complaint or request the trustee to authorize it when deemed necessary.
3. (iii) Commitment to refund taxes. In case of tax liability arising due to the fault of the trustee, the contract should clearly stipulate the responsibility for compensation or reimbursement of the trustee, as mentioned in the working minutes dated 27/01/2021 between Vidipha and Nhat Duc/Eurolink.
4. Provide legal documents. The contract should require the parties to provide all relevant documents as a basis for explanation to the authorities to avoid causing disadvantage to the trustee.

(2) Compliance with customs declaration regulations

Customs declaration is an important step in importing medicines, especially when it comes to HS codes and tax rates. The provisions of Circular 38/2015/TT-BTC (amended by Circular 39/2018/TT-BTC) require the trustee to:

Fully declare information of the trustee. The trustee is obliged to declare the name and information of the trustee must be clearly stated on the customs declaration to ensure legitimate interests, including the right to explanation and complaints.

Submit the trust contract. For non-taxable goods (e.g. Rowatinex with HS code 3004.90.99), the consignment contract must be submitted together with the customs dossier (photocopy).

Verify HS codes. Enterprises need to carefully check the HS code of the drug based on the guiding documents of the Drug Administration and the Ministry of Health. If there is a conflict between documents, the business needs to consult and discuss with the authorities and consulting units to clearly identify the HS code as well as the remaining problems before customs declaration.

The award ceremony for the title "Vietnam Pharmaceutical Star" to Vidipha Central Pharmaceutical Joint Stock Company. Source: Vidipha

(3) Close coordination between the trustee and the trustee

The lack of coordination between Vidipha and Japan/Germany/Eurolink is the main cause of the dispute. Therefore, in the process of entrusting the import of drugs, enterprises should promptly notify or coordinate promptly with the other party of any requirements or inspections from customs authorities, especially when it comes to HS codes or tax rates. Consultation and coordination between the parties before signing any document required by the customs office or other agency is extremely important to show consensus and agreement between the importer and the entrusting party. This also helps the parties avoid possible conflicts and disputes. Before signing the inspection record or agreeing with the conclusion of the authorities, the trustee must consult the entrusting party, especially if there are supporting legal documents, must send it to the authorized agency at the request of the entrusting party. At the same time, exchanges via email, Zalo, or other documents need to be kept to prove compliance later.

(4) Risk management related to HS codes and import taxes

HS codes and import tax rates are sensitive issues in drug import, therefore, in the process of importing drugs, businesses need to consult experts before importing. Businesses should consult with a lawyer or customs expert to determine the correct HS code, avoid conflicts between legal documents that cause trouble and risks for businesses in the customs clearance process. In addition, the preparation of complete legal documents is very necessary and important. Enterprises should prepare documents from the Drug Administration of Vietnam, the Ministry of Health, or the authorities and provide sufficient documents as a basis for explanation if there is a post-customs clearance inspection. In addition, tax risk provision is also something that businesses should prepare. We believe that in the trust contract between the parties, there should be a contingency clause on additional tax liability, especially in case of changes in HS codes or legal regulations.

(5) Ensuring the right to lodge complaints and explanations

The right to lodge a complaint and explain to the customs authority is the legitimate interest of the trustee who is also the taxpayer. In cases where there is a request for additional import tax payment by a competent agency, the trustee must:

Ensure the legal status of the trustee. The entrusted party must fully declare the entrusting party's information on the customs declaration to ensure that it has the right to explain and complain directly.

Complaint support. If the trustee requests authorization to make a complaint, the trustee needs to provide assistance or authorization as prescribed.

Track the progress of the complaint. Both parties need to coordinate to monitor and provide sufficient evidence during the complaint process, avoiding the situation of refusal to accept the case as in the case we mentioned in this article.

Drug import entrustment is an effective method but has many potential risks if not carefully implemented. The Vidipha case is a typical lesson in the consequences of lack of coordination, non-compliance with customs regulations, and breach of contractual obligations. Therefore, being careful in the process of cooperation, delineating specific competence and responsibilities between the parties in writing will help the parties have a favorable and sustainable cooperation process in the process of pharmaceutical business in Vietnam.