Global Minimum Tax: a call for strategic revisions in Vietnam's special zones

Loc Huynh, lawyer from Dentons LuatViet

The global minimum tax (GMT) aims to establish a floor on corporate income tax competition to ensure multinational enterprises that have consolidated annual revenues in at least two of the four fiscal years immediately preceding the year of implementation of GMT collection of EUR 750 million is subject to tax in each jurisdiction at a 15 per cent effective minimum tax rate, regardless of where it operates.

There are around 140 countries adhered to the statements on GMT. A number of countries are taking steps towards implementing this tax policy from January 1, 2024. This will impact the investment strategies and operations of multinationals that may be subject to the GMT.

The Vietnamese government is considering issuing regulations to implement the GMT policy from January 2024.

Vietnam's current tax incentives are primarily income-related, offering preferential rates and tax-free or tax-reduction periods. These incentives include preferential tax rates, such as a 10 per cent tax rate for eligible projects, as well as tax-free and tax-reduction periods (for example four years of not paying tax at all, and then nine years of paying tax at half the standard rate).

These benefits may lose their effectiveness for large foreign-invested enterprises (FIEs) due to the GMT overriding these existing preferential rates.

Typically, corporate income tax incentives are granted to companies located in special zones such as industrial, economic, or high-tech zones. With tax incentives potentially removed, special zone developers will need to adapt their strategies to remain competitive.

To navigate the implications of the incoming GMT and enhance their competitiveness in attracting foreign manufacturers to Vietnam, Dentons LuatViet’s has several suggestions for special zone developers, as follows.

One alternative is for special zone developers to shift their focus towards other key areas such as infrastructure quality, investment costs, and human resources. For example, they could aim to provide competitive land and factory rent, thus reducing the financial burden on FIEs and making investment in industrial zones more attractive.

In addition, improving the capacity of infrastructure and logistics systems should also be a priority.

To attract foreign manufacturers, special zones developers should prioritise the improvement of transportation networks, utilities, and logistics services within their zones. This can be achieved through investments in road and rail connectivity, reliable power supply, efficient waste management systems, and advanced logistics facilities. A well-developed infrastructure and logistics system can provide foreign manufacturers with a competitive advantage in terms of cost-effectiveness and operational efficiency.

Another important aspect is to focus on labour cost efficiency rather than just tax incentives. Instead of solely relying on tax advantages, industrial zone developers can leverage the availability of skilled and capable workers in specific regions.

By strategically locating their industrial zones near areas with highly cost-efficient human resources, developers can attract foreign manufacturers who value the quality and availability of human resources. This approach ensures that the attractiveness of the industrial zones is not solely reliant on tax incentives but also on the potential for a skilled and productive workforce.

The implementation of the GMT will necessitate adjustments in the strategies of special zones developers in Vietnam. To increase their competitiveness and draw more foreign manufacturers, developers should consider providing financial support for investment costs, enhancing infrastructure and logistics capabilities, focusing on locations with a qualified labour force, and fostering innovation and technology adoption.

European businesses face the storm of new tax regime The application of the global minimum tax is getting nearer, creating a new challenge for multinational corporations. Thomas McClelland, chairman of the Tax and Transfer Pricing Sector Committee under the European Chamber of Commerce in Vietnam, talked to VIR’s Tung Anh about their preparations for the tax overhaul.

UK investors confident in Vietnam’s GMT response Many British investors in Vietnam are large multinational corporations, who view the country as an emerging market or an increasingly promising place for future investment. That said, Vietnam will find many of them to be in the scope of the global minimum tax (GMT) regime and Pillar 2 by the Organisation for Economic Co-operation and Development (OECD).

Vietnam sets October for move towards global minimum tax adoption The Vietnamese government is slated to table the proposed legislation regarding global minimum tax before the National Assembly in October, with the General Department of Taxation (GDT) forecasting an implementation timeline commencing at the outset of 2024.