Assessing impact of global corporate tax rate on multinational companies

Bui Ngoc Tuan-Partner, Deloitte Vietnam

The aim is to prevent tax base erosion and profit shifting, limit the race to the bottom on tax rates, and create a fair competitive environment in attracting investment among countries. It is hoped Pillar 2 would take effect from 2023.

The regime would be applied to multinational corporations (MNCs) with a global consolidated turnover exceeding $778.5 million. Therefore, there would be a number of large MNCs in Vietnam in the scope of Pillar 2.

When applying Pillar 2, if the effective tax rate of the subsidiaries of those MNCs in Vietnam is less than the GMT rate of 15 per cent, they would incur additional tax liabilities in the country of their headquarters, equal to the difference between the 15 per cent rate and the effective tax rate in Vietnam.

Although the standard tax rate in Vietnam is 20 per cent, currently many foreign-invested enterprises (FIEs) that are subsidiaries of MNCs have projects eligible for investment incentives in Vietnam, combining the reduction and preferential tax rate for a period of time upon commercialising their operations. Therefore, a number of them may enjoy an effective tax rate below 15 per cent.

These impacts may affect the decisions of MNCs in the scope of Pillar 2 when deciding to invest or expand in Vietnam.

In terms of opportunities, Vietnam would have a chance to increase tax revenue from the application of the GMT rate. In addition, Vietnam may also be able to apply a domestic minimum tax mechanism comparable to the GMT mechanism.

In terms of challenges, the effectiveness of tax incentives may be reduced. Many large MNCs in Vietnam play key positions in the value chain and have a great influence on the business ecosystem. Thus, this is a big challenge for future investment attraction. In addition, there are technical challenges in the implementation and data collection.

In reality, when setting up the supply chain in a country of investment, normally the MNC will be accompanied by a number of vendors and supplier companies. The ecosystem creates large socioeconomic impacts. As such, any change to relocate existing investments will also impact all this.

When assessing the impact, there should be a consideration to classify different groups of FIEs, such as existing ones and potential ones; and those within the scope of Pillar 2 and those outside it. Of course, besides tax incentives, more factors also come into play such as policy, location, infrastructure, human resources and many more.

Given the material impacts in the long-term and the urgency of the GMT, the government, as well as relevant ministries and agencies, should promptly implement solutions, including completing policy regulations in both domestic law and international tax.

Firstly, Vietnam should amend the current tax policy to offer a suitable incentive regime for MNCs in the scope of Pillar 2, in order to protect the interests of MNCs and encourage investment and expansion.

The regime should be studied and considered carefully, such as whether the tax rate of 15 per cent should be applied for in-scope companies, and what the incentive period should be when it is applied. At this stage, many markets are studying the GMT regime to consider amendments to domestic law. For example, Singapore and Hong Kong have already indicated that they will implement the domestic minimum tax rate of 15 per cent to collect top-up tax from MNCs who are in the scope of Pillar 2 and have an effective tax rate below 15 per cent.

Secondly, Vietnam should continuously study and accelerate the development of other foreign investment attraction factors such as infrastructure, quality of labour, and the legal regulation system. It should also effectively implement all the free trade agreements it is involved in, as well as promote and participate in negotiation of a similar agreement with the United States and other commercial partners.

For MNCs, it is strongly recommended to pay attention to developing regulations globally as well as in Vietnam. Companies should also assess the impact on business operations, both short and long-term, and proactively contribute opinions to the government from a business perspective during the amendment process of domestic law.