Vietnam’s Bold Move on Global Minimum Tax Implementation
While regional peers like Singapore and Thailand have opted to postpone the implementation of the OECD’s global minimum tax (GMT) initiative until 2025, Vietnam has taken a decisive step forward. The Vietnamese National Assembly formally approved the application of GMT on November 29, with an overwhelming 93% support from lawmakers.
Understanding the Global Minimum Tax (GMT)
The idea of a global minimum tax emerged from efforts by the Organization for Economic Cooperation and Development (OECD) to address the tax challenges arising from digitalization and globalization. The proposed effective corporate tax rate of 15% targets large multinational enterprises (MNEs) with revenues exceeding 750 million euros (approximately $824 million) over two of four consecutive years. For Vietnam, the GMT will be applicable starting in 2024.
Potential Positives of GMT for Vietnam
One significant advantage of implementing the GMT is the expected increase in tax revenue. The Vietnamese government estimates that an additional 14.6 trillion Vietnamese dong (around $600 million) could be collected yearly through topped-up taxes under the GMT. In addition, the initiative aims to mitigate profit shifting among MNEs, thereby narrowing the tax gap and reducing reliance on tax havens.
Compliance for Multinational Enterprises
Vietnamese MNEs will be required to comply with the GMT, meaning they will need to top up corporate income taxes for their overseas subsidiaries to meet the 15% minimum standard. This could foster a more equitable tax landscape, leveling the playing field for companies operating in Vietnam.
Potential Challenges and Risks
Despite the anticipated positives, the introduction of GMT poses various challenges for Vietnam’s economy. Tax incentives have played a critical role in attracting foreign investment, a sector that significantly contributes to the country’s GDP. Vietnam’s current standard corporate income tax rate is 20%, but many incentives can result in effective rates lower than 15%. The phasing out of these incentives under the GMT could diminish Vietnam’s allure as a destination for foreign capital.
Impact on Foreign Direct Investment (FDI)
With foreign direct investment accounting for over 70% of Vietnam’s exports, the introduction of GMT might slow down the country’s trajectory to becoming a global manufacturing hub, particularly as manufacturers seek alternatives that maintain favorable tax environments. Almost 112 MNEs operating in Vietnam are expected to be affected, with large companies like Samsung and Intel likely experiencing significant tax adjustments that could render Vietnam less competitive.
The Need for Compensatory Measures
Countries like Thailand are considering compensatory strategies, such as cash grants, to retain investor interest amidst GMT implementation. The Vietnamese government may need to explore similar initiatives to offer support to large MNEs adversely affected by the new tax framework. Samsung, for instance, could face an additional tax obligation of up to $6.5 billion, which would be redirected to South Korea’s National Tax Service post-GMT implementation.
Legislative Support and Future Developments
Immediate measures to soften the GMT’s impact are crucial. A draft resolution, dated August 16, 2023, has been proposed to support high-tech companies, focusing primarily on large projects with investment incentives like tax credits or cash grants.
While this effort is promising, the broader business community will require a collective and robust support system, as the expected tax burdens could ripple across numerous sectors. Establishing expert teams to collaborate with businesses and create effective assessment programs will be essential.
Long-Term Strategy for Tax Regulations
In addition to developing immediate support measures, Vietnam should also consider legislative changes to make the tax environment more attractive. This could involve integrating new guidance on alternative incentives within current tax laws.
Both financial support and GMT-specific solutions, such as the income inclusion rule and domestic minimum top-up tax policies, should be initiated simultaneously to create a synergistic environment.
Engaging Multinational Enterprises
Executives of MNEs need to be proactive in understanding the implications of GMT—this includes actively collaborating with Vietnamese legislators to forge realistic resolutions that could mitigate adverse impacts.
In conclusion, while VAT implementation brings both opportunities and challenges, it represents a significant shift in Vietnam’s tax policies and its strategic positioning within the global marketplace. The upcoming years will be crucial as the nation adapts legally and economically to ensure that it remains an attractive landscape for foreign investment amid evolving international tax standards.