Under the two-pillar solution released by the Organisation for Economic Co-operation and Development on the global minimum tax (GMT), tax incentives for multinational enterprises investing in Vietnam, especially companies in the technology sector, will face certain challenges in maintaining competitiveness and attracting investment.
Written by Da Nguyen, Partner and Tai Nguyen, Manager - Tax Advisory Services, Mazars Vietnam
The two-pillar rules are applicable for multinationals meeting the minimum consolidated revenue of €750 million ($803 million) based on the group consolidated financial statement for each country in at least two out of the four consecutive years preceding the period under review, except for some specific cases.
So far, most countries in the European Union, countries in Asia-Pacific, Australia, the UK, and others have confirmed their intention of applying the minimum tax rate of 15 per cent, starting from 2024.
Countries receiving foreign investment, including Vietnam, are studying responsive policies. These include the application of qualified domestic minimum top-up taxes (QDMTT) to avoid the loss of taxing rights in countries where the parent company is headquartered or countries where intermediary companies within the group presenting; and simultaneously exploring financial-support solutions to retain companies subject to the GMT rule and attract new companies.
Multinationals such as Samsung, LG, Google, and Microsoft have been gradually shifting their investment of new production lines into Vietnam instead of China. Gaming giant Nintendo has also partly shifted some of its Switch Lite production activities to Vietnam.
According to statistics from the General Department of Taxation (GDT), there are currently about 335 projects in Vietnam with registered capital of over $100 million operating in the industrial and manufacturing sectors located in economic and industrial zones, which are entitled to preferential corporate income tax (CIT) rate lower than 15 per cent. Among them, the majority are high-tech and software production companies such as Samsung, Intel, Bosch, Foxconn, KMS Technology, and Techbase Vietnam.
Along with the preliminary statistics from the GDT, there are just over 1,000 foreign-invested enterprises in Vietnam with ultimate parent companies subject to the GMT rule. Among them, more than 100 large enterprises are likely to be affected by the rule if it is applied from 2024.
The normal CIT rate in Vietnam is 20 per cent. Enterprises operating in the technology sector, including high-tech and scientific technology, software production, enjoy several tax incentives. In general, the average CIT rate applied to preferential multinationals is currently around 12.3 per cent, even from 2.75-5.95 per cent which is much lower than the standard rate, and is being considered as a crucial tool to attract investment into Vietnam.
It should be said that the GMT will bring challenges, but can also be a driving force to promote Vietnam's development. In terms of challenges, the application of GMT may affect Vietnam's competitiveness in attracting foreign investment in the short run because the country's current tax incentives will become less attractive.
Companies currently enjoying Vietnamese tax incentives will have to pay additional tax here (if Vietnam applies QDMTT), or in the country where the parent/intermediary is located when the GMT rule comes into effect to ensure a minimum tax rate of 15 per cent.
Without a timely response, Vietnam will lose the right to levy taxes, and in particular a deficit in the state budget. This is also a motivation to strengthen international integration, reforming the tax system in line with international practices and standards.
There are several recommendations for policy reformation...
Firstly, Vietnam needs to accelerate research to collect opinions from the business community and business associations from countries directly affected by pillar two, consultants, auditors, etc. on the current situation. There must also be policy proposals to respond to the impacts in the short and long run, in order to promulgate domestic laws to provide guidance for application in a consistent and comprehensive manner.
Secondly, in line with the objectives in Resolution No.50-NQ/TW on improving the quality and efficiency of foreign investment cooperation, Vietnam soon needs to review and reform regulations, and consider policies to support investors on the basis of costs rather than the current tax rate for being applied simultaneously with other business support policies.
These support policies include increasing the threshold of deductible expenses when calculating CIT for expenses such as research and development costs, factory construction investment costs, production costs for high-tech products, and high-tech human resource costs; improving admin procedures on investment and accompanying regulations; improving the business environment and focusing on institutional issues such as infrastructure and human resource tech level; and providing incentives for preferential lending interest rates and direct monetary support.
Thirdly, the state should strengthen enforcement of intellectual property laws in order to promote technology creation and transfer activities, especially advanced and new technologies, and simplify the process of tech development and innovation in enterprises.
Overall, Vietnam urgently needs to study and issue regulations to internalise GMT as soon as possible to adapt to new circumstances and to continue to be an attractive and engaging destination for foreign investors in the region and worldwide.
Da Nguyen, Partner and Tai Nguyen, Manager - Tax Advisory Services, Mazars Vietnam