Global minimum tax, opportunity for Vietnam to continue reforms: EuroCham vice chairman

Corporate income tax incentives are a tool Vietnam has used effectively in recent decades to attract FDI. Do you think GMT, with a 15% rate, will reduce Vietnam's FDI attractiveness?

Lower corporate income taxes are the biggest incentive Vietnam has used so far. Therefore, the GMT implementation will certainly have an impact on Vietnam's ability to attract investment. To what extent, this needs to be viewed objectively.

Representatives of European businesses said that Vietnam has many advantages such as its geographical location, land, labor resources, and openness of the economy with many free trade agreements, which help businesses participate more conveniently in the global supply chain and enjoy tax exemptions or reductions when exporting. They are very significant advantages.

However, many businesses have suggested that Vietnam needs to reconsider its preferential policies, not just rely on tax incentives.

In many cases, tax incentives in Vietnam are still unclear. Therefore this may not be what the business community wants most. If not tax incentives, what do European businesses ask for?

Quarterly surveys by EuroCham show that the factors European businesses are most interested in are administrative procedures, quality of infrastructure, visa policy, human resources, and green growth. Tax incentives are almost at the bottom.

Vietnam offers tax incentives to investors but sometimes the incentives themselves cause difficulties for investors. Investors may suffer because the conditions are not clear. They think they are entitled to some, but actually not. It’s better to apply slightly higher rates but more transparent, this will help investors be more comfortable.

That is not to mention the cases where the tax seems to be low due to incentives, but when calculating reasonable expenses that are not deductible when determining taxable income, the actual tax rate is higher. And there are also unofficial expenses in Vietnam.

Investors need transparency from tax declaration to tax refund inspection. Vietnam has made a lot of progress in the electronic declaration, but there are still many problems such as the interpretation of laws being different in different localities. The issue of consistent application of the law still needs much improvement.

It is not known when Vietnam will apply the GMT rule, possibly 2024 or 2025, while many OECD countries are set to implement it at the beginning of 2024. How will the GMT enforcement affect European businesses operating in Vietnam?

Multinational corporations (MNCs) are interested in the GMT because they will have to pay more tax in the country where they are headquartered if they pay less than 15% in the country where they invest. In Vietnam, businesses are interested in how the new tax rules affect the incentives they are enjoying.

However, if the same tax has to be paid in Vietnam but not in the country they are headquartered under the GMT rules, European businesses will probably abide by the rules as paying taxes where they do business is one of their priorities.

Does EuroCham have a list of European businesses that have an annual revenue starting from 750 million euros governed by the GMT?

EuroCham has not conducted this survey. Tax authorities will have the list and it's simple for them.

GMT implementation will reduce or nullify tax incentives that many businesses are enjoying in Vietnam. What should Vietnam do to compensate?

Cost-based incentives are a form, but they must be seen in line with OECD rules. The second is cash support, which means that Vietnam has to spend money first and then collect taxes later.

Some large corporations, when meeting with Vietnamese agencies to ask about shifting production from China to Vietnam, have proposed the Vietnamese government provide cost support. Some countries have already had such monetary support. Vietnam needs new policies in the new context.

Investors are interested in such support, but that’s not a prerequisite condition.

Vietnam also needs to be aware that if it accepts to spend money first for incentives, it must ensure that it can collect later to compensate. Cost-based or monetary support should be applied to projects that Vietnam really encourages. For example, for research and development, sustainable development projects, and green development.

Which reforms should Vietnam prioritize the most in the new period of the GMT worldwide?

As I said, EuroCham surveys show that the most important factor that Vietnam needs to improve to attract FDI is administrative procedures.

The second is to enhance the quality of the infrastructure. The third is to minimize difficulties and create favorable conditions for foreigners to enter and live in Vietnam.

The fourth is to improve the quality of human resources. Next is green growth and the sixth is tax incentives for businesses. Tax incentives are not among the top factors that lead to investment decisions.

What are the investment trends in Vietnam from European businesses in the coming years, according to your forecast?

Vietnam has a great opportunity to attract investment resources from European businesses, especially investment in infrastructure for sustainable development and green growth. Investments in infrastructure are investments to attract investments in other areas and they fit Vietnam's aims. Europe is strong in this area.

Regarding energy, Vietnam is in the process of transitioning from traditional energy to renewable energy, green energy. European businesses are strong in this field, they want to invest in Vietnam. Energy projects require huge investment capital and take a long time to implement. What needs to be done now is that the government should soon approve the national power development plan VIII (PDP VIII), then offers clear incentives, improving transparency in the investor selection process.

It should be understood that the use of renewable energy and green energy is not only about contributing to environmental protection. It also has the goal of satisfying the conditions for exports to the European market.

The second group is logistics, transport, road, railway, waterway, and seaports. European businesses are also strong in them.

For infrastructure investment, the public-private partnership (PPP) mechanism is currently not being implemented effectively, especially for foreign investors. Policies to attract investment in the form of PPP or contractor selection need to be more transparent.

To what extent is the shift of investment and production from China to Vietnam?

According to a survey of EuroCham members, a large proportion of enterprises have moved from China to Vietnam. The shift here is not the transfer of the whole factory, but the shift of production and orders. In the survey, 4% of enterprises said that they had transferred a significant amount of production from China to Vietnam. This trend reflects European businesses starting to carry out the plans they had considered during the Covid period.

The number may not be large, but the way they are doing it is to partially shift, observe, and then evaluate the investment environment, evaluate whether it is effective or not, and then decide whether to choose Vietnam as a place to produce a significant part for their supply chain or not.

A EuroCham survey conducted in the fourth quarter of 2022 showed that nearly 35% of businesses ranked Vietnam in the top five worldwide in terms of FDI attractiveness, and 12% said Vietnam ranked first in the world.

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.

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, possibly 2024 or 2025.

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 enforce the new tax rule in 2024. Otherwise, the National Assembly is likely to issue a resolution for the government to issue regulations to implement the GMT, according to Prof. Nguyen Mai, chairman of the Vietnam Association of Foreign-Invested Enterprises (VAFIE). Prof. Mai is a member of the special working group on GMT in Vietnam.