Industrial developers eye the effects of upcoming tax regime

May 24, 2023 | 11:32
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Industrial real estate developers must be more proactive in responding to the upcoming global minimum tax policy by improving the quality of industrial zone infrastructure and providing more utilities for their tenants.
Industrial developers eye the effects of upcoming tax regime
The global minimum tax will be a challenge for Vietnam to ensure continuing major investments, Photo: Shutterstock

As an investor in industrial zone infrastructure, Nguyen Thanh Phuong, general director of Sao Do Group, shared that improving infrastructure and diversifying facilities are the most important issues right now.

“Increasing more advantages for such zones means increasing the investment attraction in a sustainable way. Tax incentives are just one of the factors for us to evaluate and make decisions. Investors always prioritise a safe and stable destination to ensure the most effective for their projects, preserving capital and increasing profits,” Phuong said

He confirmed that when applying the global minimum tax (GMT), due in many nations from next year, the competitiveness in overseas funding attraction will be seriously impacted.

“However, the government is also taking active steps to prepare countermeasures. From the perspective of infrastructure businesses who are directly affected, it is also necessary to be proactive in the face of this new challenge,” Phuong said.

When the GMT is introduced, competition in attracting foreign investment will depend increasingly on the quality and services provided, since the main attraction factors of Vietnam are tax incentives and cheap labour are increasingly fading.

The GMT is an agreement reached by G7 countries in 2021 to combat tax evasion by multinational corporations. The minimum applied level is 15 per cent, for businesses multinational enterprises with total consolidated revenue of €750 million (equivalent to $816 million) or more in two of the last four consecutive years.

“The tax increase may reduce the attractiveness of the business environment in Vietnam because efforts to attract foreign funding by Vietnam through the exemption and reduction of corporate income tax will be ineffective and Vietnam’s business environment will become less attractive,” said Bui Trang, country director of Cushman & Wakefield Vietnam,

“Industrial real estate will also be affected by this tax because in the past, investment was mainly gained thanks to tax incentives and low labour costs,” Trang added.

Meanwhile, Agustin Redonda from the Switzerland-based Economic Policy Council said that tax incentives are one of the main policy instruments by governments worldwide to beckon investment.

“Yet, despite their prevalence around the world and their high cost in terms of revenue collection, their usefulness and effectiveness in reaching government objectives remain open to question,” Redonda said.

“Now is a good time for the government in Vietnam to take a closer look at the effectiveness of such incentives. Eliminating ineffective incentives and keeping, or even expanding, those that are good value for money is crucial, and several Southeast Asian countries are already doing it,” he added.

One of the expected outcomes of the new deal is that tax competition among countries will decline. But attracting foreign investors will remain paramount to countries’ prosperity.

“It is well established that foreign funding has many benefits for economic development. Foreign enterprises help Vietnam approach the international market, create jobs for highly skilled workers, expose workers to new technologies, and strengthen the management skills of local authorities, improve knowledge of corporate governance and above all, enhance a culture of compliance with laws and rules in line with international practices,” Redonda said.

It is expected that the GMT policy will be applied in Vietnam from fiscal year 2024, in order to limit the fact that many large companies plan to minimise taxes by transferring profits to other tax havens, or transnational digital business activities without a physical presence.

In response to this new challenge, the government established a special working group on the GMT last August to research and propose solutions to the issue.

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