Lessons for Vietnam in global corporate tax transformation

June 28, 2023 | 17:00
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Countries such as Thailand, Malaysia, Indonesia, and others have announced many drastic moves to find solutions to deal with and retain investors in anticipation of possible impacts of the global minimum tax (GMT).

Obviously, this regulation will affect Vietnam and other countries which are competing to roll out the red carpet to attract major investments. If Vietnam does not have a timely policy response, it will easily be left behind in attracting foreign funding. According to experts, it is necessary to promptly compensate with replacement benefits commensurate with the incentives being enjoyed.

Lessons for Vietnam in global corporate tax transformation
Hoang Viet Tien - Deputy secretary general Vietnam Digital Communication Association

Currently, many countries are adopting a number of measures such as a standard local minimum tax regime, or new forms of investment based on costs.

However, the promulgation of any new policies or mechanisms should be carefully considered to ensure fairness for businesses within and outside the scope of Pillar 2, thus ensuring consistency in accordance with the current Law on Investment, as well as international commitments and regulations that Vietnam is a member of.

The GMT is currently a matter of concern for many businesses and investors. This new tax policy affects not only businesses wishing to expand their activities but also those who are considering choosing a location for them.

Therefore, it is necessary to have solutions to respond promptly and minimise adverse impacts. When tax incentives are no longer a criterion to attract large foreign investors, Vietnam will lose its competitive advantage in the future in attracting funding. This is the time for Vietnam to re-evaluate to adjust incentive policies more appropriately.

According to the latest data from the Ministry of Planning and Investment, Vietnam currently has about 335 projects with registered capital of over $100 million each in processing and manufacturing industries in economic zones and industrial parks. They are mostly enterprises in the high-tech sector such as Samsung, Intel, LG, Bosch, Sharp, Panasonic, Foxconn, Pegatron, and others.

According to GMT rules, for example, Group A based in South Korea, pouring capital into Vietnam, will be exempted from tax for the first four years and enjoy a preferential tax rate of 10 per cent for 15 years. However, if from 2024, South Korea applies a GMT of 15 per cent, then Group A will have to pay an additional 5 per cent tax difference to South Korea, where the group’s headquarters is located.

This makes tax incentives in Vietnam insignificant. Tax incentives that should have belonged to investors will turn into a source of revenue for companies that export capital.

With the average income tax rate applied to multinational corporations is currently around the threshold of 12.3 per cent, even from 2.75 to 5.95 per cent, much lower than the general regulations, showing that Vietnam is using tax incentives as a solution to attract foreign investment.

If Vietnam does not have timely solutions, the benefits from the corporate income tax incentives that projects enjoy in Vietnam will no longer exist, thereby affecting the attractiveness and competitive advantages of the Vietnamese market in attracting foreign direct investment, as well as affecting project expansion plans.

What they care about is paying that part of the tax in the country where the parent company is located or where they are operating. If Vietnam is slow to deploy, it will not only lose this difference, but also affects its competitive advantage. In the immediate future, it is necessary to soon calculate and deploy the local minimum tax to win the right to collect tax first.

The GMT, if state management agencies have quick and realistic react and policies, will be an opportunity for businesses in the Vietnamese market to develop. For example, it not only affects Samsung, but also the businesses that supply spare parts for it.

Along with challenges, this is also an opportunity for Vietnam to once again assert itself when it has an appropriate tax policy to attract foreign investment.

With the urgent application and implementation, it is a new problem not only for Vietnam, but also other countries around us as they are also trying to have solutions suitable to the market, enterprises, and state management agencies.

Experts and ministries are also discussing to come up with the best possible policies for businesses to feel more secure, and protect the right to tax and reserve the right to tax first.

The government should quickly check and review all the current regulations on preferential policies based on corporate income tax exemption and reduction from affected levels, sectors, and fields, both positive and negative. Along with that, it needs to further improve the business climate, considering this as the most important attraction measure to lure in new and expanded investment.

At present, the working group of the prime minister is working on draft documents to the GMT implementation, focusing on such issues as the necessity of deployment; review of the country’s tax policies; and comprehensive analysis of the possible impacts on Vietnam’s state budget and investors.

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By Viet Tien

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