Navigating global minimum tax treatment in Vietnam

Foreign direct investment plays an important role in Vietnam. In this regard, one of the key factors to attract investment has historically been corporate income tax (CIT) incentives, whereby companies operating in certain sectors and/or locations could get reduced CIT rates and/or tax breaks.

Now, with the introduction of the 15% global minimum tax rate, as presented elsewhere, these tax benefits may no longer benefit multinational enterprises (MNEs) that fall under Pillar 2 rules since, simplistically, their tax rate, if below 15%, would be raised in the jurisdiction where the MNEs are located.

There are two key effects from this. Firstly, if the Vietnamese government does not change its domestic rules, it may lose out tax revenue since the tax benefits granted to foreign investors in Vietnam may ultimately go to the home country of the foreign investor.

Secondly, Vietnam may lose out in the competition for investment since its current tax incentives may no longer be attractive and investors may choose other countries over Vietnam.

Global minimum tax treatment of developing countries

Countries and governments in the region and in fact around the globe are currently analyzing the new rules to identify how they can amend the domestic tax law to on one hand minimize the impact of the global minimum tax rate and at the same time continue to attract foreign investment.

Let me share a bit of our observations on what other countries in the region are doing.

Let’s start with China, which has attracted a lot of foreign investment in the past. The Chinese government has established a legislative committee and as far as we know, the committee has completed its study of the impacts of Pillars 2 and is expected to soon include measures in the domestic law to mitigate the impact of the new global minimum tax rate. We can also expect that the Chinese government ensures the continuation of investment attraction by providing various subsidies in a number of important and sensitive industries.

In Malaysia, at the end of January this year, the Malaysian Ministry of Finance formed a task force to review measures to respond to the impact of the global minimum tax and build a tentative schedule for amendment of the tax law effective from 2023.

In Hong Kong, the financial secretary announced its plan to submit a legislative proposal in the second half of 2022 to implement the global minimum tax. At the same time, the Financial Secretary stated that he will also consider introducing a domestic minimum top-up tax in Hong Kong.

Similarly, Singapore intends to adjust the corporate tax system and is exploring a top-up tax, which would be used to top up an MNE group’s effective tax rate in Singapore to 15%.

Other countries in the region, like Thailand or Indonesia, have also formed task forces to study the new rules and consider amendments to their domestic tax regulations.

So you can see that governments and tax authorities in the region are actively working on solutions to address the impact of Pillar 2 rules.

Recommendations of some investors to Vietnam

In order for Vietnam to keep its competitive advantage in attracting foreign investment and at the same time not lose out on tax revenue, the government needs to consider changes to its domestic tax regulations and design new incentive policies that take into account the new minimum tax rate. Current investment incentives in the form of tax incentives alone may no longer attract big multinational companies subject to Pillar 2 rules.

So let’s have a look at incentives. Other countries like India, China, or even European countries or the U.S. not only offered tax subsidies in a way to attract foreign investment prior to Pillar 2 , but also offered subsidies in the form of cash grants. Vietnam should consider a similar approach and redesign its incentive schemes to ensure that it can secure tax collection and at the same time retain its attractiveness and continue to lure foreign investment. This is also a good opportunity to reconsider that investments the country would like to focus on.

To give some ideas, other countries focus on particular areas in which they want to encourage investment and subsidize. So we have for example China that provides certain research and development subsidies to attract development in advanced industries, or grants to companies to reduce their electricity costs. Then we have Malaysia that provides certain funding or soft loans to promote biotechnology. India offers production linked incentives to boost domestic manufacturing and attract large investments in mobile phone manufacturing. And then we also see subsidies being provided to attract investment in particularly underdeveloped or problematic locations or to upskill workers to create higher paid jobs.

So again, Vietnam may look into what other countries offer to investors and should take the new rules as an opportunity to steer foreign investment in the direction it wants the country to go, and develop incentive strategies that attract foreign investment in these areas. Rather than providing tax incentives, subsidies policies could be designed to apply directly to the objectives of the investment, like subsidies on investment in certain equipment, assets, research and development, investment in people, etc. These subsidies would then benefit the investing company directly no matter whether the company is in a profit or loss position. Also, simple and clear subsidy policies and easy access to these subsidies would help attract investors and ultimately the long term development of the country.

Recently, after receiving information about the application of Pillar 2 from the OECD, PwC Vietnam is pleased to have several meetings and discussions with the policy department of the Ministry of Finance, along with other officers in charge of the General Department of Taxation to exchange knowledge and research on Pillar 2, and at the same time propose a number of policies to encourage investment.

Besides, PwC Vietnam believes that it is critical for the government to establish a task force consisting of relevant ministries to examine the effects of Pillar 2 and propose action given the effective date of Pillar 2 is approaching. While not simply a tax issue, it will involve many other macroeconomic policies, especially strategies in attracting foreign investment.