Vietnam Needs to Consider Impacts on FDI Attraction When Applying Global Minimum Tax

The global minimum tax rule is a progressive tax reform that aims to restrict large corporations from shifting their profit to tax havens or doing business via transnational digital platforms without a physical presence to reduce their tax payment.

Minister of Finance Ho Duc Phoc addresses the conference “Global minimum tax: International experiences, potential effects and implications for Vietnam”

In October 2021, the Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) issued a statement on the Two-Pillar Framework to address challenges arising from the digitalization of the economy, which has been to date adopted by all 142 member countries. Particularly, Pillar 2 regulates the global minimum tax rate: Two interlocking domestic rules (the 15% minimum tax rate rule and the undertaxed payment rule) and one tax rule of source country. To date, most EU countries, Switzerland, the UK, South Korea, Japan, Indonesia, Hong Kong (China), Australia, and other countries have confirmed to apply the 15% minimum tax rate rule, starting from 2024.

Comprehensive impact assessment of the global minimum tax

The Government Office recently issued Notice 120/TB-VPCP on the conclusion of Deputy Prime Minister Le Minh Khai at the meeting on the global minimum tax and its impacts on Vietnam. The Deputy Prime Minister requested the Ministry of Finance to analyze, and fully and thoroughly assess the impacts of the global minimum tax rate, especially adverse effects on investors for which Vietnam is committed to providing incentives to learn about its effects on the attractiveness and competitiveness of the investment and business environment. The ministry will necessarily focus on highlighting five core issues: 1. The process of formation and content of the global minimum tax rate; 2. Clearly confirm whether Vietnam needs to or does not need to, should or should not join; 3. Clarify our tax policy in the past time; 4. Analyze and evaluate fully and comprehensively the impacts of the global minimum tax rate on Vietnam, with a focus on impacts on Vietnam's state budget, investors and foreign investment; and 5. Vietnam's responses to the impacts of the global minimum tax rate, especially solutions for affected entities need to be made clear.

Currently, Vietnam is using tax incentives as a financial leverage tool to influence investment trends. Its preferential corporate income tax (CIT) policies are considered attractive relative to other countries in the region. The universal tax rate is 20% (higher than the global minimum tax rate); preferential tax rates are 10%, 15% and 17%, depending on the field, industry, scale and area of investment; and special preferential tax rates are 5%, 7% and 9%. Along with tax incentives, the current law also legislates tax exemption and 50% reduction in a given time. When Pillar 2 is officially applied, CIT incentives will affect Vietnam's competitive advantages in investment attraction.

Delegates at the event

Consulting international experiences and opinions from the business community

On April 18, in Hanoi, the Ministry of Finance held a conference themed: “Global minimum tax: International experiences, potential effects and implications for Vietnam”, chaired by Finance Minister Ho Duc Phuc, to comprehensively assess this issue.

Finance Minister Ho Duc Phoc expressed his concerns that tax incentives will no longer be very effective when the global minimum tax is applied, thereby posing challenges to the competitiveness of Vietnam's investment environment. Among 1,015 FDI firms that are subject to the global minimum tax, more than 70 are likely to be affected from 2024. If countries having parent corporations all enforce the global minimum tax, they will receive an additional tax difference of an estimated VND12 trillion in 2024, he said. Thus, tax incentives will no longer be very effective, thus posing significant challenges to maintaining the competitiveness of Vietnam's investment environment.

Mr. Dang Ngoc Minh, Deputy General Director of the General Department of Taxation, said, about 335 projects with an individual registered investment fund of over US$100 million engaged in the processing and manufacturing industry in economic zones and industrial zones are currently enjoying a preferential corporate income tax rate of lower than 15%, including tech giants like Samsung, Intel, LG, Bosch, Sharp, Panasonic, Foxconn and Pegatron. The total registered investment capital of projects of this class accounts for nearly 30% of the total FDI in Vietnam (accounting for US$131.3 billion). These projects are likely to be affected by the global minimum tax.

In the State budget revenue structure in the 2020-2022 period, the corporate income tax (CIT) accounted for 18-21% of total domestic budget revenue. CIT collected from FDI firms was about 7.5-8.5% of total domestic budget revenue and 39-41% of total CIT. Therefore, the imposition or non-imposition of the global minimum tax in 2024 needs to be very prudently considered, he emphasized.

The application of the global minimum tax may reduce the attractiveness and competitiveness in FDI attraction of developing countries like Vietnam because their tax incentives will not then be very effective, hence posing significant challenges to maintaining the competitiveness of Vietnam's investment environment. It is necessary to propose appropriate solutions for Vietnam to minimize adverse effects when the global minimum tax is imposed and to keep the appeal of the investment environment in Vietnam.

Ms. Nguyen Thi Cuc Chairwoman of Vietnam Tax Consultants Association, former Deputy General Director of the General Department of Taxation At present, 140 countries and territories have nearly 35,0900 valid investment projects in Vietnam. South Korea is the largest foreign investor, followed by Singapore, Japan and Taiwan. Meanwhile, on December 23, 2022, the National Assembly of South Korea passed the Adjustment of International Taxes Act, which applies a global minimum corporate tax rate from January 1, 2024. If Vietnam does not adopt a global minimum tax rate and continues to maintain CIT incentives as now, South Korean firms investing in Vietnam that are subject to this tax must still additionally pay the difference of as low tax rate as 15% in Vietnam to South Korea. For this reason, Vietnam needs to apply the minimum tax as soon as possible but it must also find ways to adjust other compatible preferential policies to both ensure the right to tax and have the least impact on foreign-invested firms which will do business in Vietnam. Mr. Nguyen Dang Trieu Thien CEO of Vietnam Startup Ecosystem This global trend may make it difficult for us to attract satellite businesses in the supply chain of large investors who are eligible for 10% tax incentives for 15 years. These businesses contribute to the development of the industry in Vietnam. The tax rate will also create barriers for Vietnam to develop priority areas, especially in green investment under its COP 26 commitments. However, this is only one of a few disadvantages when the global minimum tax is adopted by more than 140 countries, so Vietnam should quickly act to catch up with international integration and connect to the world's production value chain.

Source: Vietnam Business Forum)