Global minimum tax and proactive steps

Vietnam needs to carry out the necessary work related to the application of the minimum tax regime to meet the requirements of large multinational corporations as well as potential investors. Photo: ST

Regulations on the standard domestic minimum additional tax regime

On October 8, 2021, the Organization for Economic Cooperation and Development (OECD) released a two-pillar framework statement to address challenges arising from the digital economy, of which Pillar 2 sets a global minimum corporate tax rate of 15% on multinational companies to prevent them from relocating profits to low-tax countries to avoid income tax. Vietnam has agreed to this rule.

According to experts, thanks to competitive tax incentives, along with strengths, the flow of foreign investment (FDI) into Vietnam has continuously increased over the years. In 2020, for the first time, Vietnam entered the group of 20 leading FDI-attracting countries in the world. However, if Vietnam applies a global minimum tax, it will directly affect global FDI flows, so Vietnam will face many difficulties in attracting FDI through tax incentives.

Proposing solutions to implement this policy, Dr. Nguyen Nhu Quynh, director of the Institute of Financial Strategy and Policy, Ministry of Finance, said that it is necessary to supplement regulations on the standard minimum domestic additional tax (QDMTT). Under the global tax base erosion (GloBE) rule, multinational corporations with consolidated revenue of EUR 750 million or more are subject to a 15% effective tax rate where they operate. Accordingly, countries receiving investment capital - which generates income sources are entitled to priority tax collection by applying QDMTT. In the case of the aggregate income of these corporations in a country where the actual tax rate is less than 15%, the GloBE rule allows the subsidiary countries to levy additional tax on the difference. Therefore, in order to ensure Vietnam's tax collection rights for multinational corporations that are investing in Vietnam and have a minimum actual tax rate of less than 15%, Vietnam needs to have regulations on the tax base of GloBE regulation for corporations that are subject to the global minimum tax.

Dr. Nguyen Nhu Quynh recommends reviewing and completing tax incentives to continue to attract FDI into Vietnam. Although tax incentives are not the most important factor, they are also one of the factors affecting the investment and business strategies of enterprises. According to Dr. Nguyen Nhu Quynh, the completion of the corporate income tax incentive policy needs to define clear goals not only to match the implementation of the global minimum tax but also to redesign the preferential policies of tax incentives synchronously with policies other than taxes to encourage and attract investment. At the same time, it is necessary to review and amend the provisions of the Investment Law related to the form of investment incentives, beneficiaries of investment incentives, industries and areas of investment incentives.

Mr. Robert King, Deputy General Director of Ernst & Young Vietnam Co., Ltd. said that when tax incentives are no longer effective in attracting investment, Vietnam needs to take supportive measures to maintain the competition in attracting investment. Support measures need to achieve two important goals: the interests of investors, support measures must bring real benefits to investors; and support measures must ensure that they do not violate international commitments to which Vietnam is a member as well as comply with the rules of Pillar 2.

Need a quick response mechanism to protect the right to tax

According to GS. Nguyen Mai, Chairman of the Association of Foreign Investment Enterprises, the global minimum tax regime has reached a framework agreement among OECD member countries, the unification of the G20 and G7 with over 140 participating countries. Becoming the 159th member of the Global Forum on Transparency and Exchange of Tax Information (GF) from December 26, 2019, Vietnam needs to carry out the necessary work related to the application of the minimum tax mechanism to meet the requirements of large multinational corporations as well as potential investors. According to Prof. Nguyen Mai, the corporate income tax rate applied by Vietnam is 20%, the preferential tax rate below 15% includes 5%, 10%, tax reduction and an exemption period for highly preferential projects from 10 years or more. Therefore, if Vietnam is slow to apply the global minimum tax mechanism, FDI enterprises will have to pay the difference to the country where the company's head office is located. Accordingly, the State loses a sizable budget revenue, which can negatively affect the investment environment.

Therefore, it is necessary to study the documents of the G7, G20, and OECD related to the global minimum tax mechanism, referring to the regulations of some big countries such as India, China, Japan, Korea, etc. ASEAN member countries, thereby selecting the appropriate content for our country to use in the process of amending and supplementing the Law on Investment, the Law on Enterprises, the Law on Corporate Income Tax, Professor Nguyen Mai recommended. Along with that, when discussing Vietnam's solutions to the global minimum tax regime, it is necessary to pay attention to the competition among some ASEAN countries to attract FDI from the world's leading multinational corporations, as well as such as the implementation of the ASEAN Comprehensive Investment Agreement (ACIA) signed in February 2009, effective from March 29, 2012.

Regarding this issue, economic expert Can Van Luc said that, based on the preliminary impact assessment report and the proposal of the Special Working Group, the Government will soon have a plan to propose compatible tax policies and suitable solutions. Vietnam should apply this global minimum tax with proactive steps, with appropriate solutions to partially support those that are affected, and more importantly, consider this as an opportunity to continue tax reform, and improve strongly investment and business environment. That is really the driving force, the fundamental and sustainable solution.

The Ministry of Finance and the Working Group should soon propose the Government to submit to the National Assembly for promulgation and adjustment of appropriate tax and accounting policies, as well as in accordance with the provisions of the Agreements to which Vietnam has committed before this global minimum tax comes into effect (expected as early as 2024).

Accordingly, it is necessary to legislate by promulgating regulations on international law as a quick response mechanism to protect the right to tax instead of ceding the right to tax to other countries, said Dr. Can Van Luc.