Global minimum tax hot issue facing Vietnam

Vietnam should be paying closer attention to the global minimum corporate tax rate, given the country attracts foreign investors.

The tax (GMCT) is a minimum rate of tax on corporate income internationally agreed upon and accepted by individual jurisdictions. Each country would be eligible to a share of revenue generated by the tax. The aim is to reduce tax competition between countries and discourage multinational corporations from profit shifting for tax avoidance.

As of December 20, 2022, South Korea was the leading investor in Vietnam with total registered capital of nearly $81 billion, or 18.5% of the total FDI in Vietnam, according to the Vietnamese Ministry of Planning and Investment.

South Korea in late December enacted new global minimum tax rules to align with the OECD-initiated BEPS (tax base erosion and profit shifting) after they were passed by the country's National Assembly on December 23, 2022. The regulation will become effective in 2024.

On January 13, Vietnam’s Deputy Prime Minister Le Minh Khai met with Samsung Electronics chief financial operator Park Hark Kyu in Hanoi, where the two sides discussed GMCT issues.

Khai said that Vietnam’s Prime Minister Pham Minh Chinh in early August established a special taskforce for the country’s GMCT mission. The working group is building a legal framework for the new regulation, while still aiming to attract foreign investors effectively.

The Organization for Economic Cooperation and Development (OECD) plans to set a 15% global minimum tax rate, and South Korea has approved the rate. This means Korean corporations investing in other countries with a corporate tax rate below 15% must pay the tax difference in South Korea.

Vietnam's current corporate tax rate is 20%, higher than that 15% specified above. However, the fast-expanding Southeast Asian economy offers different tax incentives to attract foreign investors. But under the GMCT, foreign investors in Vietnam, like Korean corporations, must return part of such incentives to their mother countries.

As South Korea is a key trade and investment partner with Vietnam, GMCT pressure on the latter is getting heavier.

Notably, South Korea’s direct investments in Vietnam have shifted to capital-intensive and high-tech sectors instead of labor-intensive areas, making more significant contributions to the socio-economic development of Vietnam.

In early December, the two countries upgraded their ties to a comprehensive strategic partnership on the occasion of the 30th anniversary of bilateral relations.

South Korea’s Samsung is the largest single foreign investor in Vietnam, and Samsung smartphone factories in the country are responsible for producing almost half of the giant’s Galaxy smartphones.

It is set to add $2 billion to the nation, raising its total investment to $20 billion. Its Korean peer LG plans to channel another $4 billion into Vietnam, where it has invested about $5.3 billion to date.