Planned application of Vietnam's global minimum tax and its impact on foreign companies
2023/10/16
- Luong Ngo Bao Tran
I. Introduction
Global minimum taxation is a tax system initiated by the Organization for Economic Co-operation and Development (OECD). This tax system concept is based on an agreement to impose the same effective tax rate on all member countries/regions of the Group of 20 developed and emerging countries (G20). The 15% tax rate applies to large multinational companies with a turnover of 750 million euros or more. To date, countries and regions such as Switzerland, the United Kingdom, South Korea, Japan, Singapore, Indonesia, Hong Kong (China), and Australia will apply the global minimum tax rule of 15% from 2024.
A global minimum tax rate of 15% could cause temporary disruption to the investment strategies and operating policies of multinational companies, and could also affect countries’ strategies to attract foreign capital.
II. Definition and application principles of global minimum taxation
The G20 agreed on the principles of two pillars (Pillar 1 and Pillar 2) as a concrete method of global minimum taxation. Among them, Pillar 1 proposes a mechanism to redistribute a portion of profits to countries that consume goods and services, and is applicable to countries with annual global sales exceeding 20 billion euros and profits exceeding 10%. Only multinational companies. Since Pillar 1 is estimated to affect only a small number of companies, this paper will focus our analysis on Pillar 2.
The second pillar, Pillar 2, provides for a global minimum tax on international investments and aims to end competition between countries to lower corporate tax rates and transfer income. The plan requires businesses that have business activities in two or more jurisdictions and have annual sales in at least two of the four consecutive fiscal years before the Pillar 2 effective date.
A minimum corporate tax rate of 15%1 applies to large multinational companies with assets of €750 million or more.
The tax rate applied under this system is the effective tax rate guided by the OECD, and its calculation formula is as follows.
Effective tax rate = (adjusted effective tax amount) ÷ (GloBE net income)(*1)
As of this writing (September 2023), Vietnam has not agreed to join the global minimum tax. Therefore, for example, in a multinational corporate group whose head office is in Japan, if the effective tax rate of a Vietnamese subsidiary falls below 15% and additional tax is required to be paid, the payment will be made to the country where the parent company is located (Japan).
If Vietnam agrees to join the global minimum taxation, the additional tax will be paid to the Vietnam Tax Department.
III. Application status around the world, planned application in Vietnam
1.Recent Highlights: EU agreement to implement Pillar 2
On December 16, 2022, the European Union (EU) issued a press release confirming the formal application of the global minimum tax. According to this release, EU member states will legislate the global minimum tax by the end of 2023, and it will apply from 2024. This means that the EU will take the lead in applying the G20/OECD global agreement on Pillar 2.
EU developments and recent Inclusive Framework (IF) implementation plans will encourage countries to reform their domestic tax systems.
2.Planned application in Vietnam
At the time of writing this article (September 2023), Vietnam has not agreed to join the global minimum taxation, but it seems likely that it will do so in the near future.
The Vietnamese government, Ministry of Finance, and other ministries will urgently assess the impact of the application of the global minimum tax on foreign companies in Vietnam, and collect the difference between the global minimum tax and the Vietnamese corporate tax in Vietnam. We are considering legislating the system. At its October 2023 meeting(*2), the government is going to approve the application of the global minimum taxation. In addition, some local tax bureaus, such as the Bac Ninh Provincial Tax Bureau, have sent official letters to companies providing preliminary clarification on the global minimum tax and requesting updated information on the consolidated sales of corporate groups. .
3.Assessing the impact on foreign companies if the global minimum tax is implemented
According to Ministry of Finance statistics, there are currently 1,015 foreign companies in Vietnam whose foreign parent companies are subject to the global minimum tax. Of these, there are more than 70 companies that could be affected if the global minimum tax is applied from 2024 due to reasons such as receiving tax breaks(*3).
Vietnam’s general corporate tax rate is 20%, which is higher than the global minimum tax rate, so companies without tax incentives will not be affected if this law is applied. However, for companies receiving preferential treatment, preliminary estimates indicate that the actual tax rate for foreign-funded companies in Vietnam currently averages 12.3%, which is lower than the global minimum tax rate of 15%. The main tax incentives stipulated in the Corporate Tax Law are as follows, and there are three types: preferential treatment based on business content, preferential treatment based on location, and preferential treatment based on scale.
1)Preferential treatment according to business content
For scientific research, technological development, and high-tech application fields, a corporate tax rate of 10% applies for 15 years from the start of business.
In social areas such as education and healthcare, a 10% tax rate will be applied throughout the project implementation period.
2)Preferential treatment for companies implementing new investment projects in industrial parks (excluding some industrial parks), export processing zones, and industrial parks located in socio-economically difficult areas.
Two years of tax exemption and a 50% reduction in tax payments for the next four years (2 exemptions, 4 reductions) will be applied.
3)Preferential treatment for companies located in extremely difficult economic zones, high-tech zones, and socio-economically difficult areas
Tax exemption for 4 years and 50% tax reduction for the next 9 years (4 exemptions, 9 reductions), plus a 10% corporate tax rate for 15 years after the start of business.
4)Special incentives depending on investment size
In some industries, the corporate tax rate of 9% will be applied for 30 years if the investment capital is VND 30 trillion or more and the conditions of disbursement of at least VND 100 trillion within 3 years from the date of issuance of the investment registration certificate are met.
For Vietnamese companies that enjoy the major tax benefits mentioned above, the effective tax rate is likely to be below 15% and additional tax payments will be required under the global minimum tax.
IV. Conclusion
Pillar 2 will affect large foreign companies that Vietnam is trying to attract. If the country where the parent company is located (such as Japan or South Korea) has already announced participation, many of the existing Vietnam tax benefits will become meaningless for large companies in that country. For this reason, foreign investors are likely to expect alternative investment incentives from the government (for example, the supply of high-quality labor, infrastructure development, reform of administrative procedures, and investment incentives for production equipment).
We will continue to monitor how the Vietnamese government will apply the global minimum tax and introduce alternative investment incentives.
*This article was translated by Yarakuzen.
*1 https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf
*2 https://xaydungchinhsach.chinhphu.vn/chinh-phu-se-trinh-quoc-hoi-cac-chinh-sach-lien-quan-thue-toi-thieu-toan-cau-119230726193534584.htm
*3 https://taichinhdoanhnghiep.net.vn/viet-nam-co-hon-70-doanh-nghiep-co-kha-nang-chiu-anh-huong-cua-thue-toi-thieu-toan-cau-d38379 .html
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