Impact and opportunity of global minimum tax

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Vietnam has 1,015 foreign direct investment (FDI) enterprises with a turnover of EUR750 million. Photo: Internet

Impact on taxes and foreign investment attraction

Vietnam participated in the Action Plan on Base Erosion and Profit Shifting (BEPS). Accordingly, BEPS is a multilateral agreement to help countries close the gap in international tax administration, and prevent the profit shifting from multinational companies to territories with low tax rates, free taxes without real economic activities, or with a few of economic activities.

The rapid implementation of the BEPS Action Plan by countries will ensure a more sustainable international environment for the benefit of all developed and developing countries.

BEPS includes 15 major action programs, but Vietnam only participates in a few minimum commitments, suitable for developing countries such as transparency in handling tax disputes; exchange, sharing information and expanding to value added tax, sales tax in the near future, not only corporate income tax.

Another pillar of BEPS of interest to countries is the "Global Minimum Tax Rule", which is expected to be implemented by the end of 2023. The Global Minimum Tax Rule is a multilateral agreement involving more than 140 countries worldwide with an approved minimum tax rate of 15% for multinational corporations with a total turnover of EUR 750 million and higher. The rule expects to generate over US$150 billion in annual global corporate income tax.

Regarding the impact of the global minimum tax policy on Vietnam, according to experts, the global minimum tax policy clearly affects two areas: taxation and foreign investment attraction.

Currently, more than 140 countries and territories around the world are investing in Vietnam. The largest FDI partners of Vietnam are mainly from East Asia. Specifically, for many years, Korea, Japan and Singapore have always led the list of FDI sources in Vietnam. The total registered investment capital of these three countries accounts for nearly half of the total FDI investment in Vietnam.

Prof. Dr. Vu Minh Khuong, lecturer at the Lee Kuan Yew School of Public Policy, University of Singapore, emphasized that the Pillar 2 rule on the global minimum tax that comes into force at the end of 2023 is an invaluable opportunity for Vietnam to upgrade FDI attraction model and strategy. It not only helps Vietnam have a new mindset and vision, but also has abundant resources and the ability to connect more deeply with strategic investors in this new period.

Opportunities to increase budget revenue and limit tax evasion

According to Mr. Phan Duc Hieu, the National Assembly's Economic Committee, the minimum tax policy impact on our country is available. Currently, Vietnam's tax incentives for investment are incentives for tax exemption and reduction time for new investment, expanded investment; four-year exemption, nine-year reduction; two-year exemption and four-year reduction.

Some calculations show that, while the common tax rate is 20%, the actual tax for FDI enterprises in the preferential period is an average of 12.3%.

In particular, some large corporations are only a few percent. “When the minimum tax rate is applied, some large corporations may have to pay an additional tax in other countries where they are headquartered. Thus, the previous benefit will be unavailable or significantly reduced. Preferential policy validity will reduce in many cases,” said Mr. Phan Duc Hieu.

On the other hand, Mr. Phan Duc Hieu also said that this tax policy, when applied, will first impact large FDI enterprises; impact on the attraction of new investment projects. However, the noteworthy point is that this policy will impact the FDI projects that have been implemented in our country in the period of preferential policies and may affect the expanded investment decision of investors.

However, this expert also affirmed that, in addition to negative impacts, this tax policy has the opportunity to increase the budget revenue and limit tax evasion, limit the situation in that countries compete with each other to attract investment by pushing each other to the bottom.

From the perspective of tax administration, Mr. Luu Duc Huy, Director of the Policy Department, General Department of Taxation, said that in 2022, the General Department of Taxation in collaboration with Ernst & Young Vietnam reviewed 1,015 FDI enterprises with a turnover of over EUR750 million (according to the financial statements in 2021).

In addition, the General Department of Taxation also requested the local tax departments to review the regime for those enterprises. Currently, 20 Tax Departments reported that 400 FDI enterprises are enjoying the preferential regime and have only one year to enjoy tax reduction.

Therefore, Mr. Luu Duc Huy said that the specific research and assessment of the impact of the global minimum tax on businesses is very difficult because each business enjoys its own preferential regime and investment time meanwhile the effective time of the global tax policy is the end of 2023.

In 2021, the Minister of Finance and the Governor of Banks of the G20 group agreed on the principle of two-pillar solution to solve tax issues arising in the digital economy. Specifically, pillar 1 stipulates the allocation of taxes for digital activities and pillar 2 stipulates the global minimum tax rate.

Mr. Luu Duc Huy affirmed that Vietnam is definitely affected by pillar 2. Therefore, the Ministry of Finance has studied and reported to the Prime Minister on the implementation and the Prime Minister established a special working group, led by a Deputy Prime Minister in charge of proposing a global minimum tax in August 2022. The Ministry of Finance also established an assistance team including the General Department of Taxation, International Cooperation Department, and Corporate Finance Department.

"Pillar 2 is a new matter, we are aware that this is not only about corporate income tax but also needs solutions other than corporate income tax. In the near future, the Ministry of Finance, as well as the General Department of Taxation, will continue listening and exchanging experts and enterprises on solutions to ensure the taxing rights of Vietnam as well as investment attraction," said the representative of the General Department of Taxation.