Knock-on effects of global minimum tax regime

September 07, 2023 | 12:36
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A global minimum tax (GMT) policy aims to prevent tax avoidance and tax competition, and to ensure that all countries get a fair share of the tax revenues from the global profits of these organisations. The policy consists of two pillars, with Pillar 2 establishing the 15 per cent rate.

The GMT is expected to raise billions of dollars in revenue for governments, which could be used to fund public services or reduce debt. It is also expected to discourage multinationals from engaging in tax avoidance and evasion, which could level the playing field for businesses.

Knock-on effects of global minimum tax regime
Rizwan Khan - Partner, Acclime Vietnam

The GMT policy has been welcomed by many countries as a historic achievement that will create a fairer and more stable international tax system. However, some countries have expressed concerns or reservations about the policy, such as its impact on their tax sovereignty, their economic development, and their existing tax incentives. Some countries have also not yet joined the agreement.

For small- and medium-sized enterprises (SMEs) that operate only in Vietnam, the policy may not have a direct impact, as they are already subject to the domestic tax rules of Vietnam. However, they may benefit from a more level playing field with multinational corporations that previously enjoyed lower tax rates by shifting profits to tax havens.

On the other hand, for SMEs that export their goods or services to other countries, the policy may affect their competitiveness and profitability, depending on the tax rates and rules in Vietnam and other countries. For example, if a small business in Vietnam sells its products to customers in France, it may have to pay more taxes under Pillar 1, as France may claim some of the profits based on the sales made there.

Similarly, for SMEs that have subsidiaries or branches in other countries, the policy may require them to pay more taxes under Pillar 2, as Vietnam may top up their taxes to the minimum level of 15 per cent if they pay less than that in any other country. This may reduce their incentive to invest or expand in low-tax jurisdictions.

Last, but not the least, for SMEs that rely on tax incentives or exemptions offered by the governments, the policy may limit or eliminate some of these benefits, as they may be considered harmful or preferential under the GMT rules. This may affect their cash flow and growth prospects. However, some tax incentives may still be allowed if they are consistent with the policy objectives and criteria.

In recent times, Vietnam has been a popular destination for foreign direct investment (FDI) and has signed several free trade agreements (FTAs) with major trading partners, which have reduced or eliminated tariffs on many goods and services.

In addition to that, Vietnam also offers other incentives for FDI, such as tax exemptions, preferential land rents, and simplified administrative procedures. It has also improved its legal and regulatory framework to protect the rights and interests of foreign investors, such as laws on investment, enterprises, and public-private partnerships.

The GMT policy would set an effective tax rate (ETR) for corporate income, and any country that has a lower ETR would have to collect the difference from the foreign investors. The policy is expected to have a significant impact on FDI, especially in developing countries that rely on tax incentives to attract FDI.

According to some studies, the GMT policy could reduce the FDI inflows to low-tax countries by up to 20 per cent and increase the FDI outflows from high-tax countries by up to 10 per cent. This would imply a redistribution of FDI from developing to developed countries, as well as a reduction in the overall level of FDI. The policy could also affect the quality and composition of FDI, as investors may shift from productive to passive investments, or from equity to debt financing.

The advantage of Vietnam as a destination for FDI may fade due to the GMT policy, as its ETR is below the proposed threshold of 15 per cent. Moreover, the FTAs may lose some of their benefits, as the tariff reductions may be offset by the tax increases. Vietnam may also face more competition from other countries that have higher ETRs but offer other advantages.

However, Vietnam may still be able to maintain its appeal by implementing other policies to offset the negative effects of the GMT policy. For example, it could improve its public services, governance, and regulatory quality. It could also diversify its FDI sources, and foster more links with domestic firms.

Vietnam sets October for move towards global minimum tax adoption 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.

Plans manifest to balance GMT impact Plans manifest to balance GMT impact

Appropriate and sturdy policies relating to the upcoming implementation of a global minimum tax could ensure that Vietnam quickly recovers foreign investment attraction.

By Rizwan Khan

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