Vietnam leads Southeast Asia in Global Minimum Tax implementation: expert

Vietnam has made fast progress and leads Southeast Asia in implementing the Global Minimum Tax (GMT), said Jonathan Pemberton, a senior advisor with the Washington D.C-based International Tax and Investment Center.

Pemberton was speaking to The Investor on the sidelines of an international workshop on "Pillar 2 Global Minimum Tax Implementation in Vietnam" held in Hanoi Tuesday.

With hundreds of economies committing to join the GMT, it's obvious that if one government doesn't levy it, others will cash in on additional tax revenues. But what are the biggest challenges in GMT implementation, especially for the Southeast Asian region?

I think that the challenge is to change the mindset around tax incentives. Many countries in the region have become used to offering low rates or tax holidays. It will take a while for some of the institutions in the government, particularly the non-tax parts that are charged with promoting FDI, to understand that the rules of the game have changed. The GMT is a complex system. So for non-tax people, it's really quite hard to get. But when everyone understands that higher tax is inevitable, in one country or another, we will begin to see change – an evolution towards smarter incentives and also more focus on value for money.

What is your opinion on the preparations that Vietnam has made regarding Pillar 2 GMT enforcement, in comparison to Southeast Asian peers?

Based on what I've seen and particularly the discussions at the workshop, I'd say that Vietnam is a leader in the region. South Korea was the first to actually legislate the global minimum tax. But Vietnam has not been far behind and already made a move last November by putting the resolution in place. We heard at the workshop that the timetable is clear. It is to get the details of the regulations drafted by late May, with a view to beginning implementation by October.

There's a clear intention to follow the rules carefully. For multinational businesses as taxpayers, it's relatively easy for them to see what they have to comply with, so it's the system they understand, and it's going to be operated in the same way by Vietnam. And the regulations will be there well before the end of 2024. So all that looks pretty good to me.

What would you suggest be done to offset higher taxes paid by FDI companies in Vietnam under the GMT scheme?

They will be paying more tax in Vietnam than they had to earlier. But they would be paying that somewhere anyway, so it's important not to exaggerate the extent to which the introduction of GMT will actually affect FDI. Tax is in the overall hierarchy of factors that affect an investor’s location decision, but it's not in the top 4.

So I think what we discussed today is the move towards smarter incentives. It is easier to tailor them if you're looking at costs. So personally I think a key issue to address is how do we make the system work smoothly, give tax certainty and also make it easy for investors to self-assess what they'll be entitled to.

What about risks of disputes between the government and foreign companies regarding higher taxes. Can you elaborate?

I'm not aware of any and to be honest, I don't think it's in the interests of an investor to bring such a case. Even if you succeed in saying I'm not going to pay the tax in your country because of your investment agreement, you will have to pay somewhere else anyway. So I don't think we'll see an awful lot of such disputes, I think we can see from the reaction of the OECD to these sorts of questions that they're fairly relaxed about the interaction between investment agreements and the GMT.

What are some of the key things about Vietnam that you’ve learnt from the workshop?

The key thing that I learned was that with regard to preparations and insights into the need to get details into regulations, Vietnam is further ahead than I thought. I was here last year when the National Assembly first had a major debate about Pillar 2. So things moved from that debate about the possibility of doing something to acting by November; and now we've had this discussion about GMT implementation.

This shows that Dang Ngoc Minh, deputy general director of the country's General Department of Taxation, and his team are aiming to get a draft circular out by the end of May. So that's rapid, impressive progress.

These legislations are always a challenge, but based on the outcomes of the event, I see no reason why the General Department of Taxation and the Ministry of Finance shouldn't stick to their timetable and secure implementation by the end of the year, or by autumn as they've planned.

Then we're into the next phase – the practical aspects of administration. I think there was an appreciation of the need, for example, to have a centralized process for managing the returns and liabilities under the GMT. That sounds very sensible to me so. It's not done until it's done, but based on how things are looking today, Vietnam has made good progress.

What advice or recommendation do you have for Vietnamese authorities?

The only advice I would give is to stick closely to the GMT template of the OECD because it would make it easier to work through what you need to have in the legislation. It's great that the Global Anti-base Erosion (GloBE) Rules have been translated into Vietnamese already; and this makes it a lot easier for multinationals to comply, because they know what the rules are.

* Jonathan Pemberton is also a former official at the UK's HM Revenue and Customs (HMRC) and OECD.

On November 29, 2023, Vietnam's National Assembly, the country's highest legislative body, passed a resolution on levying additional corporate income tax as per Global Anti-base Erosion (GloBE) Rules; applying a tax rate of 15% to taxpayers who are constituent entities of multinational enterprises with turnover in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) for at least two of the four years immediately preceding the fiscal year reaching €750 million or more.

The exceptions are government organizations, international organizations, non-profit organizations, pension funds, investment funds that are UPEs, real estate investment entities that are UPEs, entities with at least 85% of the asset value owned directly or indirectly through organizations specified in points ‘a’ to ‘e’ of this clause.

The resolution takes effect on January 1, 2024, applicable from fiscal year 2024. To make regulations on corporate income tax consistent, the parliament requested the Government to urgently complete the dossier of the (amended) Law on Corporate Income Tax project and submit it to the Standing Committee of the National Assembly. The National Assembly will consider adding it to the 2024 lawmaking agenda.