Vietnam needs to modify FDI incentives to stay competitive amid global minimum tax application: expert

Vietnam’s policymakers need to consider changes to foreign direct investment incentives to keep the country competitive when it implements Global Minimum Tax rules, says Prof. Nguyen Mai, chairman of the Vietnam’s Association of Foreign Invested Enterprises (VAFIE).

Since 1986, Vietnam has been transforming into a market economy while integrating internationally, expanding trade and investment relations with other countries on the principle of equality and mutual benefit.

Since the country adopted the Law on Foreign Investment in December 1987, the foreign direct investment (FDI) sector has made important contributions to its socio-economic development. The country had attracted a total of 39,140 valid projects with a combined registered capital of $468.9 billion as of the end of 2023, with $297.2 billion disbursed, equal to 63.4% of registered capital. The FDI sector annually contributes about 20% of GDP, 20% of state budget revenue, 55% of total industrial output, and 72% of external trade, creating 4.5 million direct jobs and tens of millions of indirect jobs.

Harmonizing interests

Vietnam's policy on inbound and outbound FDI is consistent with the basic principle of harmonizing national interests with foreign investors', the interests of the Vietnamese side with foreign sides, and employers' interests with employees’. The country attracts FDI to meet its socio-economic goals, while foreign investors come to Vietnam mainly to make money. Therefore, in the context of fierce competition for FDI, the state needs to facilitate institutions and create an attractive investment environment to harmonize national interests with investors’ to lure more FDI.

National interests require industries, localities, and businesses to serve and not oppose them. Unfortunately, in reality, there have been actions that negatively impact national interests, such as refusing to open the market, seeking to prolong monopolies, and setting conditions that are against the law.

To name a few examples, state utility Vietnam Electricity (EVN), which wants to maintain a monopoly, does not want to attract too many FDI projects in solar and wind power, even though our country has advantages in these areas and huge power demands. In the early stages, the post and telecommunications industry advocated no joint ventures or 100% foreign investment in telecommunications services, which limited the industry’s ability to meet the rapidly increasing demand for its services.

Some local governments have proposed tax incentives and land rents that are higher than the regulated levels. Many FDI enterprises have exerted pressure and made use of several contact channels to force the government to extend its trade protectionism. That situation is contrary to state laws, inconsistent with our country's international commitments, and slows down the process of perfecting the market economy and international integration.

Policies and state laws must be implemented uniformly throughout the country. Government agencies and localities can apply policies and laws that suit their situations, but cannot go beyond the framework prescribed by the state. It’s worth remembering that, while Vietnam holds the right to promulgate policies and laws, investors have the right to choose which country to invest in. If their interests are in harmony with our national interests, they will proceed with the project.

On the contrary, if policies and laws do not create an attractive investment environment, they will not invest, or even shift their currently operating factories to another country. On the other hand, it is also necessary to realize the limits of meeting investor interests while making policies and laws, so as not to harm national interests.

Parliamentary resolution on Global Minimum Tax (GMT) implementation

On November 29, 2023, the National Assembly passed Resolution No. 107/2023/QH15 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 their 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.

Exceptions are government organizations, international organizations, non-profit organizations, pension funds, investment funds that are UPEs, real estate investment entities that are UPEs, and 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 also explains that the GloBE rules and the Vietnamese government's regulations are consistent with the GMT regulations of the Inclusive Framework (IF) on base erosion and profit shifting (BEPS), to which Vietnam is a party (hereinafter referred to as the GMT regulations).

The OECD's GMT, also known as Pillar 2, stipulates the GMT rate at 15%, requiring FDI enterprises to pay income tax of at least 15%.

In case after the effective date of this resolution, the IF on BEPS guides, amends, and supplements GMT regulations, the government will promulgate provisions for implementation. In case GMT regulations contradict this resolution, the government shall report to the National Assembly for consideration and approval. In cases of urgency between two regular parliamentary sessions, the government shall report to the National Assembly Standing Committee for consideration and approval and report to the parliament at the nearest session.

Resolution 107/2023/QH15 takes effect on January 1, 2024, applicable from fiscal year 2024.

To make regulations on corporate income tax consistent, the National Assembly has asked the government to urgently complete a dossier of the (amended) Law on Corporate Income Tax according to the provisions of the Law on Promulgation of Legal Documents and submit it to the Standing Committee of the National Assembly. The parliament will then consider adding it to its 2024 lawmaking agenda.

International organizations, investors, and FDI enterprises subject to the GMT highly appreciate Vietnam’s capacity to promulgate economic policies, including FDI policies commensurate with international changes such as the GMT regulations. They also expect the government to ensure the principle of harmony of interests when implementing it in Vietnam.

Samsung Electronics Vietnam (SEV) – the largest investor and most important contributor to the country's economic growth – posted revenue of about $75 billion in 2023, accounting for nearly 20% of Vietnam’s export turnover, creating jobs for nearly 200,000 direct workers and millions of indirect workers. It plans to rapidly ramp up investment in information technology and semiconductors, and hopes the government to ensure fair and equitable benefits for the company.

Ongoing issues

The Ministry of Finance is in drafting a government decree to implement the National Assembly’s GMT Resolution. The Ministry of Planning and Investment is drafting a government decree to amend several regulations related to the GMT and a decree to amend the investment incentive policy from mainly tax holidays to finance and cost-based incentives for priority projects.

The Vietnam’s Association of Foreign Invested Enterprises recommends:

1) Quickly review FDI enterprises affected by GMT implementation, assess the ability to collect the top-up tax and the impact on the investment environment; review all current regulations on investment incentive policies to eliminate those that are no longer consistent with the GMT regulations. Only when the full extent of the impact is determined can appropriate solutions be worked out.

2) Proactively gain the right to impose a top-up tax by adopting domestic regulations to implement the GMT. Urgently study and apply the Qualified Domestic Minimum Tax (QDMTT) mechanism according to OECD standards from 2024 onwards.

3) To remain competitive in attracting foreign investment, Vietnam needs to consider switching from investment incentives in the form of CIT to cost-based incentives, including accelerated depreciation, monetary support for R&D activities, infrastructure investment, and human resource training, among others.

The promulgation of new policies and mechanisms needs to be carefully considered to ensure fairness for companies subject and not subject to adjustments related to Pillar 2, ensuring consistency with regulations that safeguard investors’ rights, as well as not violating international commitments and OECD regulations that Vietnam is a party to.

4) Make changes to FDI incentive policies in a way that focuses on improving Vietnam’s competitiveness with factors such as robust betterment of the investment-business environment, especially administrative procedures; upskilling of the workforce; upgrading of infrastructure systems; development of supporting industries and suppliers, which are the basic factors that influence foreign corporations’ investment decisions instead of applying tax incentives.

5) Vietnam needs to proactively propose ASEAN countries take common measures in applying the GMT, building a consensus on common minimum standards for investment incentive policies to prevent unfair competition for FDI attraction among member countries.

The Vietnamese state is reforming institutions, laws, and FDI policies that approach international practices to successfully attract FDI in line with orientations to high-tech, future industries such as AI, blockchain, Big Data, modern services, R&D, innovation, skilled human resources, and healthcare. These orientations will help effectively implement 17 new-generation free trade agreements and multi-faceted cooperation at bilateral, regional, and international levels to respond to challenges and take advantage of new opportunities, and quickly realize prosperity aspirations for a rich people, prosperous nation, and fair, democratic and civilized society.

* Prof. Nguyen Mai is former Vice Chairman of State Committee for Cooperation and Investment, now Ministry of Planning and Investment.