European businesses face the storm of new tax regime

The global minimum tax (GMT) is expected to make a significant impact on many enterprises from early 2024. Will the GMT affect business plans and strategies of your member companies in Vietnam?

Thomas McClelland, chairman of the Tax and Transfer Pricing Sector Committee under the European Chamber of Commerce in Vietnam

The GMT applies to large multinational groups, those with annual revenues of at least €750 million ($803 million) and where the multinational group’s effective tax rate is less than the GMT rate of 15 per cent, and not to all the foreign direct investment.

We understand from information provided in public forums that around 1,000 foreign-invested enterprises currently in Vietnam could be in the scope of Pillar 2. Of these, nearly 10 per cent will be impacted. Some of these will be significantly impacted, including many members of ours. These companies make a significant contribution to Vietnam’s exports and GDP.

In December 2022, the EU officially approved a directive to apply GMT of 15 per cent from 2024, thus many in-scope EU investors operating in Vietnam in certain sectors, for example high-tech manufacturing projects, will potentially enjoy tax incentives of four years exemption, nine years at a 50 per cent reduction, and a 10 per cent tax rate for 15-30 years, which will significantly reduce the benefit of these incentives if the GMT is adopted.

What are the possible solutions to these challenges?

The in-scope foreign-based multinationals that have operations in Vietnam should form a strategy and have an action plan to efficiently manage the upcoming changes.

They should make preparations ahead: perform an impact assessment from a group-wide perspective and identify risk areas; identify entities within the group that would be obliged to pay the top-up tax; assess the impact of additional tax costs, cash flows, and dividend distributions to shareholders; and quantify potential impact by undergoing a modelling exercise;

They could also analyse if the present accounting system could generate the data required for GMT purposes; be prepared to lodge a filing, as this is required regardless of whether there is a top-up tax; and stay close to Pillar 2 developments and understand how the authorities in different jurisdictions may respond.

Multinationals should also consider currently available tax incentives and analyse whether there is a need to seek discussion with the Vietnamese government to claim alternative incentives such as cost-based incentives where appropriate.

What are your recommendations for Vietnam to better support foreign-invested enterprises affected by the GMT, and are there lessons it could learn from other countries?

This is an excellent opportunity for Vietnam to undertake reforms of its legislation and tax incentive policies such as the introduction of cost-based incentive mechanisms, which are applied in many developed countries to support the investment environment.

Compared with income-based incentives, cost-based incentives such as cash grants to partially cover the cost of investments in fixed assets, and research and development (R&D) or human resources, have the advantage of being able to encourage substance and long-term investment activities, such as large investments in facilities, machinery and factories, and investment in R&D activities, including expansion of investment activities at a later stage, and limiting profit shifting or short-term investments.

Although cost-based incentives may result in an upfront payment from the state budget, such payments are easy to estimate based on the value of the investment and are independent of business results. Therefore, this is appropriate for budgeting purposes.

The application of cash grants is also being considered by countries such as Malaysia, in continuing to attract and retain foreign investors. This may adversely affect the investment attraction environment of Vietnam in the case of such a scheme being approved for implementation.

Besides this, some expenditure-based incentives aiming at diversification and encouragement of substantial investment activities, such as super expense deduction for R&D activities and intellectual property registration, are relatively common in other countries such as China, Singapore, and Malaysia.

The additional revenues that come from the introduction of the qualified domestic minimum top-up tax can be used to fund such cost-based incentives. Thailand, for example, has recently announced that it will use revenues from this to provide other benefits to encourage funding from overseas.

To enhance the advantages of foreign investment over other developing countries, the time is right for Vietnam to reskill and upskill the quality of its labour as well as upgrade the quality of infrastructure and logistics to meet the increasingly higher demands from multinational investors.