GLOBAL MINIMUM TAX: OPPORTUNITIES AND CHALLENGES FOR VIETNAM

ABSTRACT

The Global Minimum Tax is an initiative of the Organization for Economic Cooperation and Development to overcome the situation where multinational enterprises take advantage of the lack of uniformity in tax regulations across countries to reduce tax rates. Vietnam is a country with a rapidly growing and highly open economy, and is an attractive place for multinational enterprises to invest and do business. This article analyzes the opportunities and challenges of the Global Minimum Tax for Vietnam and proposes some policy recommendations.

АННОТАЦИЯ

Глобальный минимальный налог – это инициатива Организации экономического сотрудничества и развития, направленная на преодоление ситуации, когда транснациональные предприятия пользуются отсутствием единообразия в налоговом регулировании в разных странах для снижения налоговых ставок. Вьетнам – страна с быстро растущей и высоко открытой экономикой, а также привлекательное место для инвестиций и ведения бизнеса для транснациональных предприятий. В этой статье анализируются возможности и проблемы глобального минимального налога для Вьетнама и предлагаются некоторые политические рекомендации.

Keywords: global minimum tax; opportunity; challenge; Vietnam.

Ключевые слова: глобальный минимальный налог; возможность; испытание; Вьетнам.

1. What is global minimum tax?

The Global Minimum Tax (GMT) is the second pillar of the "Base Erosion and Profit Shifting - BEPS" initiative proposed by the Organization for Economic Cooperation and Development (OECD). Accordingly, governments will impose a global minimum corporate income tax rate of 15% on multinational enterprises (MNEs) with revenue of 750 million EUR or more. If the enterprise operates in a country with a corporate income tax below this level, it will have to pay the tax difference to the country in which the enterprise is headquartered.

This agreement aims to overcome the situation where multinational enterprises take advantage of the lack of uniformity in tax regulations between countries to maximize profits for businesses but only contribute a disproportionate amount of tax for reinvestment in infrastructure, worker welfare and general welfare of society.

During negotiations, the global minimum tax encountered opposition from China, Eastern European countries and developing countries such as Vietnam on the grounds that the agreement would break existing tax agreements of them - agreements that grant investment incentives to manufacturers through effective corporate tax rates lower than the minimum 15% proposed by G7 countries. Developing countries disagree because the agreement will not let them raise more taxes from the largest MNEs, and they will only have the right to tax a small portion of these enterprises' profits based on sales.

Overcoming the arguments, the Global Minimum Tax Agreement was signed in October 2021 by 137 countries and to date more than 140 countries have joined. According to the initial commitment, the Global Minimum Tax will take effect from January 1, 2023 but was later postponed to January 1, 2024. Most countries that are major trade and investment partners of Vietnam participate in this agreement. As the European Union (EU) has approved a plan to impose a global minimum tax rate of 15% on December 15, 2022. By December 23, 2022, the country with many businesses investing in Vietnam, South Korea, passed the International Tax Adjustment Act, applying the global minimum corporate tax rate from January 1, 2024.

The Organization for Economic Cooperation and Development estimates that the Global Minimum Tax would reduce low-taxed profits globally by about 80 %; from 36% of global profits to about 7%. This decrease comes from both the reduction in profit shifting and the application of top-up taxes. The remaining low tax profit mainly reflects the impact of the substance-based income exclusion. This reduction is present in all income groups, but largely concentrated in investment hubs. Remaining low-taxed profit is largely due to the presence of the substance-based income exclusion, where the GMT takes account of the real economic activities of MNEs [1] .

2. Vietnam - an attractive destination for multinational enterprises

Since implementing reform and opening up (Doi Moi - Renew) in 1986, Vietnam has transformed from a centrally planned economy into a leading large open market economy in the world.

In 1986, Vietnam's economy was basically a backward agricultural production system, with GDP only reaching 26.3 billion USD, and most people had a poor standard of living. By 2023, the scale of Vietnam's economy will be 430 billion USD, average GDP per capita will reach 4,300 USD, and the proportion of households according to the international poverty standard will only be 2.9%. In addition, from a closed economy, Vietnam has become an economy with a high level of global integration, becoming the 22nd largest trade partner globally, with total import and export turnover in 2023 reaches nearly 700 billion USD [3] . Vietnam is currently a member of 15 new generation free trade agreements (FTAs), which include major partners accounting for more than 80% of Vietnam's trade proportion. Among these 15 FTAs, 4 FTAs have completed their tariff reduction commitments, including: Vietnam-ASEAN; ASEAN - China; ASEAN - Korea; ASEAN – Ausralia – NewZealand.

With the advantage of a young population and a stable economic growth rate of 7%/year, many MNEs with global production chains have come to invest, produce and do business in Vietnam. In 2023, total foreign investment in Vietnam will reach 23 billion USD, and the output of MNEs currently accounts for 20% of Vietnam's GDP.

Currently, the corporate income tax rate in Vietnam is 20%. To attract foreign businesses to invest, Vietnam implements many preferential tax policies, so the actual average tax rate these businesses must pay is only about 12%. In particular, there are businesses like Samsung (SEV) that enjoy huge incentives: corporate income tax exemption for the first 4 years (from 2009), 5% for the next 9 years and 10% for the next 17 years.

When implementing the commitments of the Global Minimum Tax Agreement from 2024, there will be more than 100 MNEs in Vietnam whose parent enterprises will be affected by this tax policy. This will greatly impact the choices of MNEs and create opportunities as well as challenges for Vietnam.

3. Challenges for Vietnam

The Global Minimum Tax Agreement initiated by the Organization for Economic Cooperation and Development (OECD) aims to protect the interests of developed countries, so developing countries like Vietnam will have to face many challenges [4]:

- First , Vietnam will face the risk of declining foreign direct investment flows. This capital source may even be net withdrawn. This is because when additional taxes are levied by the government of the country where the headquarters is located, the overall cost of the investment plan in Vietnam will increase, and Vietnam's competitive advantage will be reduced. MNEs will tend to invest in their home country or countries with more overall preferential policies. In the context of the current Vietnamese economy, foreign direct investment capital flows are still very important and the decline of this capital flow will cause many adverse impacts on the national economy.

• Second , this new tax policy may cause tax loss if we do not take timely measures. As in the case of SamSung Electronics Vietnam Company (SEV), which is subject to a tax rate of 10%. When the Global Minimum Tax Agreement takes effect, this 5% tax difference (15% - 10%) will have to be paid by the business to the government of the country where the business is headquartered (Korea). This causes the loss of a huge amount of money that Vietnam spends on business incentives, but the results flow to other countries' budgets.
• Third, MNEs will sue because the Vietnamese government violates existing tax agreements when inviting businesses to invest. According to regulations on investment guarantees in the current Investment Law, in case the government has a lower incentive policy, investors will enjoy incentives for the remaining period of the project. This means that when the global minimum tax policy is applied, there is a possibility that MNEs can sue to apply investment guarantees.

4. Opportunities for Vietnam

Besides the challenges posed, the Global Minimum Tax also opens up many opportunities for the Vietnamese economy [2]:

First , standardize tax policy according to world standards. This is pressure and also creates motivation for Vietnam to improve the investment environment, increase its attractiveness as a favorable and attractive investment destination, not simply relying on tax incentives as before.

Second , the application of global minimum tax contributes to limiting the phenomenon of tax evasion, tax avoidance or transfer pricing... of MNEs in Vietnam. This is a long-standing problem when MNEs do very well in business, continuously expanding investment but have acts of transfer pricing and interest reduction to limit the amount of tax payable. A notable case is that CocaCola Vietnam has invested since 1994, continuously expanding its business activities but continuously reporting losses due to huge costs for imported raw materials from abroad and brand copyright costs for the parent enterprise.

Third , this tax can help prevent a "race to the bottom" on preferential tax rates to compete to attract investment between countries. Finally, to a certain extent, raising the tax rate to the minimum level of 15% for businesses can help Vietnam gain a certain amount of budget revenue and at the same time have more resources to implement it. Support in other forms (infrastructure, human resource training...) is intended to compensate investors for having to pay this
minimum tax.

5. Recommendations

To overcome the challenges and take advantage of the opportunities that the Global Minimum Tax brings, Vietnam needs:

First , Vietnam needs to quickly review and carefully study the impacts of this new regulation on foreign-invested enterprises, countries where the enterprises are headquartered, and developing countries that want to attract MNEs like Vietnam. Carefully review Vietnam's regulations and tax incentives from central to local levels to thoroughly assess the impacts of new regulations on Vietnam.

Second , conduct negotiations with MNEs currently enjoying tax incentives to come up with a plan to maximize the benefits of both parties. Propose other measures to encourage investment such as: reducing import and export taxes, extending land rent exemption periods and cost-based incentives, such as advertising costs, accelerated depreciation and especially research and development costs.

Third , the most basic and long-term solution is that Vietnam needs to reform administration, tax collection processes, reduce corruption... to improve the effectiveness of national governance to enhance the competitiveness of the economy.

Currently, countries around the world are acting very actively. Investing countries such as the European Union (EU), Korea, Japan have all approved amendments to apply the Global Minimum Tax to collect additional taxes from 2024. Investment-receiving countries such as Thailand, Malaysia, Indonesia also have drastic moves to retain this capital flow. Vietnam needs to act quickly to find appropriate solutions to minimize negative impacts, ensure the competitive position of the investment environment as well as increase the country's financial benefits./.

References:

1. General Statistics Office, Statistical year book of Vietnam 2023. / [Electronic source] - Available at. - URL: https://www.gso.gov.vn/en/statistic-book/ (Accessed on 25.03.2024). [in Vietnam].
2. Nguyen Phuong Linh, Scientific arguments for participating in the Multilateral Tax Agreement on implementing measures to prevent tax base erosion and profit shifting for Vietnam, 2018. / [Electronic source] - Available at. - URL: https://vnu.edu.vn/ttsk/?C2423/N33368/Information-on-Doctoral-thesis-of-Fellows-Nguyen-Thi-Phuong-Linh.htm (Accessed on 28.03.2024). [in Vietnam].
3. Organization for Economic Cooperation and Development (2024), Economic Impact Assessment of the Global Minimum Tax: Summary. / [Electronic source] - Available at. - URL: https://www.oecd.org/tax/beps/summary-economic-impact-assessment-global-minimum-tax-january-2024.pdf/ (Accessed on 15.04.2024). [in Vietnam].
4. Vietnam economic times (2024), Vietnam: 40 years of DoiMoi and 2045 vision. / [Electronic source] - Available at. - URL: https://en.vneconomy.vn/vietnams-doi-moi-journey-celebrating-40-years-and-crafting-a-vision-for-2045.htm (Accessed on 20.04.2024). [in Vietnam].