In December, the EU officially approved a directive for companies to pay a minimum tax rate of 15 per cent from 2024. Our neighbouring markets such as Malaysia, Singapore, and Hong Kong are heading towards the official application of GMT policy from 2024 or 2025.
|Thomas McClelland - Country tax leader Deloitte Vietnam |
Countries with foreign investment in Vietnam, like South Korea and Japan, will implement new tax policies or announce a draft tax reform, moving towards the application of the GMT from the fiscal year 2024. The impact of the policy on Vietnam is clear and urgent, and requires the authorities to take timely action before it is too late.
Firstly, to protect tax collection, Vietnam could consider the immediate solution of implementing a qualified domestic minimum top-up tax to gain the right to collect the top-up tax rather than the tax going to another country. This mechanism can simply be understood as a domestic mechanism in which the calculation of excess profits and minimum tax is applied corresponding to the provisions in Pillar Two according to the Organisation for Economic Co-operation and Development’s guidelines. This is a measure that markets such as Hong Kong, Singapore, and Malaysia have announced their intention to implement.
Being considered as a rapid response measure, the application of a qualified domestic minimum top-up tax should be considered carefully, as its eligible subjects are defined as multinational corporations with a consolidated annual global revenue of more than $794 million. The application to all enterprises would result in negative impacts for enterprises that are not in the scope of Pillar Two but are enjoying tax incentives in Vietnam.
Regarding foreign investment, Vietnam should revisit the incentive policies, such as introducing cost-based schemes and policies to support businesses that are enjoying tax incentives and affected by Pillar Two.
Currently, the Vietnamese regulations on corporate income tax (CIT) incentives are not manifold, focusing mainly on income-based incentives such as tax incentives and tax exemptions. Cost-based incentives, especially cash grants, are still limited.
Cash grants may include partial support for investors’ expenditures on infrastructures such as buildings and machinery, human resources, research and development, and intellectual property. Several countries in Asia and Europe have been providing cash grants for enterprises in certain sectors. Such grants are considered effective measures in promoting preferential sectors. Cash or cash equivalent grants should be considered in terms of both advantages and disadvantages in Vietnam.
In terms of advantages, this type of incentive has the effect of directly supporting businesses affected by the GMT. In Vietnam, many enterprises belong to large multinationals impacted by Pillar Two, which are enjoying CIT incentives due to satisfying conditions of investments in preferential locations, preferential industry sectors, or large-scale investment, with applicable tax rates much lower than the 15 per cent GMT.
These incentives will no longer be as effective when Pillar Two applies due to the additional top-up tax. Therefore, the application of cash grants to support a portion of the investment costs will help enterprises reduce the burden, and encourage substance-based and long-term investment.
In addition, as under the Pillar Two, enterprises will benefit from the substance-based income exclusion, meaning enterprises will have exclusions based on a certain ratio of fixed assets’ residual value and payroll costs in calculating top-up tax. The provision of cash grants directed to green growth could, as an example, encourage the green energy transition. The form of cash grants will also help to create a stable economic base, limiting profit shifting or short-term investment, as in the case of income-based incentives. Although cash grants may result in an upfront payment from the state budget, such payment is however easy to estimate based on the value of the investment and independent of business results.
However, the impact of such a scheme on the state budget is the key concern of developing markets, given budget restrictions and difficulties in making upfront payments. The issuance of a new incentive regime would create additional administrative procedures, such as processes of incentive application and evaluation, as well as post-inspection to ensure the regime is implemented appropriately, and meets its objectives without losses.
The GMT is approaching and Vietnam needs to consider it carefully. The prime minister’s task force on the issue should quickly conduct assessments and develop a domestic legal framework related to its application to ensure that incentives for foreign investors are implemented efficiently. The issuance of any new policy requires a careful analysis to ensure fairness among businesses that are both in and out of scope of Pillar Two and to ensure consistency with the regulations under the current law on investment, as well as not violating international commitments.
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As many countries plan to adopt the Global Minimum Tax Rate (GMTR) in 2024, experts are concerned that the entry into force of the rate would discourage foreign companies from locating their operations in low-tax countries.