Vietnam mulls means to apply 'global minimum tax'

Vietnam is calling for ideas from foreign companies and business associations on how to apply the "Global Minimum Tax" rule in Base Erosion and Profit Shifting (BEPS) actions of the OECD suited to both foreign investors and the government. Dr. Dang Ngoc Minh, deputy chief at the General Department of Taxation, talks with The Investor about the details.

BEPS actions of the Organization of Economic and Cooperation Development (OECD) are underway across the world as a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. What is the "Global Minimum Tax" rule about, and why did Vietnam join?

The "Global Minimum Tax" rule is part of BEPS actions. Vietnam joined BEPS in 2017, and more than 140 countries have so far taken part in BEPS.

The multilateral agreement aims to help countries close the gaps in international tax administration to prevent multinational companies from transferring profits to territories with low tax rates or little taxation where they have little or no business activities. Rapidly implementing BEPS actions will ensure a more sustainable international environment for the benefit of developed and developing countries.

BEPS includes 15 major actions though Vietnam only participates in a few minimum commitments that are suitable for developing countries, like transparency in handling tax disputes, and information exchanges. In the time to come, this may expand to value added tax and sales tax, rather than just corporate income tax (CIT).

The second pillar of BEPS is the "Global Minimum Tax" rule. It sets a global minimum tax rate of 15% for multinational corporations with an annual total turnover of €750 million or more, and is expected to generate over $150 billion in global CIT per year.

This rule is a coordinated tax system that makes sure major multinationals will pay a minimum tax rate on income generated in each of the jurisdictions where they operate. It goes against tax havens, fights against competition in international investment by racing to lower tax rates of 0%.

The rule allows countries to set the minimum tax at 15%. Enterprises must declare international investment activities. If the tax rate applied in the countries where they come to invest is lower than 15%, they will pay the difference to the countries where they are headquartered, mainly developed countries. This helps tackle policies pertaining to tax havens.

It is expected to have influences on developing countries that are destinations for investment like Vietnam. However, actively joining BEPS also allows Vietnam to levy minimum taxes on large enterprises investing abroad. Even if Vietnam does not join the agreement, developed countries home to large multinational corporations investing in Vietnam still have the right to tax the majors to ensure compliance with the minimum 15% rate. This means joining or not joining both have an influence.

Therefore, the question is what actions Vietnam should take to ensure long-term and sustainable interests of both investors and the government. From the perspective of policy making and the regulator, we are in dire need of voices from business associations and investors, who are directly affected by BEPS.

The "Global Minimum Tax" reportedly will take effect at the beginning of 2023, so it is a very urgent task. In the beginning of this year, Prime Minister Pham Minh Chinh assigned the Ministry of Finance to study and propose implementation plans. How far has this gone?

Up to now, Vietnam has signed 83 bilateral agreements on avoiding double taxation. Therefore, Vietnam's participation in the BEPS agreement means the country has to amend all the 83 agreements to be consistent with BEPS.

In February 2022, the Vietnamese Ambassador in charge of this was authorized by the State President to sign the protocol for BEPS accession, and we are waiting for approval. In the coming time, Vietnam will join the action on transparency and information exchange.

As for pillar two, which is the "Global Minimum Tax" rule, a specific time to start implementation has not been determined. The Ministry of Finance is of the view that at present Vietnam needs to have a voice to reserve the right of developing countries to attract foreign investment to support economic growth through a transitional provision.

Pillar two is intended to prevent multinationals from transferring profits to tax havens. Meanwhile, Vietnam offers tax incentives to multinational corporations in order to support economic development and create more jobs. Therefore, procedures should be different from those in tax havens.

Vietnam and other developing countries with the same circumstances may require a transitional provision like extending the application period by two-three years. At the same time, there should be bilateral negotiations between Vietnam and a number of countries on strategic cooperation. This solution is considered highly feasible.

Besides, we are preparing to amend corporate income tax regulations. During this time, it is necessary to discuss this with foreign direct investment (FDI) enterprises to ensure consistency and sustainability.

In accordance with the "Global Minimum Tax" rule, we may raise the tax rate for FDI enterprises to 15%. However, along with that, to ensure a competitive investment environment able to continue to attract major and high-tech projects, and to support FDI companies in business expansions, Vietnam should work out new investment incentives that will not violate the country’s global commitments. This is challenging, and the Ministry of Finance is seeking solutions.