Global Minimum Tax is not a risk to Vietnam’s inbound FDI: VinaCapital

The implementation of the new Global Minimum Tax (GMT) is unlikely to impede foreign direct investment (FDI) inflows into Vietnam, said Michael Kokalari, chief economist at leading fund management firm VinaCapital.

In a recent annual note titled “Looking ahead at 2024”, Kokalari listed two reasons. First, Vietnam will almost certainly find “workarounds” to essentially rebate some or all of the higher taxes many multinationals will be required to pay the Vietnamese government after the GMT is implemented.

According to the note, some companies like Samsung paid tax rates as low as 5% on their Vietnam earnings before the GMT introduced a minimum 15% tax rate for companies with at least $800 million in annual revenue. The GMT is expected to affect more than 100 multinational companies currently operating in Vietnam and to raise about $600 million of additional tax revenue for the government, which equates to about 4% of FDI companies’ earnings in Vietnam.

Vietnam’s Ministry of Planning and Investment (MPI) has already started working on the creation of a fund named Investment Support Fund (ISF) that would rebate some of the higher GMT tax burden to certain firms by subsidizing employee training expenses, R&D expenses, and even interest expenses.

The MPI’s efforts to create the ISF were announced within the last few days, and more details are expected to come online in the coming weeks.

Vietnam’s regional competitors for FDI are likely to also find similar “workarounds”, which will likely re-level the international taxation landscape back to more-or-less where it was before GMT, noted the economist.

Second, tax incentives are not the main motivation for multinational companies to invest in one developing country versus another, according to research by the World Bank and others. Multinationals consider a wide variety of factors, such as wages, quality of the workforce, quality of infrastructure, and ease of doing business, in deciding where to invest.

In developed countries, all of those factors like workforce, infrastructure, among others, are fairly homogenous, so tax rates are a much bigger consideration when multinational companies consider investing in developed countries than when they invest in developing countries, Kokalari asserted.

Vietnam’s FDI story gets better

Kokalari reminded of Vietnam’s key appeal to FDI investors: (i) wages are less than half those in China but the quality of the workforce is comparable, according to surveys by JETRO and others; (ii) Vietnam’s geographic proximity to Asia’s high-tech industry supply chains; and (iii) Vietnam is in the “friendshoring” cohort of countries at low risk of having tariffs imposed on their exports to the U.S.

In 2023, Vietnam staged two major diplomatic developments, which were the double upgrade of relations with the U.S. and Chinese president Xi Jinping’s visit to Hanoi, making Vietnam the only country in Asia Xi visited last year and the only country that both Biden and Xi visited in 2023.

The two events illustrate “Vietnam’s unique position in the world’s evolving geopolitical landscape, which benefits investors because multinational companies that set up a factory in Vietnam need not worry about being able to sell their products into the U.S. market nor their ability to access production inputs from China since Vietnam is being actively courted by both countries,” wrote Kokalari.

Citing Apple’s plans to move some key engineering functions to Vietnam for the first time, the economist reiterated that the single most powerful growth driver for a country like Vietnam is an increase in the complexity of the products and services it is able to produce.

“We believe Apple’s latest move is a step (albeit a modest one) towards the development of a semiconductor industry in Vietnam, which is currently the subject of considerable discussion among executives from leading U.S. and Taiwanese firms such as Nvidia,” he said.

He suggested Vietnam accelerate infrastructure development in order to maximize high quality FDI inflows; urgently upgrade its transportation and logistics infrastructure; and tackle FDI companies’ concerns about Vietnam’s ability to reliably supply electricity to industrial users, following last summer’s power outages in the northern region.