Vietnam stands to benefit from new OECD tax rules

Dean Rolfe, tax partner at KPMG

The reach of the internet and its integration into the lives of everyone in Vietnam is clear. Vietnamese citizens have long enjoyed the freedom to connect to the internet through a range of "smart" devices that are transforming everyday lives. As we all know, it is now possible to shop from the comfort of our living rooms, work from home, advertise and promote our business interests, find employment opportunities online, purchase transport services, and watch and listen to media and music from all over the world.

However, many of these service providers are not based in Vietnam and are beyond the reach of Vietnamese taxation. While this may be a controversial fact, this position is based on long agreed international tax rules which require a physical presence in a country like Vietnam to exist before a taxing nexus is created. Such rules are protected by international tax agreements which Vietnam adopted long ago.

What is the OECD proposing?

Recognising these shortcomings, and in response to pressure to develop new tax rules to address new business models, the OECD and the G20 have been busy developing new rules to address this obvious gap.

The OECD blueprint on Pillar One which was released in October is 232 pages, while long, encapsulates a relatively simple idea. The idea is to allocate taxing rights between jurisdictions to allow places like Vietnam to tax the business profits of a digital business which is not located in Vietnam.

Very broadly speaking, the proposed rules would allow Vietnam to expand its taxing rights under international laws where users of Automated Digital Services (ADS) are located. ADS is defined to include the provision of a digital service over the internet or other electronic network with minimal human involvement. That is to say, the existing rules relating to physical presence will be changed in recognition of the fact that physical presence is not needed for the provision of ADS.

The physical presence requirement for taxation would be replaced with new rules based on the source of the revenue like the internet address of the end-user. This would allow Vietnam to tax revenues which are generated from sales to Vietnamese end users.

When will this occur?

The initial timeline for a contemplated agreement between participating members (which includes Vietnam) was targeted for the end of 2020, but the stated goal of the Inclusive Framework is now to “bring the process to a successful conclusion by mid-2021” because of unforeseen delays caused by COVID-19.

Has this been agreed?

No. This is just a blueprint for consideration, discussion, and ideally future political agreement between the participating jurisdictions. International consensus has not been achieved and much work is still needed to address remaining issues and areas of concern. In any case, the final adoption of these measures is likely to be some years away, even if an international consensus is ultimately reached in 2021 or beyond.