Key issues on the global minimum corporate tax rate

May 24, 2023 | 11:14
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Corporate income tax is often considered as a variable in a multivariate foreign direct investment model. In some cases, the impact of the reduction in the rate will result in an increase in estimated investment from overseas. However, there is no correlation between lower rates and higher foreign funding globally.
Key issues on the global minimum corporate tax rate
Nguyen Thy Nga - President Institute of Policy Administration and Development Strategy

In fact, there is no significant correlation when considering the amount of foreign direct investment (FDI) per capita or focusing only on FDI in the green sector. Other important FDI drivers such as market size, labour, stability, and the business environment play a key role in driving decisions, contributing to maintaining competitiveness and sustainable development.

There is also an important distinction to be made when considering the impact of corporate income tax (CIT) on FDI by type of business activity. Lower CIT rates are more likely to impact malls than manufacturing hubs.

The upcoming GMT aims to limit the race to the bottom because havens with lower rates than the GMT will not be more attractive from the perspective of profit-transforming companies than those with the correct rate as specified by the GMT.

This global trend not only sets new requirements for the business community, but also requires quick and timely adaptation from governments. Policies to cope with the impact should be carefully formulated for both the short and long term.

Moreover, if ASEAN really wants to overcome sustainable development challenges such as climate change and high poverty rates, they need to end the current policies through strong political commitments to improve domestic revenue mobilisation.

In recent years, there have been some issues with the way multinational companies pay tax. Countries compete vigorously with each other to attract enterprises and investors to do business by offering a variety of tax incentives.

To lure more FDI, countries open their markets, and relax investment regulations, including tax rates. This has led to an inevitable race to the bottom as countries cut taxes more and more to maintain options for investors. However, in doing business overseas, foreign companies and investors have not paid CIT fairly, thus creating an unfair tax burden on local businesses.

By setting a minimum CIT rate, governments limit a floor for the contribution of businesses to the state budget, ending the race to the bottom through effective tax policy. The GMT is designed to make positive impacts in countries adversely affected by the profit change.

Vietnam needs to prepare in all aspects for the actual presence of GMT’s Pillar II from early 2024. In the short term, the adoption of a qualified minimum domestic tax regime to win the right to collect taxes should be considered as soon as possible, in line with the regulations.

In the long term, the tax system and incentives can also be reformed to limit the negative impacts of Pillar II, to ensure the attraction of substantial investment and to limit tax base erosion and profit shifting.

To support multinationals affected by Pillar II, new cost-based forms of investment incentives should be considered compared to other incentives like income-based funding. Vietnam could reform the tax incentive system to be more suitable in the new situation and policies implemented by other countries.

Vietnam could adjust the current policy to provide incentives for multinationals impacted by the GMT to protect the interests of businesses investing in Vietnam to mobilise and expand funding, as well as in harmonising with Vietnam’s interests.

The government should continue to research and promote the development of investment attraction factors apart from tax incentives, such as improving infrastructure, quality of labour, and the legal system, which will contribute to enhancing the ranking of Vietnam’s business environment.

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By Thy Nga

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