Global Minimum Tax
Vietnam must meet the challenge of a Global Minimum Tax
137 countries have agreed on details for tax reform after years of negotiations. Supporters of this global minimum tax (GMT) speak of a historic breakthrough in the fight against tax avoidance. However, there is also criticism. Vietnam is an official partner of the GMT. Currently, it is trying to adapt the new rules in the best possible way to continue to be attractive for FDI. For a long time, low corporate taxes have been an attractive measure in Vietnam to attract FDIs. These FDIs have greatly benefited both the country and its people.
In principle, the corporate tax in Vietnam is 20%, but there are various measures, such as a halving for the first 9 years or a complete suspension of the tax for 4 years. At the same time, there is pressure on Vietnam to implement the GMT rules as soon as possible, because otherwise the upcoming “tax-plus” will be collected by the countries that have already implemented them. South Korea, a key partner country, has already implemented the GMT. If the GMT rate is applied, then any tax savings enjoyed by qualified multinationals in Vietnam will be lost. However, Vietnam will be able to tax large (including tech) companies without worrying about retaliation from the governments of developed countries. In this context, Phan Đức Hiếu, a Permanent Member of the National Assembly's Economic Committee, said it was necessary to develop appropriate tax and fee policies, especially building policies to adapt to the GMT and improving the business environment transparency to remain an attractive FDI destination.
The GMT project is divided into two pillars
Particularly large and profitable companies (annual sales of more than EUR 20 billion and a profit margin of more than 10%) are also to pay more tax than before in the so-called market states. This is primarily intended to reflect the adaptation to the digital age, as up to now corporations have only been taxed locally if they also had a physical branch there. Pillar 1 will be implemented via a multilateral treaty under international law (so-called "Multilateral Instrument 2.0").
Large corporations with at least 750m Euro annual turnover should have to pay a GMT of at least 15%. To give an example of the concept: If a German company pays only 10% tax abroad, then Germany is allowed to collect another 5% tax from this profit amount - this way, countries that do not commit to this will be forced to raise the tax rate as well. For Vietnam as a country with in general lower taxes, the perspective would be different. Although the number of large investors as above accounts for a small proportion of the number of FDI enterprises in Vietnam, beyond increasing the state budget, their investment determines the supply chain and the participation of domestic enterprises in the global supply chain and value chains.
At this point it is worth considering the following: The most common way of tax avoidance by corporations is via subsidiaries in tax havens, which collect high license fees for, for example, the logo, the domain, etc.. If a company is only based in such an oasis and distributes its profits there, the taxation rule would no longer apply to other countries. Therefore, these royalty payments may no longer be fully deducted as operating expenses in the home country if they flow to a company that is based in a "tax haven" (assuming countries that are not partners to the agreement). Furthermore, segmentation is to be increasingly used in order to avoid circumvention of the new rules.
GMT in an industrialized nation like Germany and its implementation in Vietnam
In Germany, the project of a GMT is generally perceived positively. It is expected that such a tax will help to combat tax havens and aggressive tax avoidance by multinational corporations. Most German politicians support the project, as it could help multinational corporations pay their fair share of taxes and thus bring more money into public coffers. However, there are also critics who fear that a GMT could have a negative impact on the economy. Anyway, even such a global tax will not change the need for countries like Vietnam to manage taxes responsibly. Dr Florian Tonkar, MP of Germany's ruling FDP party, says in this regard, for example: "Moreover, a global minimum tax rate will not change the fact that corporate taxation in Germany is too high and too complicated and urgently needs to be reformed. This is of central importance for the future viability of the German economy."
In Vietnam, the Government clearly saw the urgent need for action and began detailed studies on the GMT in 2022. A working group of experts from various disciplines was set up by VAFIE to consult with the government. Everything must be molded into new laws that take into account the interests of all stakeholders involved, including, of course, foreign investors.
It is a matter of fact that if Vietnam is too slow in implementing the GMT, it can lead to serious disadvantages for the country. On the one hand, Vietnam would not receive the 8 percent tax differential from the more than 100 FDI companies that would be eligible for this tax. This would amount to foregoing several billion U.S. dollars annually for Vietnam's national budget. On the other hand, the investment environment in Vietnam would be affected as investors would divert their investments to other countries with a benefit-sharing mechanism related to this new tax rule.
GMT: The way ahead
It will be important for Vietnam to exchange ideas and best practices with other countries. It is important to look not only at the approaches and experiences of Western, industrialized nations but also those in other emerging economies of ASEAN. In this context, it is also worth considering the role of incentives, which play a significant role in guiding and attracting investment. Here in particular, the basic conditions in an industrialized country like Germany, with its excellently developed infrastructure, are different from those in Vietnam, where conditions are diverse and, for example, infrastructure must first be developed and human resources created. The financial incentives that are created over and above the pure tax rates are then naturally different, in Germany and other countries as well as in Vietnam.
GMT is a huge challenge but also brings new opportunities for Vietnam. Tax evasion and transfer pricing were major problems in the past. These must now be addressed in the context of discussing the legal implementation of mechanisms for this global tax. Vietnam continues to offer many advantages to investors, including strong integration into global value chains, a clear commitment to free trade and investment protection, and a large market of 100 million consumers and a growing affluent middle class. However, in addition to the tax reform related to the GMT, the country's other problems also need to be tackled vigorously, including compliance issues, infrastructure, administrative processes, labour productivity, and an education and skills offensive. The GMT is a fact. It is now important for Vietnam to play this tax policy instrument with virtuosity.
In short, Vietnam needs to seize this important opportunity to reconsider the use of tax incentives and improve the investment policy framework to continue to be an attractive destination in the long term, especially for multinational enterprises.
*Prof. Dr. Andreas Stoffers is the Country Director of the Friedrich Naumann Foundation for Freedom in Vietnam.