Wide global ripples expected following G7 tax negotiation

For years, world leaders have been scratching their heads in trying to come up with a system to fairly tax massive corporations. Photo: Shutterstock

Last week, the finance ministers from the world’s seven-richest nations reached a deal that has been described as a remarkably historic change in the international business tax regime.

The deal is slated to reform the global tax system to create a fair environment in which companies would pay the right taxes in the right places. In the proposal, a global minimum tax rate (GMTR) is set at at least 15 per cent.

According to Bui Ngoc Tuan, tax partner of Tax and Business Advisory Services at Deloitte Vietnam, this is not the first concerted effort from global leaders to minimise detrimental impacts of multinational corporations (MNC) shifting their profits to slash their tax burden.

Since 2019, in an attempt to enhance the base erosion and profit shifting actions, the Organisation for Economic Co-operation and Development (OECD) has been working on and is now seeking support from its members around the world, especially developing countries, to push forward the important proposal and set a global minimum tax scheme on earnings of large MNCs in the incentivised and tax heaven countries. This aims to avoid profit shifting from low-rate tax jurisdictions in a bid to offer aggressive tax incentives to attract foreign investors.

Tuan explained, “This G7 tax deal means that instead of enjoying low rates of corporate income tax (CIT), MNCs may have to additionally pay CIT at minimum rate back to the country where its global headquarters are, for example, the United States.”

Ho Quoc Tuan, senior lecturer at Bristol University, noted that the agreement is envisaged to limit MNCs’ efforts on shifting their tax to so-called tax havens.

“However, whether the deal would leave any impact on Vietnam in the long run remains a question. It is necessary to wait for this agreement to be largely ratified in multiple rounds of negotiations, especially in the upcoming G20 meeting next month in Venice,” he said.

“One of the major roadblocks lies in the US Congress, where large MNCs could lobby US congressmen to negotiate the elimination or adjustment of this global corporate tax threshold.”

Fox News reported that some members of the US Republican Party have already been voicing opposition, with some describing the G7 minimum tax rate “a fantasy” and a “terrible agreement”.

Tuan of Deloitte assumed that when the GMTR is fully implemented by OECD member countries, the rate may not be much beneficial to Vietnam. If a subsidiary of an MNC operates and enjoys tax incentives in Vietnam, its repatriated profit (if qualified) would be subject to GMTR and its ultimate parent company would have to pay in a country other than Vietnam.

“For large Vietnamese corporations with offshore investments and profit overseas, the GMTR may not be applicable, as under the current CIT regulations, income generated by offshore investment projects would be consolidated and subject to the standard CIT rate in Vietnam (currently 20 per cent), no matter if the overseas project is under incentive period,” Deloitte’s Tuan explained. “However, the company in Vietnam may get credit for CIT amounts already paid overseas and may pay the rest in Vietnam.”

Elsewhere, leading global investment bank Goldman Sachs believed if a GMTR is enacted – and that is a big “if”, given the sizable hurdles ahead – it would have just a small impact on corporate profits.

The Wall Street bank estimated that a 15 per cent GMTR would represent a downside of just 1-2 per cent from consensus per-share earnings estimates for 2022.

“Goldman Sachs found that certain low-tax industries like technology and healthcare would face a steeper haircut. However, even those sectors would suffer a downside of less than 5 per cent compared with current consensus estimates,” the bank stated.

The next obstacle is getting the G20 nations to bless the GMTR – a difficult task because Ireland, which is represented in the G20 via its membership in the EU, might not support the GMTR, Fox News commented. This is because Ireland has successfully lured international companies to its shores with a corporate tax rate of just 12.5 per cent, a sizable cut compared to the current US rate of 21 per cent.

In terms of Vietnam, Tuan of Bristol University suggested that the country could mull over negotiating similar tax agreements with the US, Japan, South Korea, China, Taiwan, and Singapore, which are home to many MNCs operating here. However, it takes nearly a decade of negotiation to reach such an agreement.

Tuan also explained that the US only accepts concessions in return for a commitment to achieve a minimum tax rate. There is also the possibility that European countries will eliminate the electronic transaction tax. This means that the US government and companies receive certain benefits in accepting concessions.

“Meanwhile, Vietnam is offering too many incentives to foreign investors. Why would tax havens like Singapore negotiate such an agreement with Vietnam? What can Vietnam offer in return to get a more favourable tariff agreement? These questions pose challenges for us as we have treated foreign investors favourably, which means we have very little stakes on the negotiating table,” he noted.