HSBC sees ‘manageable’ impact of Global Minimum Tax in Vietnam

While the details of the Global Minimum Tax (GMT) are still being finalized, its impact on Vietnam’s inward foreign direct investment (FDI) should be manageable, HSBC said in a monthly report.

Vietnam’s parliament in November 2023 agreed to implement a minimum 15% corporate tax rate for multinational corporations (MNCs), effective January 1, 2024, for MNCs with revenue of more than EUR750 million ($825 million).

In Vietnam, 122 foreign companies will face a steep rise in their tax costs, which will generate an estimated revenue of $600 million per year.

Long before the parliament’s approval of the GMT, concerns had been raised by MNCs operating in Vietnam. The most notable example is Samsung, which is not only the single largest foreign investor in Vietnam, with its exports alone expected to account for 13% of GDP in 2023, but also has three of its affiliates among Vietnam’s top 10 foreign taxpayers.

At the same time as the greenlighting of the tax hike, the authorities are also planning to work on specific incentives in 2024.

“When it comes to investment decisions, tax is a key factor, but it is not the only factor in determining FDI inflows. It is thus important to improve on other metrics, such as infrastructure connectivity, the availability of a skilled workforce, the ease of doing business, and free trade agreements, to name a few,” HSBC researchers commented.

In addition, Vietnam is not the only country that is set to introduce a similar minimum tax rate. Its ASEAN peers such as Indonesia, Malaysia, Singapore, and Thailand are also working towards a similar goal.

In a recent note released earlier this week, Michael Kokalari, chief economist at fund management firm VinaCapital, commented that the implementation of the GMT is unlikely to impede FDI inflows into Vietnam.

He named two reasons to back his argument: First, Vietnam will almost certainly find “workarounds” to essentially rebate some or all of the higher taxes many MNCs will be required to pay the Vietnamese government; and second, tax incentives are not the main motivation for multinational companies to invest in one developing country versus another.

Kokalari asserted that Vietnam remains appealing to FDI investors because wages are less than half those in China but the quality of the workforce is comparable; Vietnam’s geographic proximity to Asia’s high-tech industry supply chains; and Vietnam is in the “friendshoring” cohort of countries at low risk of having tariffs imposed on their exports to the U.S.

Suan Teck Kin, executive director at UOB Global Economics & Market Research, on Thursday reckoned that Vietnam is in a good position to attract more FDI, given its competitiveness and an ongoing supply chain shift to the Southeast Asian region.

Vietnam had a record year in 2023, receiving $36.6 billion worth of FDI, up 32% year-on-year, despite external trade headwinds. The figures indicate that a lot of companies still see Vietnam as an attractive destination over the next five years as supply chain shifts continue with the ongoing regionalization trend, Teck Kin said.