Ms. Valerie Teo, Tax Partner at Grant Thornton Vietnam, and Mr. Nguyen Dinh Huy, Tax Senior Manager at Grant Thornton Vietnam
Vietnam has been known as an attractive country for investment due to its preferential tax incentives. With the application of a Global Minimum Tax (GMT), it will face many challenges in encouraging new investment from multinational enterprises (MNEs), granting tax incentives to existing foreign investors, maintaining current investors’ investment funds, and supporting their expansion plans in Vietnam.
With delays by the government in adopting suitable solutions to reform certain policies, Vietnam may lose its competitive edge in attracting investments from MNEs from 2024 onwards and especially investments from developed countries, which include most European countries, the UK, Japan, and South Korea, among others, who have confirmed they will apply the GMT from 2024.
Vietnam is among 141 countries to apply the GMT from 2024, at which time it will face a reaction from MNEs on their investment strategies. Vietnam and other countries therefore need to develop their own strategies and solutions to effectively deal with the impact of the GMT.
With a threshold on applying the GMT from 2024, of consolidated revenues of €750 million and upwards, it is expected that 1,015 FDI companies in Vietnam and their parent companies will be subject to the GMT. Therefore, the Vietnamese Government needs to develop supporting policies and investment laws to reduce any impact and maintain the competitiveness of the country’s investment environment, via assessing the impact of increasing tax costs for FDI, attractive investment schemes for FDI sectors, and tax collection rights and incentive commitments to current FDI businesses in Vietnam; revaluate existing domestic tax laws to capture the impact of the GMT as well as develop non-tax preferential policies, for example subsidies and/or cuts in land rental fees and related land compensation fees, subsidies for supporting infrastructure, high-skilled worker training, supporting social housing for MNE workers, and cutting import taxes, etc.; obtaining opinions / recommendations from impacted MNEs and relevant ministries and agencies to develop suitable supporting policies; and studying the implementation of the GMT in other countries, particularly Asian countries, which is recommended for Vietnam to introduce attractive support policies and packages to help businesses impacted by the GMT.
Application of the GMT would support Base Erosion and Profit Shifting (BEPS) action plans and reduce tax evasion / profit shifting to tax havens.
With the participation of the Organization for Economic Cooperation and Development (OECD)’s inclusive framework, Vietnam and other countries can strengthen the transparency of tax environments, which will be an important matter for investors when considering investing in Vietnam. In implementing GMT policies from 2024, Vietnam also has the right to collect the additional top-up corporate income tax (CIT) to 15 per cent, providing an opportunity to increase domestic revenue in the short term. This is an important tax collection regime that the Vietnamese Government needs to consider and amend domestic laws to protect taxing rights and support to boost the State budget.
Over the next six months, the GMT will take effect in some countries and it is recommended that the Vietnamese Government expedite the process of developing certain tax and non-tax policies to achieve two important goals: creating and maintaining a favorable investment environment, and actively protecting the right to apply a GMT rate of 15 per cent in Vietnam. The business community also needs to actively follow up on new or complicated policies and have proper strategies to protect the tax cost and non-tax benefits. The Vietnamese Government is also advised to have various action plans to simplify administrative compliance and procedures, enhance innovation capabilities, and improve the skills of Vietnam’s workforce.
Mr. Nguyen Thanh Vinh, Partner at Baker McKenzie Vietnam’s Tax Practice, and Ms. Dao Thanh Hoa, Special Counsel at Baker McKenzie Vietnam’s Tax Practice
Tax incentives have been among the key attractions for foreign investment in Vietnam. Current corporate income tax (CIT) incentive schemes may bring the effective tax rate (ETR) to under 15 per cent and make Vietnam a low tax jurisdiction under GMT rules. In this case, other jurisdictions applying the GMT rules can collect up to 15 per cent tax and, consequently, the tax incentives granted by the Vietnamese Government will be nullified. Therefore, in a post-Pillar Two environment, Vietnam will need to reform tax incentive policy and consider alternatives to attract FDI. That said, the GMT rules will only affect large multinational enterprise groups with GMT global annual revenues of €750 million ($807 million), meaning that not all foreign investors investing in Vietnam fall within the scope of GMT rules.
If Vietnam applies the Qualified Domestic Minimum Top-Up Tax (QDMTT), the State budget is expected to increase, which would provide Vietnam with financial sources for implementing policies on FDI attraction. Specifically, Vietnam will have more budget to reinvest in infrastructure, reform regulations and policies, eliminate red tape, develop an enterprise-friendly digital government, and so on.
However, timing is of the essence. More and more jurisdictions are looking to implement Pillar Two from next year, such as South Korea, Japan, and Singapore, where most of Vietnam’s foreign investors come from. If Vietnam adopts and applies domestic law on QDMTT after those foreign countries, the GMT rules will allow those countries to collect top-up tax. In addition to the adoption of domestic law on QDMTT, Vietnam will also need to quickly amend the policy and regulations on alternative incentives to maintain the attractiveness of its investment environment. Another challenge would be that the Model Rules of the OECD must be obeyed to develop domestic law on QDMTT while following existing concepts and rules under Vietnamese law.
In the short term, Vietnam needs time to improve and adjust its new alternative incentives to attract foreign investment in consideration of similar measures and schemes adopted by other countries. Foreign investors would evaluate their overall investment strategy in consideration of GMT and actions adopted by the countries they have invested in. This could affect their investment decisions on a short-term basis.
In the long run, additional tax revenue from the GMT would provide more funds for the government to invest in sustainable development in the legal policy system, digital transformation, and the simplification of administrative procedures. These measures are expected to enhance the attractiveness of Vietnam’s investment environment.
Professor Andreas Stoffers, Country Director of the Friedrich Naumann Foundation in Vietnam
The Global Minimum Tax (GMT) is a fact that Vietnam, together with over 140 countries worldwide, has to come to terms with. The task now is to clearly examine the impact on Vietnam’s State budget and take appropriate measures to ensure that the country remains attractive for FDI and does not lose State budget revenue. This is also an opportunity for the tax authority to review all current preferential tax regulations and determine the impact of the GMT on each sector of the economy, thereby effectively providing in-depth solutions for each area of the economy.
It is a matter of fact that if Vietnam is too slow in implementing the GMT it could lead to serious disadvantages for the country. On the one hand, Vietnam would not receive the 8 per cent tax differential from the more than 100 FDI companies that would be eligible for this tax. This would amount to foregoing several billion US dollars annually for Vietnam’s State budget. On the other hand, the investment environment in Vietnam would be affected as investors would divert their investments to other countries with a benefit-sharing mechanism related to this new tax rule.
The relatively low taxes for foreign investors in many areas have certainly been a strong asset for Vietnam in attracting FDI in the past. This will definitely not continue with the introduction of the GMT. Vietnam will lose this factor of fiscal attractiveness. For this reason, appropriate measures must be taken promptly, which will help maintain Vietnam’s competitiveness. In the future, factors such as economic openness and reliability, functioning infrastructure, integration into international value chains, a well-educated population, and free trade agreements will become more important. Vietnam’s geographically central location in Southeast Asia and an increasingly attractive domestic market with 100 million potential consumers are further positive points.
Vietnam must succeed in repositioning itself in international competition and present itself, despite the GMT, as an investment destination of first choice. The GMT is a huge challenge but also brings new opportunities for Vietnam. Vietnam continues to offer many advantages to investors, including strong integration into global value chains, a clear commitment to free trade and investment protection, and a large market of 100 million consumers and a growing affluent middle class. However, in addition to tax reform related to the GMT, the country’s other problems also need to be tackled vigorously, including compliance issues, infrastructure, administrative processes, workplace productivity, as well as an education and skills offensive.
It is essential to maintain Vietnam’s open economic policy. Trade and investment partners should be diversified in order to reduce one-sided dependencies. In addition, further areas should be developed, especially in the service sector, in order to reduce dependence on investments in certain industrial sectors.
Mr. Federico Vasoli, Managing Partner at dMTV Global and Vice-Chairman of the Italian Chamber of Commerce in Vietnam (ICHAM)
On one side, the implementation of the GMT is good news and Vietnam is essentially conforming to international laws. On the other hand, the problem that a lot of business organizations like EuroCham, of which I’m a member, and others are raising is that if joining the GMT does not come with a deeper formation, the tax system could result in tax increases for companies from abroad that are currently enjoying special tax treatment in Vietnam and that would discourage foreign investments.
Vietnam should reform its legal system to apply the rule of law. The problem that I see in Vietnam as a lawyer is that sometimes as a foreigner it is difficult to exercise your rights when it comes to business. In order to attract foreign investment, I would say the priority goes to the rule of law, before taxation. There are countries with high taxes and yet foreigners do go there.
Vietnam should go through its tax system and see how the implementation of the GMT impacts current incentives and how Vietnam could balance a potential increase in taxation with other types of tax related incentives, such as import duties or tax breaks for research and development, real estate, etc.
The core should be ensuring that investors are making profits with continuous growth. So what has to be ensured is growth, not really specific tax incentives or specific tax rates. There will always be a place in the world that is cheaper, that has better tax rates. But what investors look for is a holistic approach, which means exercising rights. Furthermore, it is also a matter of digitalization in public administration. If you create a setting where you have language, easy procedures, safety, cybersecurity, free trade agreements, etc., then eventually the tax impact can be absorbed by the attractiveness of the system as a whole.
One big opportunity for Vietnam is the chance to go through its current system, study it in depth, and reform it. Because, by 2024, Vietnam is required like everybody else to implement this system. That means that Vietnam has a year and a half, more or less, to go through the current system and see how the country can be best adapted to, on one hand, conform to global standards like this, and on the other hand make sure that the global standards do not have a negative impact on the system as a whole.