Global Minimum Tax offers big opportunities for Vietnam: expert

The Global Minimum Tax (GMT) under OECD Pillar Two is a once-in-a-lifetime global tax reform that will apply to multinational companies with revenue above 750 million euros, and many OECD countries are set to implement it at the beginning of 2024.

Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign-Invested Enterprises (VAFIE), talks with The Investor about why Vietnam needs to quickly implement the GMT so that the country can tap new opportunities.

Prime Minister Pham Minh Chinh last August established a special working group on GMT in Vietnam. It is not known when the country will apply this new tax rule, while many countries in the Organization for Economic Cooperation and Development (OECD) group are slated to implement it in early 2024. Therefore, there is some criticism in Vietnam about the delay. What do you think about this, considering the reality here?

According to the OECD, some countries are applying corporate income tax (CIT) rates of 27-28%; some countries like Vietnam 15-17%; some countries are lower.

Vietnam has a policy to create a favorable investment environment, which is highly appreciated by investors. It is necessary to choose methods that ensure the interests of Vietnam while ensuring the interests of investors and investing countries in line with the Vietnamese government's spirit of sharing benefits and risks. Therefore, saying "slow" or not depends on each individual’s point of view.

Recently, the CEO of a global corporation, while talking to me, said he was impatient because he felt things were moving too slowly. I explained that in Vietnam, this tax rule is new and there are different approaches. For example, the Ministry of Planning and Investment always tries to encourage FDI in Vietnam. The Ministry of Finance agrees, but wants to make sure that GMT will not harm the country's budget collection. So among experts, they think differently.

In fact in 2022, when the Covid-19 pandemic was under control, the government started to study the GMT. Last June, the VAFIE held the first workshop on the GMT and submitted to the Prime Minister proposed solutions. Right after that, the Prime Minister established a working group to advise the government. The working group includes investment experts, economic experts, financial experts, tax experts, and representatives of the "Big 4" auditing companies.

Vietnam is proceeding cautiously. The GMT mainly involves major foreign investors. Therefore, the government wants their opinions, and opinions from countries and territories with significant investments in Vietnam like South Korea, the U.S., Japan, Singapore, and Taiwan.

If the government can submit to the National Assembly amendments to current laws like the Enterprise Law, Investment Law and Law on Tax Administration this October, then it could begin in 2024. Otherwise, the National Assembly is likely to issue a resolution for the government to issue regulations to implement the GMT.

Supposedly, a South Korean corporation is paying CIT of 7% in Vietnam. When the GMT of 15% is applied in South Korea in 2024 but not yet applied in Vietnam, this corporation will have to pay at least 8% in South Korea. Obviously, this corporation will want the two countries to enforce the new tax rule at the same time so that Vietnam will soon offer it other incentives to offset the loss. What are your thoughts in this regard?

In the case of Vietnam's slower implementation, there are two disadvantages. One is Vietnam does not get this 8% difference. My calculation is that there are more than 100 businesses that will have to pay the GMT in Vietnam. Thus, our budget will lose several billion U.S. dollars a year, while the total annual budget revenue is only about $100 billion.

Why do enterprises want Vietnam to implement the GMT as soon as possible? Because any country that implements the GMT will have to negotiate with multinational companies to implement a benefit-sharing mechanism, and that Korean multinational would gain if Vietnam and South Korea do it at the same time.

Businesses have concerns, and so does Vietnam. If Vietnam is slow, the investment environment will also be affected. If investing in Vietnam without the GMT in use, investors will consider Indonesia or India to gain more benefits if these countries already have the GMT in place with benefit-sharing mechanisms.

The OECD has recommended a number of support mechanisms for businesses when the GMT is applied. Are there any suitable mechanisms that Vietnam can apply?

We need experience from many countries. For example, Indonesia has a mechanism to encourage green projects. Indonesia sells carbon quotas to countries with greenhouse gas emissions higher than allowed, then allows these businesses to enjoy the benefits.

In today's global environment, there are many initiatives that can be applied. If we learn from international experience, not only from Europe but also from countries in the region like Indonesia, Malaysia or Thailand, we could develop a mechanism that receives full support from investors.

Apart from emission-related incentives, do you have any other suggestions for business support mechanisms?

I think that policies in many countries including Vietnam pay too much attention to tax incentives. They are necessary but not always the most important.

Vietnam has given a global corporation a financial incentive of $80 million, equivalent to 8% of its total investment in Vietnam, which is $1 billion. But we have agreed a mechanism not in cash, but in support of human resource training.

That day, I was in a special task force advising then Prime Minister Phan Van Khai and Deputy Prime Minister Pham Gia Khiem. We discussed with that corporation that in the Vietnamese context, it was clear that if they had separate training contracts with many universities, it would be very difficult and not suitable given the conditions in Vietnam.

We agreed to provide 3,200 engineers to meet the multinational's requirements. The corporation would get 3,200 engineers and then train them for a few months. Universities were directed to train in line with the company's requirements. Some universities were in charge of hardware training, others in software.

I heard that this year, Ho Chi Minh City may attract another $4 billion from that corporation. Regarding human resources, the company should not worry anymore because they already have training and research partnerships. There is information that they would choose Vietnam to build an upstream chip factory, and this type of plant is present in only Scotland and Israel because the two countries can provide high-level human resources.

What should business associations such as AmCham, EuroCham, KoCham or majors like Intel, LG, Samsung do to make the GMT be applied faster in Vietnam to maximize their benefits and Vietnam’s benefits?

All are highly appreciating the Vietnamese government's efforts to improve the institutions and reform administrative procedures. All levels from the Prime Minister to the ministers, the chairpersons of the provinces and cities are always ready to welcome investors. Therefore, I think they are not concerned about working with the government of Vietnam to solve the GMT issues.

Out of 100 Japanese investors, 65 said they are ready to expand production in Vietnam. An AmCham survey shows that if investors have to shift production, they only move within Vietnam, and very few thought about another destination. They thought that, besides India and Indonesia, Vietnam is a good place for production shift from China.

In a recent GMT meeting with the CEO of a multinational, you advised the company to submit a document to the Vietnamese government saying what it desires. Is this advice also for other enterprises and business associations?

A South Korean corporation has set up a working group on the GMT, but as far as I know, not all companies have this.

My advice is that the best way for enterprises is to make contributions to Vietnam’s lawmaking process because once the National Assembly passes a law, it is very difficult to amend it. Therefore, companies should join work with legislators so that the government can get their opinions. Companies would be very happy when their opinions are included in effective laws.

The GMT is a huge challenge for Vietnam, but are there new opportunities arising from the tax?

The challenge is new because the GMT is new. But I think this also comes with huge opportunities. One of Vietnam’s weaknesses is it has not been able to handle the problem of transfer pricing for tax evasion. The OECD says about $220 billion in taxes will go back to the investment-receiving countries. There was a time when Vietnam ranked 18th in the world in terms of investment, I believe this year the rank will be higher because we have big projects from the US and Europe in renewable energy, digital technology, LNG, and others.

If there is a GMT mechanism, Vietnam can be certain it would not lose out. Such a mechanism, together with Vietnam’s advantages like political stability, economic stability, curbed inflation, a market of 100 million people with 25-30 million people in the middle class, will offer a great opportunity. We also have a very good world market thanks to 15 signed free trade agreements and those that are being negotiated.

According to Resolution 50 of the Politburo, Vietnam is not only attracting investment capital but also improving the quality and efficiency of investment capital by attracting multinational companies in the Top 500 and helping them set up high-tech projects, projects involving future technology, modern services, research and development of human resources, healthcare, and projects that create production hubs in the country...

How do you forecast the investment trend in Vietnam in the context of the GMT implementation, hopefully in 2024 or 2025?

I am very optimistic because we have many renewable energy projects, green growth projects, future technology projects such as AI, big data in the process of negotiation, and Ho Chi Minh City is likely to welcome an additional $4 billion from a global tech giant. I believe there will be a new wave of FDI flowing into Vietnam.

What I'm most worried about is administrative procedures in Vietnam, and corruption, harassment of civil servants, and “envelop money” required for every step of procedures. Investors generally disagree. The Party General Secretary, the State President, the National Assembly Chairman, and the Prime Minister know these things, and all have said that reforms will not take place if the lower levels are unwilling to change.

My next worry is law enforcement. Last year, the Ministry of Justice inspected and instructed provincial and local governments to remove hundreds of regulations, or things like excessive investment incentives and low land rents, or they forcing investors to do what's not required by law.

Another problem is that we have a lot of major investors, but we don't know how to choose investors for the projects we need.

Multinational companies always have a global investment strategy, and normally they only change once every 5-7 years. However, in times of crisis like this, they will probably adjust faster. Our investment promotion officials need to catch up with their needs.

We have held investment promotion seminars but they cost time and money with no benefit. If our investment promotion officials cannot prove their effectiveness, we may lose big opportunities.

Currently, Vietnam has a very fast-growing private sector. There are many large corporations, and many small and medium companies are also capable. We need to pay attention to FDI to help the country develop and to help domestic enterprises develop.

We do not impose constraints on the FDI sector, we encourage it to develop, but the domestic business sector must develop at a higher rate to achieve the goals we want. The goal is an FDI sector that contributes to but not the locomotive force of the national economy which should be self-reliant, strong and internationally integrated.

* Prof. Nguyen Mai is former Vice Chairman of State Committee for Cooperation and Investment, now Ministry of Planning and Investment.

The Investor (www.theinvestor.vn) will hold a workshop on Friday to discuss solutions to maintain and improve Vietnam’s competitiveness and lure FDI as countries across the world prepare to implement the global minimum tax (GMT).

Participants will include representatives of the Ministry of Finance, Ministry of Planning and Investment, business associations, Vietnamese and foreign investors, economic experts, and the "Big 4" auditing companies.

Time: 8:30 am, Friday, February 24, 2023

Venue: Floor 1, Ministry of Planning and Investment office building at 65 Van Mieu street, Hanoi.

Pls contact Ms. Nguyen Hong Hanh at [email protected] and [email protected], or 0912312954 for registering.