Global minimum tax - opportunities and challenges for Vietnam

Adoption of the global minimum tax (GMT) will bring both opportunities and challenges for Vietnam in attracting foreign investment, wrote Huong Vu, co-head of the Vietnam Business Forum's (VBF) Tax & Customs Working Group.

The GMT, initiated by the Organization for Economic Cooperation and Development (OECD), is currently a matter of concern for many businesses and investors. In recent times, the VBF has received comments and questions from many businesses and investors about Vietnam's response to the application of the GMT Pillar Two under the OECD’s Base Erosion and Profit Shifting (BEPS) program.

This new tax policy affects not only businesses currently operating in Vietnam and those wishing to expand investment in the country, but also potential investors who are considering a location for their investment because investment incentives are always a matter of top concern.

As a bridge between the business community and the Vietnamese government, the VBF would like to give some comments on this issue for the government to consider and take appropriate and timely response actions to minimize its adverse impacts on the business community and maintain the attractiveness of Vietnam's investment environment.

Firstly, with the application of Pillar Two rules, the current tax exemption and reduction incentives that Vietnam are applying will no longer be beneficial to businesses, especially foreign investors. Under the rules, companies with a global turnover of 750 million euro ($794 million) and more will be subject to a minimum global tax rate of 15%. If their subsidiaries enjoy an “effective” tax rate of less than 15% in countries they are investing in, the countries where their parent companies are headquartered will be subject to a top-up tax on the difference between the global minimum tax rate of 15% and the effective tax rate in the recipient countries.

Reducing the amount of tax payable in Vietnam means reducing the effective tax rate and an increase in the amount of tax payable in countries making the investment. So, investors suffer from increased tax costs while Vietnam also loses the right to tax incomes generated in Vietnam.

Secondly, when tax incentives are no longer a criterion to attract major foreign investors, Vietnam will have a reduced competitive advantage in luring foreign investment. For many years, tax exemption and reduction have been an important tool in attracting foreign direct investment (FDI) in Vietnam. The country’s largest FDI partners are mainly from East Asia, including South Korea, Japan and Singapore. When the GMT is applied, Vietnam's efforts to attract foreign investment through corporate income tax exemption and reduction will no longer be effective and its investment environment will become less attractive.

Thirdly, at present, countries are actively researching and developing policies to implement and respond to Pillar Two rules. Leading investors like South Korea, Japan and European countries are studying the issuance of regulations to collect additional taxes on large corporations.

Meanwhile, investment recipients, especially those in the region, which are the main competitors of Vietnam in attracting investment like Singapore, Malaysia, Thailand, and Indonesia officially announced the application of GMT rules. These countries are also actively promoting research and analysis of new regulations to determine how they can adjust investment policies to maintain competitive advantages and continue to attract foreign investment. Both investors and investment recipients are urgently preparing for the application of GMT rules from 2024.

Vietnam seems to be very late compared to other countries in this regard. Without immediate action, Vietnam will not be able to come up with appropriate policies to apply these rules in 2024.

Fourthly, it’s the time for Vietnam to consider re-evaluating investment incentives. In addition to the published documents on Pillar Two rules, the OECD has also delivered detailed analysis reports on how countries’ current tax and investment incentive groups are impacted by the rules once they are applied. The OECD has also provided specific recommendations for both investors and investment recipients. The OECD strongly recommended the governments carefully evaluate existing tax incentives and consider developing tax incentives to be applied after Pillar Two rules become effective. Countries need to take into account the interaction between tax incentives and Global Anti-Base Erosion (GloBE) model rules when assessing and developing future tax incentives.

The reports also say that spending-based tax incentives are more effective in attracting investment than income-based tax incentives and are less affected by Pillar Two rules. The review of existing tax incentives as well as the issuance of new ones to attract investment requires the government to study and evaluate the impact of each policy very carefully and amend relevant legal documents.

Fifthly, this is a particularly important moment that has great influence on Vietnam's foreign investment attraction. Amid the volatile world economic and political situation and a risk of financial crisis in many countries, large corporations as well as multinational companies are restructuring their production scale and supply chain, cutting down personnel, and relocating to places with lower administrative and energy costs and tax burdens.

Therefore, many multinational corporations will have to consider re-planning their investment strategies to minimize the impact of GMT rules once they are applied. The recent moves of many corporations clearly show that foreign investment continues to flow into ASEAN. At a pivotal time in the adjustment of investment structure and location, major investors are paying great attention to the moves and responses of the governments of investment recipients to the GMT. Therefore, the government of Vietnam needs to make great efforts in researching and developing investment incentive policies to gain advantages over other countries.

We think that the Vietnamese government needs to have more specific and drastic action programs to internalize Pillar Two rules as well as review and devise investment support-related laws to create an attractive investment environment to lure new investors and retain existing investors. This is both an opportunity and a challenge for Vietnam in foreign investment attraction in the new context.

The GMT under OECD Pillar Two is a once-in-a-lifetime global tax reform. It is aimed at ensuring that multinational companies pay their fair share of taxes of at least 15%, regardless of where they operate. A number of OECD countries have announced to apply the new tax from the beginning of 2024. GMT enforcement will directly affect Vietnam’s budget revenue and competitiveness, and its ability to attract FDI.