During recent time, the booming of digital economy and globalization through the internet network has increasingly effected to the socio-economic of all nations. Along together with that the appearance of many new business models which are based on technology platform has produced maximum facilities to consumers. However, the development of science and technology has also posed many challengers to management agencies of government, especially in terms of tax management, in preventing against cross border business activities accompanied with acts of transfer pricing abuse and profit shifting (to low tax jurisdictions) by multi-national economic groups, eroding tax base and causing social inequality.
Implication of global minimum tax rules and their effects
To implement the BEPS action plan, in July 2021 member countries of G20 have agreed on a new tax rule in the digital process of the economy (referred to as agreement on global minimum tax for short). Accordingly, member countries have agreed to uniformly impose a minimum CIT rate of 15% on multinational enterprises earning annual gross revenue of 750 million euros or more in at least two of the four fiscal years preceding the relevant fiscal year. Such a rule is aimed at preventing the situation of tax avoidance practiced by multinational economic groups through transfer pricing abuse as well as shifting their profit to low tax or no tax jurisdictions, causing damages to host countries, especially less developed countries. Under the global minimum tax, a multinational economic group will be imposed an addition tax (top up tax) by the country where its headquarter is located (home country) if such a multinational economic group paid corporate income tax (CIT) at a rate less than 15% in jurisdictions where its business operations are carried on. For example, an enterprise with foreign direct investment (FDI) doing business Vietnam had derived before CIT profit of 100 billion dong in 2022 and paid an CIT amount of 10 billion dong to Vietnam state budget (under the incentive CIT rate of 10%). In this case, its parent company in home country will be imposed top up tax at rate of 5% (15% – 10%), equivalent to an amount of 5 billion dong (about 200,000 USD).
According to the implementation principle of global minimum tax stated by the OECD, member countries are not obligated to apply the global minimum tax rules; however, once to select to apply they have to strictly comply with common practices. In case where a country not select to apply, it still has to accept the global minimum tax applied by the others. Recently, most countries in European Union and Northeast Asian region have declared to introduce the global minimum tax rule of 15% from 2024. Meanwhile, some regional countries such as Thailand, Singapore, Indonesia, and Malaysia have planned to apply the global minimum tax in order to gain the right to impose the top up tax. Having discussed the issue, experts have considered that Vietnam should timely cope with impacts to foreign investment attraction in order to protect the national taxing right on the one hand, to maintain the magnetism of its own investment environment as a real attractive destination of foreign investment follows on the other hand.
According to the statistic figure of Ministry Plan and Investment, recently, there are more than 1,000 FDI enterprises in Vietnam of which their parent companies would be subject to the global minimum tax. Among them nearly 100 enterprises would be possibly impacted by the global minimum tax when such kind of tax will be applied from the beginning 2024. For the time being the FDI enterprises in Vietnam are enjoying the incentive CIT rates between 7% and 10% far lower than the rate of global minimum tax (15%). It does not mention that some FDI enterprises have yet paid CIT because they are enjoying the CIT holiday in four years and a CIT reduction in nine following years. If home countries of parent companies apply the global minimum tax, they will additionally collect a tax amount about 10,000 billion dong resulted from the difference in tax rates (compared to 15%). Thus, CIT incentive measures will no longer have effect, posing big challenger to the maintaining the competitiveness of Vietnam’s investment enterprises.
Representatives of some foreign investors in Vietnam informed since 2024 they will have to pay the top up tax in their home countries, making their finance burden to increase, and therefore, influencing to business strategies, and reducing the competitive capacity of products made in Vietnam. Even, such a policy would make FDI enterprises to reconsider the strategy of establishing investment and production hubs, including the possibility to leave the “nest” in Vietnam. To relieve difficulties, some large economic groups such as Samsung, Intel, LG, Sharp, Panasonic, and so on have proposed Vietnam Government to early have solutions aiming at compensating such additionally increasing tax in order to enable FDI enterprises to stabilize their production and business.
Recommendations for implementing the global minimum tax in Vietnam
Having discussed on economic forums on the global minimum tax policy, investors and experts have analyzed that Vietnam had participated in and become a member of the BEPS Forum since 2017, it means that Vietnam has been ready for a new playing field of accepting the new tax rule and attracting foreign direct investments. When the effective time of global minimum tax is coming soon (1st January 2024) it requests that relevant agencies must be more urgent in assessing impacts of such a new policy to the state budget revenue as well as to attraction of foreign direct investment in Vietnam; and thereby, supplement provisions on CIT to accommodate to OECD standards. At the same time, it is essential to further improve the entire tax system to be accommodated to the practice of implementation of global minimum tax, especially to re-design incentive policies to be consistent to other policies on attracting foreign investment. This means that it is necessary to clarify tax items that must be adjusted as well as issues in relation to tax administration and tax management after changing the incentive mode aiming at attracting foreign investment to Vietnam and to calculate tax amount additionally payable (including the total tax amount additionally payable in the economy and the one payable by each enterprise),
To realize the rules mentioned above, experts have recommended that first is to study for promulgating a law which supplements, amends many related laws (Law on Investment, Law on Enterprises, Law on CIT) toward replacing the current policies on CIT exemption and reduction being applied to enterprises with direct foreign investment capital in Vietnam by a qualified domestic minimum top-up tax at rate of 15% from 1st January 2024. The following is to suggest support solutions aiming at maintaining an attractive investment environment to retain foreign investors, protecting benefits of enterprises effected by the top-up tax (in a simple term, it is to seek solutions to grant the effected enterprises new benefits equivalent to tax amount additionally paid as a result of the implementation of the global minimum tax). More concretely, to avoid breaking the international principles (anti-subsidy, anti-dumping, non-discrimination) upon building the support policies, Government should consider the particular situation of Vietnam based on practical demands and suggestions from foreign investors. Among them some practical solutions are to reduce land rental, personal income tax (PIT), fees and charges, and so on; at the same time, to improve investment environment, to support expenses for research and development activities, expenses for environment protection, emissions. During the time of economic recession, it is possible to consider supporting some expense items for welfare of employees such as expenses for building apartments, kindergarten schools, and clinics used for employees working at industrial parks and export processing zones.
To implement from the central level to localities in a proactive and smooth way, it is possible to separately record state budget revenue additionally collected from applying the global minimum tax (about 10,000 billion dong per year) to finance for support expenditures mentioned above, helping enterprises to reduce expenses, increasing the magnetism with respect to foreign investment flows. Along together with adjusting the CIT, it is also necessary to review the entire tax system to continue adjusting in accordance with the orientation of the Strategy of tax system reform until 2030 approved by Prime Minister. Accordingly, to study for applying a sole VAT rate (instead of two rates of 5% and 10% as of today) in accordance with international practices and easiness to understand, easiness to comply.
Regarding the PIT, it is also necessary to supplement toward reducing the number of tax brackets, replacing the current highest rate of 35% by a new rate (about 25%, for example) to ensure a common income redistribution level of 20% as being applied to the business community. The reduction of PIT, especially, the highest rate, would contribute to attract foreign experts to live and work in Vietnam.
In long term, the thinking of attracting foreign investment through tax incentives should be changed toward increasing the investment in training and education to enhance the quality of human resource, improving business investment environment attached with selectively attracting foreign investments to enhance the quality of investment projects, especially projects with high technology content, modern machineries and equipment, environmental friendship, and suitable to socio-economic conditions of Vietnam in a new situation.
By PhD. Nguyen Ngoc Tu – Ha Noi University of Business and Technology
The content was copied from https://www.gdt.gov.vn/