Việt Nam embraces global minimum tax for sustainable fiscal boost and FDI impact

Việt Nam’s adoption of the global minimum tax is vital for upholding taxing rights, fostering trust, promoting investment and showcasing transparency.

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Võ Trí Thành

* Võ Trí Thành

On November 29, the National Assembly approved a Resolution to implement additional corporate income tax aligned with the Global Anti-Base Erosion Rules (global minimum tax), effective from January 1, 2024. Despite receiving a majority vote in favour (93 per cent), concerns persist about the feasibility, impact on Việt Nam’s competitiveness in attracting foreign direct investment (FDI), and preferential policies for retention of high-tech “eagles”.

Under this resolution, a global minimum tax rate of 15 per cent will apply to multinational corporations with revenue exceeding 750 million euros (about US$800 million) in two of the four consecutive years.

The Resolution affects constituent units of multinational corporations and introduces two components: Qualifying Domestic Minimum Top-Up Tax (QDMTT) for units with activities in Việt Nam and Minimum Taxable Income (IIR) for parent companies in Việt Nam with ownership of low-tax foreign entities.

The Ministry of Finance’s calculations estimate 122 foreign corporations in Việt Nam will be affected by QDMTT, with an expected additional tax collection of around VNĐ14.6 trillion ($608.3 million). If IIR is applied to Vietnamese corporations, about six entities may be subject to it, with an estimated additional tax collection of around VNĐ73 billion.

Notable corporations impacted by the Resolution include Samsung, Intel, LG, Bosch, Sharp, Panasonic, Foxconn and Pegatron, which constitute nearly 30 per cent of the total FDI capital in Việt Nam (around $131.3 billion) and are enjoying preferential corporate income tax rates below 15 per cent.

The global minimum tax is not an international treaty, and countries are not obligated to apply it. However, if Việt Nam chooses not to apply it, other countries can still enforce the global minimum tax, potentially collecting additional taxes on businesses in Việt Nam, particularly for foreign-invested enterprises.

Countries and territories investing abroad, including those with substantial capital in Việt Nam (such as South Korea, Japan, Hong Kong, Singapore), are expected to implement the global minimum tax from 2024. Similarly, countries receiving foreign investment, like global minimum tax, are exploring policies to address the global minimum tax.

In this context, it is imperative for Việt Nam to affirm the adoption of the global minimum tax in accordance with OECD guidelines. This is vital for upholding taxing rights, fostering trust, promoting investment and showcasing transparency.

However, concerns arise that the global minimum tax may impact Việt Nam’s competitiveness in attracting investment, potentially diminishing the effectiveness of tax incentives for foreign businesses, especially for strategic investors amid intense competition for foreign investment. The potential shift of investment away from large-scale businesses could hinder national industrial development goals, affecting technology transfer and ecosystem building.

The Ministry of Planning and Investment (MPI) is urged to design additional incentives to support new investment activities and maintain a competitive environment. FDI enterprises recommend Việt Nam implement preferential mechanisms and policies, focusing on factors like labour, infrastructure and administrative procedures.

According to experts, FDI enterprises may be willing to pay a 15 per cent corporate income tax rate, but request additional preferential policies to encourage investment, production and business. Looking at it differently, the global minimum tax can be viewed as an opportunity for Việt Nam to develop a favourable and competitive investment and business environment.

International studies suggest financial incentives (taxes) may not be the decisive factor for long-term investments; the transparency of the legal framework holds more importance. Additionally, various forms of support, including cash support for training, research and development, and infrastructure, can be explored.

With the global minimum tax implementation, additional revenue can be allocated to infrastructure development, human resource training, technology investments, and supporting Vietnamese businesses in multinational corporations’ value chains. Inspired by Thailand’s approach, allocating a percentage of the global minimum tax to an investment committee’s competitiveness enhancement fund could be considered by Việt Nam for domestic businesses.

Moreover, as Việt Nam expands outward investments, the global minimum tax application aids in understanding foreign countries’ legal practices.

Additional advantages stem from the enforcement of global minimum tax regulations, providing fresh prospects for Việt Nam to elevate State budget revenue, bolster international integration, and address issues related to tax evasion and avoidance.

Finance Minister Hồ Đức Phớc emphasised the purpose and perspective behind the Resolution project, which strives to showcase progress and transparency in the tax management system and the business investment environment, aligning with international standards. Importantly, existing preferential policies for businesses not subject to the global minimum tax will be maintained.

Việt Nam’s foreign investment strategy for 2021–30 prioritises global production connectivity, green and high-tech investment, support industries, and balanced interests between investors, the State and people.

Despite challenges, Việt Nam’s appeal for FDI remains strong, driven by advantages like cost-effective human resources, strategic location, free trade agreements, economic growth, and a stable political and legal system. FDI is expected to play a vital role in supporting economic growth and driving the industrial park real estate sector in the coming years.

In the past 11 months, FDI attraction reached almost $29 billion, a nearly 15 per cent increase from the same period last year, with implemented capital hitting $20.25 billion, the highest between 2018 and 2023.

Amidst the emergence of heightened standards and new requirements for digital and green economic expansion, the global minimum tax should be seen not as a burden or challenge, but as an opportunity for Việt Nam. It presents a chance to expedite reforms, enhance the business and investment environment, and align with global trends, ultimately attracting high-quality investors.

*Võ Trí Thành is former Vice President of the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems. He authors the Việt Nam News column Analyst’s Pick.