Navigating Global Minimum Tax rules

Dang Ngoc Minh, deputy head of the General Department of Taxation, gives his insight into the status of Pillar 2 implementation of the Global Minimum Tax (GMT) in Vietnam, takeaways from Resolution No. 107/2023/QH15, and the Government's plan to build a follow-up decree.

In June 2013, the Organization for Economic Co-operation and Development (OECD) launched an initiative to prevent Base Erosion and Profit Shifting (BEPS), endorsed by the heads of the G20 countries, with two main contents.

First, divide taxing rights, carry out assessments on profit allocation, and develop global profit allocation principles. Second, ensure that all businesses engaged in international investment activities pay a minimum tax rate.

In 2015, the finance ministers of the G20 countries asked the OECD to establish a Joint Cooperation Framework, according to which by early 2016 non-G20 countries, especially developing countries, would participate in the Inclusive Framework (IF) on the basis of equality. In 2017, Vietnam joined the IF, becoming the 100th member of BEPS. To date, the IF has gathered 142 countries.

The IF has approved the BEPS solution package consisting of 15 actions to establish a global modern and fair international tax system. Widespread and consistent implementation is a key requirement for the effectiveness of the BEPS project, especially the application of international tax rules.

On July 9, 2021, the finance ministers and central bank governors of the G20 agreed on the principle of the Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy.

Pillar One allocates taxes on digital-based business activities (reallocation of taxing rights for multinational enterprises between where they are headquartered and where they do business).

Pillar Two sets a 15% global minimum corporate income tax rate for multinational enterprises (MNEs) to prevent these companies from shifting profits to low-tax countries to avoid taxes.

On October 8, 2021, the OECD issued a statement on the Two-Pillar Solution Framework to address the challenges arising from the digital economy.

On December 16, 2022, the OECD/G20 IF on BEPS announced that 138 countries agreed (no objections) to the content of the Two-Pillar Solution Framework to address the challenges arising from the digital economy. Vietnam became the 100th BEPS member and had no reservations about this content, so it was one of the consensus countries. To date, the Two-Pillar Solution Framework has been consented by 142/142 IF member countries.

Content of Global Minimum Tax

Applicable subjects

An MNE whose revenue stated in the consolidated financial statements of its UPE for at least two years in the four immediately preceding years to the taxable year is equivalent to 750 million euros or more is subject to the GMT. All countries can apply the GMT to the UPE of MNEs in their jurisdiction, even when the MNEs do not meet the above-mentioned consolidated revenue threshold. A number of organizations are excluded from the GMT.

The GMT is applied on a country-by-country basis. The computation of effective tax rate (ETR), excess profits tax, and top-up tax will be based on all of constituent entities of the MNE in each country.

For example, Samsung Group has seven constituent entities in Vietnam, then the effective tax rate, excess profits tax, and top-up tax of Samsung Group in Vietnam will be computed on the basis of aggregate income or losses of the seven entities. If a Vietnamese company has investments in Cambodia (with three constituent entities) and Laos (four constituent entities), the top-up tax on Group A will be computed separately in Cambodia on the basis of three constituent entities in Cambodia and separately in Laos on the basis of four constituent entities in Laos.

Global Minimum Tax regulations

Income Inclusion Rule (IIR): A top-down tax rule that allows the country where the parent company's headquarters is located to levy a top-up tax on the parent company when income of constituent entities in countries where the effective tax rate is lower than the minimum tax rate of 15%.

Undertaxed Payment Rule (UTPR): This rule is designed to supplement the IIR above, applicable in cases where the constituent entities are subject to an effective tax rate lower than the minimum level but not subject to a top-up tax under the IIR in any other country (because the country home to the ultimate parent company or the holding company has not yet applied the IIR), then the countries in which the MNE’s constituent entities operate (if these countries apply the UTPR) will have the right to levy top-up taxes on the constituent entities in that country, including all constituent entities located in the country.

The Subject to Tax Rule (STTR) allows the source country where the income (such as interest, royalties) arises to tax it at a minimum rate of 9% for certain income payments to related parties that are taxable below this 9% minimum tax rate. These payments are expected to include loan interest, royalties, and some other payments. The tax amount payable under the STTR will be considered a tax within the scope of application under the GMT regulations. To implement the STTR, countries must sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

The Qualified Domestic Minimum Top-up Tax (QDMTT) is an important rule for countries to gain the right to levy top-up taxes before other countries, specified in Article 10.1 of the OECD Model Rules. According to the OECD Model Rules, countries with effective corporate income tax rates lower than 15% are entitled to promulgate legal regulations to gain the right to collect top-up taxes under QDMTT rules before other countries (the countries that are applying the IIR and UTPR). The promulgation of these regulations must ensure “standards” according to OECD guidelines.

Principles of application

According to the application principles of the GMT announced by OECD/G20, if member countries:

- Are not required to apply the GMT regulations, but they opt to apply them anyway, they will have to comply consistently with the guidance of the GMT, in accordance with the IF model rules and instructions; and

- If a country does not apply them, it must still accept the GMT regulations applied by other IF members.

Order of priority in implementing regulations

Countries are given priority to apply the Qualified Domestic Minimum Top-up Tax (QDMTT) to gain the taxing right before countries that apply the IIR and UTPR.

Between IIR and UTPR, IIR will be given priority to apply first to the ultimate parent entity in the country home to the ultimate parent entity’s headquarters. In case the country where the ultimate parent entity is headquartered does not implement the IIR, the country where the company holding of the next secondary equity in the MNE’s ownership structure operates will be able to implement the IIR for this company. In case the countries where the ultimate parent entity or holding company operates does not apply the IIR, the UTPR will apply to member companies.

The STTR will be given priority before the IIR and UTPR, in which the tax amount paid under the STTR will be included in the tax amount of the IIR and UTPR.

In addition, in some cases, countries that have double taxation avoidance agreements can avoid double taxation according to the exclusion mechanism (i.e., an income already taxed in this country will not be taxed in the other country regardless of the tax rate) instead of an offset mechanism (i.e. the tax collected on an income in this country will be offset when calculating tax on the income in the other country). In this case, a transfer provision in the MLI could be added to implement the IIR.

Global Minimum Tax application by countries

Regarding the implementation of the GMT, countries that have outbound investments will mostly apply the GMT from 2024 to collect the difference between the effective tax rate and to the GMT (15%), including economies that are large investors in Vietnam such as South Korea, Japan, Hong Kong, and Singapore, among others.

Countries like Vietnam are working on policies to respond to the GMT, including applying the QDMTT to prevent top-up taxes on the income of constituent entities that enjoy effective tax rates lower than the minimum level from going to countries where the parent company is headquartered. At the same time, they are also studying a number of financial incentives to retain FDI enterprises subject to the GMT and attract new foreign investors.

Impact on state budget revenue

If Vietnam applies the QDMTT, the country will collect additional corporate income tax from enterprises subject to its application. According to preliminary calculations based on tax returns for 2022, 122 foreign corporations investing in Vietnam will be affected by the application of the QDMTT and the tax amount Vietnam will collect is estimated at VND14,600 billion ($573.52 million).

According to preliminary calculations with tax returns for 2022, when Vietnam applies the IIR for Vietnamese enterprises investing overseas, about six Vietnamese corporations with outbound investments will be affected by the IIR and the tax to be collected is estimated at VND73 billion (if the residence countries do not apply the QDMTT).

Perfecting Vietnam's legal framework

The GMT is not an international treaty, or an international commitment, or mandatory for countries to apply. However, if Vietnam opted to not apply it, the country would have to accept that other countries do so, and therefore have the right to collect top-up taxes for companies that operate in Vietnam (if they are subject to) and enjoy an effective tax rate lower than the global minimum rate of 15%, especially foreign-invested enterprises.

In such context, to ensure its legitimate rights and interests, Vietnam needs to affirm the application of the GMT. According to OECD guidance on the Global Anti-base Erosion (GloBE) rules, the GMT is essentially an additional corporate income tax and countries need to regulate it in their legal systems accordingly.

According to clause 4, Article 70 of the Constitution of the Socialist Republic of Vietnam, the National Assembly “regulates, amends or abolishes taxes”. Therefore, the application of additional corporate income tax under the GloBE Rrules, the GMT needs to be submitted to the National Assembly for consideration and regulation.

The promulgation of the additional corporate income tax policy according to the GloBE rules is in accordance with the policies and guidelines of the Communist Party of Vietnam and the state.

The application of the GMT brings new opportunities to Vietnam, such as increasing state budget revenue with top-up tax collection, enhancing international integration, and limiting tax evasion, tax avoidance, transfer pricing, and profit transfer.

Key takeaways of Resolution No. 107/2023/QH15

On November 29, 2023, the National Assembly passed Resolution No. 107/2023/QH13 on levying additional corporate income tax as per GloBE rules. Accordingly, Vietnam will apply two rules: the QDMTT and the IIR, but it has yet to apply the UTPR or the STTR. These rules will be studied when the amended Corporate Income Tax Law is drafted (expected to be promulgated in May 2025).

The resolution includes eight articles, as follows.

Article 1 stipulates the scope of regulation of the resolution. The resolution stipulates the application of additional corporate income tax to taxpayers according to the GloBE rules.

Article 2 regulates taxpayers. The taxpayers prescribed in this resolution are constituent entities of MNEs with revenues in the consolidated financial statements of the ultimate parent entity equivalent to 750 million euros or more in at least two of the four years immediately preceding the fiscal year.

Article 2 also stipulates exclusion cases including: governmental organizations, international organizations, non-profit organizations, pension funds, investment funds that are the UPEs, real estate investment organizations that are the UPEs, and organizations with at least 85% of the asset value owned directly or indirectly through the above-mentioned organizations.

Article 3 regulates the interpretation of terms used in the resolution. In particular, several noteworthy terms are the GloBE rules, corporation, multinational enterprise, UPE, constituent entity of a multinational enterprise, low-tax constituent entity, low-tax countries, consolidated financial statement, accepted and applicable financial accounting standards, and concepts related to revenue and income or loss.

Articles 4 and 5 provide detailed regulations on the subjects of application and how to compute top-up tax per the QDMTT and the IIR. Accordingly, the QDMTT applies to constituent entities in Vietnam of MNEs with parent companies based abroad (inbound investment in Vietnam) and constituent entities in Vietnam of Vietnamese MNEs. The IIR applies to parent companies in Vietnam (including UPEs, intermediate holding companies, or partially-owned holding companies) in respect of the income of constituent entities located outside Vietnam (outbound investment).

The methodology to compute the QDMTT top-up tax is specified in Article 4 as follows:

QDMTT top-up tax amount = (top-up tax percentage x excess profit) + top-up tax adjusted amount for the current year.

Specifically:

- The top-up tax percentage is the difference between the minimum tax rate of 15% and the MNE’s effective tax rate in Vietnam.

- The effective tax rate in Vietnam is calculated for each fiscal year and is calculated as the total amount of corporate income tax in Vietnam within the scope of application that has been adjusted in the fiscal year of the constituent entities in Vietnam divided by net income in Vietnam for the financial year under the GloBE rules.

- Excess profit = net GloBE income – deductible value of tangible assets and wages per the GloBE rules.

Allowing deductions for the value of tangible assets and wages when computing excess profit demonstrates the concept of the GloBE rules to encourage real existent investment in the residence country through the existence of tangible assets and labor.

In addition, the QDMTT top-up tax amount will be determined to be zero in a financial year if the average GloBE revenue is less than 10 million euros and the average GloBE income in Vietnam is less than 1 million euros.

Article 5 regulates the IIR. To determine the amount of top-up tax the parent company must pay in Vietnam, the IIR also stems from the computation of top-up taxes in each resident country. Top-up taxes in each country are determined as specified in Article 4 above.

In addition, according to the order of priority in applying the GloBE rules, countries are given priority to apply the QDMTT to gain taxing rights before countries applying the IIR. Therefore, when computing top-up taxes in Vietnam according to the IIR, corporations will be deducted the amount of tax paid according to the QDMTT in the recipient countries.

The additional taxes in a country are then allocated to each constituent entity earning income in that country.

Finally, the tax allocated to the parent company from the top-up tax of the low-tax constituent entity will be computed by the top-up tax amount of the low-tax constituent entity multiplied by the percentage allocated to the parent company for the constituent entities subject to low tax rates.

Similar to the QDMTT, the top-up tax amount under the IIR will be determined to be zero if the conditions of average revenue and average income/loss are met simultaneously.

Article 6 regulates tax declarations, payment, and management. Accordingly, taxpayers as prescribed in the resolution need to submit documents, including information returns per the GloBE rules, and top-up returns accompanied by an explanation of the differences due to differences between accounting standards, and pay taxes for both cases.

The deadline for submitting documents and paying taxes from the end of the fiscal year is 12 months under the QDMTT, 18 months under the IIR for the first year, and 15 months for subsequent years.

If the MNE has only one constituent entity in Vietnam, then that constituent entity in Vietnam will declare and pay taxes. If the MNE has more than one constituent entity in Vietnam, then the MNE shall designate a constituent entity in Vietnam to submit declarations and pay taxes. In case the MNE does not notify the designation, the tax authority will notify the designation of a constituent entity that must submit declarations and pay taxes.

The top-up tax amounts according to the GloBE rules are paid to the central budget.

Article 6 also stipulates the foreign currency exchange rate to determine the revenue and income thresholds in the resolution, which is the average mid-point exchange rate of December of the year immediately preceding the year in which the revenue and income are made, set by the State Bank of Vietnam.

To reduce the compliance burden on corporations, in accordance with the OECD guidance, the draft resolution includes a safe harbor for the transitional period for financial years from December 31, 2026 backwards, but the safe harbor does not include fiscal years ending after June 30, 2028.

Accordingly, the top-up tax amount in a country for a fiscal year will be determined to be zero if the MNE has a standard country-by-country income report with total revenues below 10 million euros and before-income tax profit of less than 1 million euros in that country, or the MNE with a simple effective tax rate in that country of at least 15% for 2023 and 2024, 16% for 2025, and 17% for 2026, or the MNE’s before-income tax income/loss in that country is equal to or less than the deduction for income associated with tangible assets and labor computed under the GloBE Rules for constituent entities resident in that country according to the country-by-country income report.

During the transitional period, there will be no tax administrative penalties for violations of declaration and submission of information returns according to the GloBE rules and top-up returns attached with an explanation based on differences between accounting standards.

The resolution also stipulates that the constituent entities may choose to use a simple calculation methodology to determine their satisfaction of the safe harbor criteria for taxable excess profits, average revenues and income, and the effective tax rate.

The amount of top-up tax paid according to the provisions of this resolution can be offset when computing the corporate income tax payable in Vietnam corresponding to the income received from overseas investments.

Articles 7 and Article 8 of the resolution regulate the implementation procedures and implementation provisions.

Regarding application time, the resolution takes effect from January 1, 2024, applicable to fiscal year 2024 (until the date this resolution is replaced by the Corporate Income Tax Law).

Follow-up Decree for Resolution No. 107/2023/QH15

Currently, the Ministry of Finance is leading and coordinating with relevant ministries and branches to build and submit to the government for promulgation a decree detailing regulations to ensure a full legal basis, synchronization, and consistency with the provisions of the resolution.

The plan for building the decree is expected to be as follows.

+ May-June 2024: Collect written opinions from ministries, branches, associations, relevant agencies, and affected subjects (at least 20 days) and post on the Government Portal and the Ministry of Finance websites (at least 60 days)

+ July 2024: Compile, research, explain, receive comments to complete the draft decree and send it to the Ministry of Justice for appraisal

+ August-September 2024: Study, explain, receive appraisal opinions to revise and complete the draft decree to submit to the government

+ October 2024: Tentative promulgation of the decree

Above are some of the main contents of Resolution 107/2023/QH15 on levying additional corporate income tax as per the GloBE Rules as well as the plan to build a detailed follow-up decree for the resolution.