The implementation of the global minimum corporate tax will directly affect Vietnam’s efforts to attract foreign direct investment (FDI). With a minimum tax rate of 15% imposed on multinational companies, measures to attract foreign capital through tax incentives will no longer be effective.
Some countries will apply the global minimum corporate tax rate starting from 2024. Right now, foreign investors are showing their interest in the corresponding policy changes in Vietnam while considering their investment decisions for 2023 and subsequent years.
Opportunities and challenges
The global minimum tax rate is a key element of the programme to combat tax base erosion and profit shifting, initiated by the Organisation for Economic Cooperation and Development (OECD), which has now been embraced by more than 140 countries. Under this mechanism, multinational corporations with revenue of 750 million EUR or more will be subject to a minimum tax rate of 15%. Thus, when a company invests in a foreign country but pays corporate income tax of less than 15% in that country, it will have to pay the difference in the country where it is headquartered.
Manufacturing electronic parts at Origin Manufactures Vietnam, a Japan-invested company, at the Dong Van Industrial Park.
According to Dr Can Van Luc, chief economist at the Bank for Investment and Development of Vietnam (BIDV), the European Union (EU) and the Republic of Korea have approved plans to impose a minimum tax rate of 15% from 2024. Switzerland is expected to hold a referendum in June 2023 on the matter while Japan is also formulating drafts for revised tax law with contents on implementing this tax rule.
To cope with the new context, some countries are considering imposing a domestic minimum tax mechanism known as QDMT. With this mechanism, countries can protect their taxing rights by collecting additional tax, equal to the difference between the domestic minimum tax rate and the preferential tax rate for subsidiaries of multinational corporations, before this tax is paid to the government of the country where the parent companies are located.
In Southeast Asia, Malaysia introduced issued a QDMT mechanism operating in tandem with the global minimum tax policy while Indonesia issued a decree allowing a global minimum tax to be implemented based on a system of regulatory measures against tax loss and tax agreements for foreign investment. Thailand is also considering the implementation of the QDMT mechanism to claim the taxing rights.
Dr Luc said that the application of the global minimum tax rate will have both positive and negative impacts on the Vietnamese economy. The positive impact is that it will help Vietnam reform its tax system in line with international practices and standards, especially regarding increased tax revenue, and reduce tax evasion, tax avoidance and transfer pricing by multinational corporations.
Data from the Ministry of Finance shows that in 2021, nearly 14,300 foreign-invested enterprises reported losses, accounting for 55% of the total number of FDI enterprises operating in Vietnam. It is notable that many corporations suffered constant losses but have continued to expand their business in Vietnam.
On the other hand, the global minimum tax rate is predicted to have a negative impact on Vietnam's economy by making the country less competitive in attracting FDI in the short term since one of the advantages that makes Vietnam attractive to foreign investors is its tax incentive policy.
Citing data from the General Department of Taxation, Dr Luc stated that the actual corporate income tax of the FDI sector is about 12.3%, which is lower than the general tax rate of 20%. Some foreign corporations are even taxed at only 2.75%-5.59% thanks to tax incentives. Therefore, multinational companies investing in Vietnam may be subject to additional tax in the country where their head offices are located if the tax rate in Vietnam is lower than 15%. Thus, tax incentives will no longer be as effective, and Vietnam will lose a large amount of tax revenue.
No room for delay
The impact of the global minimum tax rate on Vietnam is very clear and urgent. In August 2022, the government established a special working group to study and propose solutions related to the OECD's global minimum tax rate. The group is working to build a legal framework for corporate income tax related to the application of the global minimum tax so that preferential policies for foreign investors are implemented effectively.
According to Thomas McClelland, a tax specialist at Deloitte Vietnam, the Vietnamese government can consider applying QDMT to gain the right to collect additional tax before other countries. In addition, it is necessary to promulgate cost-based incentive mechanisms and policies to support the businesses that are currently enjoying tax incentives and will be affected by the global minimum tax rate.
This new tax policy affects not only businesses currently operating in Vietnam but also potential investors who are considering a location for their investment because investment incentives are always a top concern. With the application of the global minimum tax rate, Vietnam's current tax exemption and reduction incentives will no longer be beneficial to foreign investors as before and Vietnam’s competitive advantage in attracting foreign investment will be reduced. Without immediate action, Vietnam will have no time to introduce appropriate policies that can be applied from 2024.
Dr Phan Duc Hieu, a member of the National Assembly’s Economic Committee, suggested that the government should quickly assess the extent of the impact of the global minimum tax rate and review all current regulations on preferential policies as a basis for accurately determining the scope and extent of impacts to the economic sector.
“Only when we have a full picture of the new policy’s impact can we come up with the right solution. When tax incentives no longer work, we must attract investment with a favourable, transparent and low-risk business environment, considering this the most important and effective investment attraction measure to respond to the challenges from the global minimum tax policy", emphasised Hieu.
The global minimum tax presents great opportunities for Vietnam but also poses many challenges. Actively participating in the “game” will be the best way for Vietnam to avoid being left behind.