Urgently prepare a scenario to apply principles of global minimum tax

Mrs. Huong Vu, General Director of Ernst & Young Vietnam

Currently, the global minimum tax is a very hot issue because many countries worldwide have and are planning to apply it. What do you think about this issue?

The current global minimum tax is a matter of concern for many businesses and investors. Recently, the Vietnam Business Forum (VBF) has received comments and questions from many businesses and investors about Vietnam's response to applying the global minimum tax policy under the Pillar 2 of the Base Erosion and Profit Shifting Program (BEPS). This new tax policy affects not only businesses currently operating in Vietnam and businesses wishing to expand investment but also potential investors considering choosing a location for their investment because investment incentives are always a matter of their top concern.

With the application of the principles of Pillar 2, the current tax exemption and reduction incentives that Vietnam is applying will no longer be effective and no longer beneficial to enterprises (foreign investors) like before. Under the principles of Pillar 2, companies with a global turnover of 750 million Euros or more will be subject to a minimum global tax rate of 15%. If the subsidiary enjoys an "effective" tax rate of less than 15% in the country of investment, the country where the head office of the parent company is located (the country of origin of the investment) will be subject to a top-up tax on the difference between the global minimum tax rate of 15% and the effective tax rate in the country of investment. Reducing the amount of tax payable in Vietnam means reducing the effective tax rate and leading to an increase in the amount of tax payable where the parent company invests. Invisibly, investors suffer from increased tax costs while Vietnam also loses the right to tax the income generated in Vietnam.

So how will this policy affect Vietnam, madam?

When tax incentives are no longer a criterion to attract large foreign investors, Vietnam has a reduced competitive advantage in attracting foreign investment. For many years, tax exemption and reduction incentives have been important in attracting FDI in Vietnam. In particular, Vietnam's largest FDI partners are mainly from East Asia, specifically Korea, Japan, and Singapore, always leading the list of FDI sources in Vietnam. However, when the global minimum tax policy is applied, Vietnam's efforts to attract foreign investment through corporate income tax exemption and a reduction will lose their effectiveness, and Vietnam's investment environment will become less attractive.

Currently, countries are actively researching and developing policies to implement and respond to the principles of Pillar 2—specifically, the group of investment countries such as Korea, Japan, and other countries. European countries are actively researching and promulgating regulations to collect additional taxes on large corporations, while the group of investment recipient countries, especially those in the region, are The main competitors with Vietnam in attracting investment, such as Singapore, Malaysia, Thailand, Indonesia have also made official announcements on the application of global minimum tax principles. On the other hand, these countries are also actively promoting research and analysis of new regulations to determine how they can adjust investment policies to maintain competitive advantages and continue to attract foreign investment. Whether it is a group of countries that invest or receive investment, they are urgently preparing for the scenario of applying the global minimum tax principles from 2024. If they did not take immediate action, Vietnam could not come up with appropriate policies to be applied as early as 2024.

The Government is also developing a plan to apply a global minimum tax rate. What recommendations do you have, ma'am?

This is the time for Vietnam to re-evaluate to adjust investment incentive policies. In addition, this is also a critical moment that is pivotal and significantly influences Vietnam's foreign investment attraction. Currently, the economic and political situation in the world is volatile, and there is a risk of a financial crisis in many countries. As a result, large corporations and multinational companies have to restructure their production scale and supply chains, downsize personnel or move locations to places with administrative procedures, energy costs and lower tax burden. Therefore, many multinational corporations will have to consider re-planning their investment strategies to minimize the impact when the global minimum tax policy is applied.

Observing the recent moves of many corporations, it is clear that foreign investment flows continue to pour into ASEAN. At the point of the adjustment of investment structure and location, large investors are paying close attention to the moves and reactions of the Governments of the host countries on the global minimum tax issue. Therefore, the Government of Vietnam needs to make great efforts in researching and developing investment incentive policies to gain advantages over other countries.

In my opinion, the Government of Vietnam needs to have more specific and drastic action programs to incorporate the rules of Pillar 2 into national law, review and develop laws related to preferential policies, and support investment to create an attractive investment environment to attract new investors and retain existing investors. This is both an opportunity and a challenge for Vietnam in attracting foreign investment in the new context.

Thank you!