KPMG exclusive #1: Major tax and legal changes on horizon

Hoang Thuy Duong, head of Tax of KPMG in Vietnam

KPMG has recently held its flagship annual event, the Tax and Legal Institute to update clients on key concerns for the coming years. What major trends will businesses have to incorporate into their strategies?

This year’s Tax and Legal Institute came at a time of recovery and the return to growth and expansion in 2022 and the next years forward. We are now looking at an extremely fluid regulatory and tax environment as Vietnam is juggling COVID-19 temporary adaptive measures and economic stimulus packages.

On the longer term, Vietnam has been restructuring its economy to industrialise and modernise export-oriented production while also executing on its ambitious climate change and sustainability commitments, such as the net-zero target Prime Minister Pham Minh Chinh has announced at the United Nations Climate Change Conference (COP26). And all this while adjusting to global regime changes, such as the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion Profit Shifting global tax reforms to addressing taxation challenges of the digitalised economy (BEPS 2.0) under the Inclusive Framework that is expected to come into force sometime in 2023/2024.

Vietnam is still very much a destination for inbound investment and a major beneficiary of the global production shift, investment migration, as well as various free trade agreements – but now Vietnamese corporates are also investing abroad as a natural progression of its growth story.

Many of these trends will take shape over the course of several years while others will need urgent adjustments – either way, businesses should already be looking at the potential impacts on their operations.

Zooming in on the next 1-2 years, what would you say businesses need to pay the closest attention to?

We are at a time of transition. We are just over the lockdown, but temporary restrictions are still in effect for many business activities. The entire country is waiting for the government’s long-term COVID-19 strategy in parallel with its strategy for economic recovery.

With the next stimulus package waiting to be approved by the National Assembly, there is expected to be greater public spending on infrastructure, social programmes, and programmes to support enterprises. While discussions centre on what these would mean for the different sectors and enterprises, it is also worth taking a look at where the government will be looking to drum up the funds from. Usually, to secure new revenue, the government either introduces new taxes, adjusts existing ones and/or recover tax revenue on high tax risks areas through, for example, tax reviews and audits – and there have already been several moves in this direction.

New tax regulations are being rolled out, such as the Law on Tax Administration that came into force from July 1, 2020 with ongoing rollout of a number of taxation regimes about e-invoicing and taxation of e-commerce. Enterprises, domestic and foreign alike, will have to incorporate these new rules in their strategies.

At the Tax and Legal Institute, we have gone into great detail about the coming e-invoice system and the new tax administration law which requires foreign e-commerce companies to register in the Vietnamese tax system and file tax reports. KPMG has been working with the General Department of Taxation (GDT) to discover how this will impact global e-commerce companies and how a reporting system can be set up.

The GDT are creating a portal for company registration. As foreign companies are not really present here, they would need support from someone on the ground with the tax reporting. We at KPMG can support them through the whole tax registration and reporting process.

As you already mentioned, these domestic considerations will have to be slotted into Vietnam’s long-term strategies as well. What are the most important considerations guiding Vietnamese tax policy over the medium to long term?

At the Tax and Legal Institute, we stressed two important trends shaping tax policies. On one hand, we expect to see more tax solutions related to climate change and carbon emissions. Tax policies will be changing, with certain activities taxed higher or incurring taxes where they did not before while other activities will enjoy tax incentives.

Take electric vehicles, for example, where additional fees and taxes make up a significant portion of the final price of a vehicle. Car manufacturers and prospective buyers both expect a reduction of the special consumption tax on electric vehicles that could make them price-competitive or even cheaper than petrol cars.

The other driver of tax policy changes will be the BEPS 2.0 and how it will be reconciled with Vietnamese tax policies. This is a very complex issue because tax policies apply consistently for both Vietnamese and foreign investors yet the government needs to support domestic investment and even outbound foreign investment by Vietnamese corporates, as well as foreign inbound investment.

What can businesses expect from BEPS 2.0?

Quite recently, in October, the G20 leaders issued a joint statement to endorse the political agreement and implementation plans issued by the OECD/G20 Inclusive Framework on BEPS. The framework includes two pillars to address tax challenges from an increasingly digitalised global economy.

Pillar 1 aims to make the largest multinationals taxable in countries where they have users. According to the new communique, multinationals having global revenue in excess of €20 billion ($22.57 billion) and profitability above 10 per cent of revenue will be taxable in market jurisdictions where they derive at least €1 million in revenue (€250,000 if GDP less than €40 billion).

Under Pillar 2, the parties agreed to apply a global minimum tax rate of 15 per cent for multinationals having a gross annual turnover over €750 million (around VND18-20 trillion).Thus, if BEPS 2.0 comes into force, multinationals’ profit in Vietnam would be taxed at least at 15 per cent. If the effective tax rate of Vietnam is below the global minimum tax rate (that is 15 per cent), then a top-up tax will be imposed by the ultimate parent company countries like the US, Europe, or China.

An important point of BEPS 2.0 is that it would roll back domestic digital service taxes – which exist not only in Vietnam but many other markets too – to determine profit allocations for all markets.

This is still an ongoing and highly political process, so the exact shape of the new regime remains an open question for now. However, it will be a major development for the global and domestic tax regimes alike and businesses should keep a close eye on the BEPS process.

The views and opinions expressed herein are those of the interviewees and do not necessarily represent the views and opinions of KPMG Tax and Advisory Limited.