Will the tax make it difficult to attract FDI?

A consensus was clearly seen at a recent conference on "Global Minimum Tax and Problems with Vietnam". Although the application of the global minimum tax is necessary and will likely bring benefits to Vietnam, it is also likely that Vietnam will become less attractive in attracting foreign investment (FDI). 

Late last year, agreements on the global minimum tax were approved and they are expected to be applied by the end of 2023. Accordingly, companies with global revenue from 750 million EUR (approximately $870 million) or more will be subject to a global minimum tax rate of 15%. If the company enjoys an effective tax rate of less than 15% in the country of investment, the difference will have to be paid in the home country.

In Vietnam, tax incentives are still the main policy tool to attract FDI. Therefore, when applying the global minimum tax, it will limit the ability of countries to use tax incentives to compete for investment, experts said.

According to experts, the global minimum tax will pose challenges to maintaining the competitiveness of Vietnam's investment environment in the upper segment, including global- scale investors. 

The number of these investors make up a small proportion of FDI enterprises in Vietnam, but their presence is very important because they lead the supply chain, and partly shape capital structure and industries that FDI enterprises choose to invest in, they said.

For example, by investing in Vietnam, Samsung, Panasonic, and Intel have enjoyed many investment incentive policies, including corporate income tax incentives, with the most favorable rate under current regulations - a corporate income tax rate of 10% for 10-15 years, exemption for four years, and a reduction of 50% for the next nine years.

However, when applying the global minimum tax, these groups will have to additionally pay the difference in tax to the country where the head office is located. Thus, Vietnam's investment incentive measures will be "nulled". With the introduction of a global minimum tax rate of 15%, these tax incentives may no longer be beneficial to multinational businesses.

Experts said that there are two main effects from this issue. If the Vietnamese government doesn't change domestic regulations, it could lead to a loss of tax revenue, as foreign investors may eventually return to their home countries. Along with that, Vietnam may lose in the competition to attract investment, because tax incentives in Vietnam would no longer be attractive and investors could choose other countries.

Therefore, what experts recommend is "the action from the Vietnamese side". “The Vietnamese government needs to take a more urgent approach, because at present international corporations are very confused, and the global minimum tax regulations are still unclear, with only an agreement on the rules. This poses great risks to the investment environment, causing great damage to countries like Vietnam that receive large investments,” said Mr. Dau Anh Tuan of the Vietnam Chamber of Commerce and Industry (VCCI).

Urgent issue

It is necessary to quickly take measures to handle the global minimum tax issue, because this is a "big deal" for Vietnam at the present time, when the strategy for foreign investment cooperation for the 2021-2030 period has just been issued. Speaking at the conference, experts, including representatives of Big4 Vietnam, and Dr. Nguyen Mai, Chairman of the Association of Foreign-invested Enterprises, all said that the Government needs to set up a special working group to handle the global minimum tax issue.

Nguyen Quoc Hung, Deputy Director of the Department of International Relations (Government Office), said the Prime Minister agreed to the establishment of an interdisciplinary special working group, including representatives of related ministries and sectors, the subjects of the tax, experts, and scientists to accelerate the review process on the implementation of the global minimum tax.

This will certainly receive the consensus and support of investors.

“Vietnam needs to be aware that it has to act very aggressively. In the immediate future, it is advisable to focus on creating peace of mind for investors, then do research to have a mechanism to partially compensate for the loss (if any) for investors who have and will have investment plans in Vietnam”, said Mr. Phan Duc Hieu, Standing Member of the Economic Committee of the National Assembly.

Dr. Nguyen Mai said there are many issues Vietnam needs to deal with.

First, Vietnam should take advantage of new opportunities to speed up the ongoing reform process, creating a new driving force to attract better quality FDI as stated in Resolution 50-NQ/TW of the Politburo.

Second, Vietnam needs to compare international regulations on global minimum tax with tax policies and investment incentives in the Law on Investment, Law on Enterprises, Law on Corporate Income Tax and relevant regulations to amend or supplement the laws in accordance with international regulations.

"It is necessary to study the experience of several developing countries applying a minimum tax to consider whether to apply it to our country when adjusting the law related to FDI," he said, adding that it is also necessary to renegotiate contracts with FDI enterprises affected by the global minimum tax regime on the principle of "mutual benefit", to eliminate the possibility of tax transfer to the country of residence of the foreign investor.

Which option?

The question “Which is the best option for Vietnam?” is difficult. According to Mr. Dang Ngoc Minh, Deputy Director of the General Department of Taxation, the view of the Ministry of Finance is to protect the right to tax for Vietnam. Currently, the G20 and the EU are preparing guidelines for the implementation of the global minimum tax from 2023, and Singapore and Hong Kong have quickly raised the tax rate to 15% to protect revenue sources.

Minh mentioned the option of continuing to find solutions to give investment incentives to active projects to protect revenue, but long-term measures are to raise the minimum tax rate to 15%.

To address this "urgent" problem, it is necessary to have a more effective way, such as organizing extraordinary meetings of the National Assembly, or building a law to amend many laws, said Mr. Phan Duc Hieu, Standing Member of the Economic Committee of the National Assembly.

Some experts have proposed applying an additional minimum domestic income tax rate, in order to protect Vietnam's tax base, but to "compensate" investors, it should apply additional support measures for investors, including monetary support.

This is not a violation of commitments on investment incentives, does not create additional tax obligations in the parent company's country, and minimizes the impact on investors' interests and government budget, achieving harmonization of the interests of both parties.

Some countries such as India, China, and even European countries or the US, before the implementation of the global minimum tax, have not only provided tax incentives to attract FDI, but also provided support in the form of cash grants.

China provides some research and development support to attract development in advanced industries, or provides subsidies to companies to help them reduce electricity charges. Malaysia also offers certain funding or concessional loans to promote biotechnology. India introduced manufacturing linkage incentives to boost domestic production and attract large investments in mobile phone manufacturing.

Rather than providing tax incentives, supportive policies can be designed to apply directly to the goals of the investment, such as supporting an investment in equipment, assets, research, and human resources. This support will then directly benefit investment, whether the company is in a profit or loss situation, experts said.

Dr. Nguyen Mai mentioned the case that Intel was previously supported by Vietnam but, of course, not entirely with money but through support for investment in training high-tech human resources.

Thus, additional support, in addition to tax incentives, has been applied. However, Intel is so far the only case. According to experts, Vietnam still lags behind India and China in policies to support investors.

Meanwhile, from an investor's perspective, Mr. Kim Yong Seok, Samsung's External Affairs Director, said that Vietnam is too focused on investment incentives through taxes. When a global minimum tax is introduced, these policies will no longer be effective.

“For businesses that have been investing, we were quite surprised with the introduction of a global minimum tax. Therefore, Samsung hopes the Vietnamese Government can do research and issue new plans and measures to help foreign businesses investing here," said Mr. Kim Yong Seok.

Duy Anh