Global tax shift forces inevitable adjustment

Vietnam is progressing towards adopting a global minimum tax (GMT). How is this initiative intertwined with the broader economic development strategy of the country, and what is the timeline for its implementation?

Duong Hoang, partner and head of Tax at KPMG in Vietnam

Vietnam’s decision to move towards the implementation of GMT aligns with its broader political resolution related to tax reforms, foreign investment attraction, and socioeconomic development strategies targeted for 2030. This strategic move is anchored by the prime minister’s sustainable development vision, which, among other things, emphasises combating profit shifting, championing transparency, and bolstering investor confidence.

Drawing from the Pillar II guidelines of the Organisation for Economic Co-operation and Development, Vietnam is recalibrating its strategy. Rather than predominantly leaning on tax incentives, the country seeks to foster a diversified competitive ecosystem.

On September 28, the National Assembly Standing Committee were giving comments on the draft resolution on the application of additional corporate income tax in accordance with global anti-base erosion provisions. Minister of Finance Ho Duc Phoc also voiced his opinion that Vietnam should support and proactively apply the GMT regulation from 2024, which is set to create a favourable mechanism to encourage enterprises to pay additional taxes in the country. This ambitious timeline, however, hinges on the National Assembly’s (NA) nod, which we anticipate might transpire in their 15th session in October.

Key elements of the proposal include the income inclusion rule and the qualified domestic minimum top-up tax, targeted at both foreign and domestic businesses with a global revenue of at least €750 million ($790 million).

How does the Pillar II model shape Vietnam’s tax strategy to remain competitive and appealing to foreign investments, particularly in light of the unanimous minimum tax rate of 15 per cent?

Global tax shift forces inevitable adjustment, illustration photo/ Source: freepik.com

Vietnam, being one of 142 markets that signed the framework agreement, has its investment partners and recipients both covered by this accord. Thus, Vietnamese businesses investing abroad and multinationals investing in Vietnam, with global revenue of at least the aforementioned threshold, will be subject to this new tax landscape under Pillar II. The core premise is to ensure a level playing field for all businesses operating across borders.

If Vietnam chooses not to enforce the GMT, companies would still be liable for additional taxes in their home countries or wherever their parent companies are based. Thus, the net effect remains a uniform 15 per cent tax rate.

The real challenge and focus now is to maintain Vietnam’s attractiveness as a top-tier investment destination. Leveraging advantages like expansive land resources, abundant labour, and expansive trade networks with significant players remains a priority. The stable political climate further consolidates Vietnam’s edge.

In the context of shifting production trends, how is the country positioning itself to continue attracting foreign investment, especially in high-tech and green sectors?

Vietnam’s strategic assets, from its vast labour pool to a comprehensive trade network, have consistently positioned it as a preferred investment locale. Stability, both politically and economically, is a unique advantage that Vietnam possesses.

In addition, the country has been a beneficiary of the recent trend where multinational groups are diversifying their production bases, moving from China to other countries. Vietnam has already demonstrated strengths in certain sectors, notably electronics and high technology. New areas like electric vehicles and their manufacturing ecosystem are emerging.

This trend is expected to remain central to Vietnam’s strategic focus until at least 2030. Additionally, Vietnam is exploring avenues in green technology and renewable energy. To further attract foreign funding in these high-priority sectors, there are proposals for amendments to the investment law which will cater to preferential treatments and incentives. These incentives are not just tax-based but also encompass broader benefits. Vietnam’s high-tech sector, in particular, proposes incentives not just for multinationals but also for domestic enterprises, even those outside the €750 million ($788.1 million) revenue bracket, provided they meet certain research and development criteria. As the global competitive landscape intensifies, Vietnam is determined to maintain its competitive edge by timely adjusting its policies to continue attracting high-tech projects.

Amid global foreign direct investment (FDI) slowdowns and high interest rates, to what extent are tax reforms in Vietnam anticipated to impact inflow?

Tax reforms are not seen as a primary factor slowing down such investment. Global FDI is currently in a slowdown, and given the high interest rate environment, the financial benefits of investments are not as straightforward. Investors should tread with caution, unsure of how the next 2-3 years will pan out, especially in the face of prolonged inflation and high interest rates.

However, Vietnam, like other countries, is in the process of reviewing and reforming its tax policies, and more clarity on the direction is expected post the upcoming NA session. By 2024, there will be definitive changes in laws and policies related to investments.