Global minimum tax rules pose many challenges for Vietnam

View of the Conference

Minister of Finance Ho Duc Phuc spoke at a Scientific Conference with the theme: "Global Minimum Tax Rule: The application experiences of countries, expected impacts and recommendations for solutions for Vietnam", organized by the Ministry of Finance on April 18, 2023.

The global minimum tax rule is a progressive tax reform aimed at curbing the fact that many large companies plan to minimize taxes by relocating profits to tax havens, or doing business via transnationally digital platforms without a physical presence. In October 2021, the Global Cooperation Forum on BEPS (IF) issued a statement on the Two-Pillar Framework to address challenges arising from the digital economy, which has so far received approval from 142 member countries.

In particular, Pillar 2 regulates the global minimum tax rate, including two combined domestic law rules (the 15% minimum tax rate rule and the rule for less than the minimum taxable payment) and a tax rule of the source country. Up to now, most countries belong to the European Union; Switzerland, UK, Korea, Japan, Indonesia, Hong Kong (China), Australia, etc have confirmed to apply the 15% minimum tax rate rule, starting from 2024.

However, the application of this Code may reduce the attractiveness and competition in attracting foreign investment of developing countries, including Vietnam, so tax incentives will no longer bring many benefits, thereby posing a significant challenge to maintaining the competitiveness of Vietnam's investment environment.

Speaking at the workshop's opening, Finance Minister Ho Duc Phuc said that the development of the digital economy and globalization has greatly influenced the socio-economic development of countries. Many new business types based on information technology were born, bringing new conveniences to customers, but at the same time posing new challenges for management agencies, especially measures of proper tax collection management to prevent acts that erode the tax base and transfer profits.

In this situation, the initiative against tax base erosion and profit shifting (BEPS) was initiated by the OECD and approved by the G20.

Implementing the actions of BEPS, in July 2021, the Finance Ministers and Central Bank Governors of the G20 agreed on the principle of a Two-Pillar Solution to address tax challenges arising in the process of digitization of the economy, known as the Global Minimum Tax Agreement.

Specifically, pillar 1 is tax allocation for digital-based business; Pillar 2 sets a global minimum corporate tax rate of 15% for multinational companies to prevent them from relocating profits to low-tax countries to avoid taxes. The Two-Pillar Framework has now received the consensus of 142 member countries, including Vietnam.

The Minister of Finance delivered the opening speech in the conference

The Minister emphasized that, according to the principle of application of the global minimum tax published by the OECD/G20, member countries are not required to apply the provisions of the global minimum tax, but if they choose to apply this regulation, countries will have to follow the guidelines consistently. In the event that a country does not apply, the global minimum tax regulations applied by other members must still be accepted.

According to the Ministry of Finance, there are currently 1,015 foreign-invested enterprises in Vietnam whose parent companies are subject to the global minimum tax, the minister said. In which, more than 70 businesses are likely to be affected by the global minimum tax when it is applied in 2024.

“If countries with parent companies all enforce the global minimum tax, these countries will receive an additional tax difference in 2024, which is estimated at more than 12 trillion VND. Thus, tax incentives will no longer be effective, thereby posing a significant challenge to maintaining the competitiveness of Vietnam's investment environment," the Minister noted.

In Vietnam, in August 2022, the Prime Minister established a special working group to research and propose solutions related to the OECD's global minimum tax rate.

The Minister said that on March 31, 2023, the Ministry of Finance reported directly to Deputy Prime Minister Le Minh Khai at the meeting on the global minimum tax rate, its impact and its influence on Vietnam. Currently, the Ministry of Finance is urgently researching and proposing solutions to respond.

At the seminar, Mr. Dang Ngoc Minh, Deputy Director of the General Department of Taxation, said that up to now, most countries belong to the European Union; Switzerland, UK, Korea, Japan, Singapore, Indonesia, Hong Kong, Australia, etc confirmed to apply the minimum tax rate of 15%, starting from 2024. In particular, Korea, Singapore, Japan, etc are countries with a large amount of foreign investment in Vietnam, and are countries with many businesses that are subject to the global minimum tax.

Pursuant to Mr. Dang Ngoc Minh, there are currently about 335 projects with registered investment capital of over 100 million USD operating in the field of processing and manufacturing industries in economic zones and industrial parks and are enjoying preferential treatment of corporate income tax incentives lower than 15%.

Mainly enterprises in the high-tech sector such as Samsung, Intel, LG, Bosch, Sharp, Panasonic, Foxconn Pegatron, etc with total registered investment capital accounting for nearly 30% of total FDI in Vietnam. (reaching about 131.3 billion USD). These are projects that are likely to be affected by the global minimum tax. Accordingly, if the global minimum tax is applied and Vietnam does not have timely response solutions, the benefits from the corporate income tax incentives for Vietnam projects will no longer be. Since then, affecting the attractiveness, leading to loss of competitive advantage of the Vietnamese market in attracting foreign investment and affecting investment expansion plans of projects.

At the Workshop, the opinions focused on discussing four groups of contents: the main contents of the global minimum tax rule; implementation status and orientation of applying the global minimum tax rule of some countries; analyzing and assessing the impacts of the implementation of the global minimum tax on the world and Vietnam's economy and investment; timely response measures, ensuring Vietnam's tax collection rights as well as the attractiveness of the investment environment.