Vietnam is highly sought after as a destination for foreign direct investment (FDI) for various reasons, one of which is its tariff instruments. By participating in agreements such as CPTPP, EVFTA, and RCEP, Vietnam has successfully reduced or eliminated tariffs on numerous goods and services. This has created a conducive environment for enterprises with foreign direct investment outside the country to operate. The global minimum tax (GMT) policy is designed to address tax avoidance and competition among multinational corporations. Its aim is to ensure that all countries receive a fair portion of these organizations’ profits worldwide.
In brief of Vietnam’s tax market
a. Overview
The objective of GMT is to establish a global standard for corporate income tax by implementing an international agreement. Its primary aim is to combat profit shifting and tax base erosion by multinational companies. The agreement proposes a minimum global effective tax rate of 15%, and it is projected to take effect in 2024. However, this regulation applies only to businesses with an annual turnover exceeding 750 million euros (approximately $815 million).
b. Category
The policy consists of two pillars:
+ Pillar 1:
Allows the countries where the revenue of multinational corporations is made to tax a portion of the profits of these companies, even if they do not have a physical presence there. This pillar mainly targets digital companies with large market share and high profitability.
+ Pillar 2:
Set a GMT tax rate of 15% for multinational corporations, based on their business results. If a company pays less than 15% tax in a certain country, the company’s home country can raise its taxes to a minimum, eliminating the incentive to shift profits to jurisdictions. low tax.
c. Advantage of GMT
Governments anticipate that the policy will generate billions of dollars in revenue. These funds can be utilized to finance public services or reduce debt. The implementation of GMT aims to curb tax avoidance and evasion by multinational corporations, thereby establishing a level playing field for businesses and enhanced fairness for taxpayers. According to the OECD, they estimate that GMT will generate an additional $150 billion in annual tax revenue. They expect the policy to go into effect in 2024, after enacting necessary domestic legislation and signing a multilateral agreement among participating countries. Many nations have acclaimed the GMT policy as a significant accomplishment that will foster a more equitable and stable international tax system.
Impact of GMT on Small and Medium Enterprises (SMEs)
This policy may not directly affect small and medium enterprises (SMEs) that solely operate within Vietnam since they already abide by the country’s domestic tax regulations. However, they can potentially benefit when the competitive landscape becomes more equitable. In the past, multinational corporations could take advantage of lower tax rates by shifting profits to tax havens.
For SMEs with subsidiary companies or branches in other countries, this policy may necessitate paying more taxes under Pillar 2. Vietnam can impose additional taxes to meet the minimum rate of 15% if the SMEs are paying less tax compared to any other country. This might reduce the motivation to invest or expand in low-tax jurisdictions.
This policy may restrict or eliminate certain benefits for small and medium enterprises (SMEs) that rely on tax incentives or exemptions provided by the government. Some may consider such benefits unsuitable or they may result in a tax collection lower than the GMT rate. Consequently, this could have an impact on the cash flow and growth potential of these SMEs. However, certain tax incentives can still be applicable if they align with the objectives and criteria of the policy. It is important to note that negotiators and implementers are currently working on the GMT policy, which means that they may make alterations or grant exceptions to specific SMEs. Additionally, the enforcement and application of this policy are subject to the domestic laws of each country.
Impact on Vietnam
Apart from tariff reduction, Vietnam actively provides other incentives for foreign direct investment (FDI), including tax exemption, preferential land rent, and streamlining administrative procedures. Vietnam has furthermore achieved the establishment of a comprehensive legal and regulatory framework to safeguard the legitimate rights and interests of investors. This framework encompasses key laws such as the Investment Law of 2020, the Enterprise Law of 2020, and the Public-Private Partnership Law of 2020. These laws have significantly enhanced the transparency and consistency of the investment environment, while also opening up additional avenues for public-private partnerships.
Experts predict that the implementation of the Global Minimum Tax (GMT) policy will profoundly affect foreign direct investment (FDI) inflows, especially as developing nations heavily rely on tax incentives to attract such investments. They anticipate that the GMT policy could potentially reduce FDI inflows to low-tax countries by around 20% while simultaneously increasing FDI outflows from high-tax countries by up to 10%.
Consequently, this could lead to a redistribution of FDI from developing to developed countries as well as a reduction in the level of direct investment abroad. Vietnam, which currently benefits from being an attractive destination for FDI, may face challenges under the GMT policy as its minimum effective tax rate falls below the proposed threshold of 15%. As a result, Vietnam may need to collect more taxes from foreign investors, potentially diminishing its ability to compete and allure such investments. However, Vietnam has the option to implement additional policies and reforms, thereby enhancing its investment environment and potentially offsetting the adverse impacts of the GMT policy. This could involve renegotiating free trade agreements, engaging in global dialogues and collaborations regarding tax matters, and taking steps to maintain its appeal to foreign investors.
Conclusion
In conclusion, the implementation of a GMT represents a significant step towards achieving a fairer and more equitable international tax system. By ensuring that multinational corporations pay their fair share of taxes regardless of where they operate, this measure aims to eliminate tax evasion and address the issue of profit shifting. Moreover, a GMT can help countries generate more revenue to invest in vital public services, infrastructure development, and social welfare programs. The potential benefits of a global minimum tax cannot overstated, despite the challenges it may face in implementation and enforcement. Ultimately, it is an essential tool in fostering global economic cooperation and creating a more just and sustainable future for all.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
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Website: hmlf.vn Email: miller@hmlf.vn
