While other Southeast Asian economies such as Singapore and Thailand have announced they are deferring implementation of the OECD global minimum tax initiative to 2025, Vietnam is keen to apply the tax this year. Its introduction was formally approved by the Vietnamese National Assembly on Nov. 29 by a resolution passed with over 93% of votes in favor.
While there’s no specific legal guidance on GMT implementation, there currently seems to be no difference between its prospective application and international practice.
The concept of a GMT has been agreed internationally since October 2021 under the Organization for Economic Cooperation and Development’s two-pillar solution to the tax challenges arising from digitalization and globalization. An effective corporate tax rate of 15% was proposed by the OECD as a minimum standard for large multinational enterprises with revenue exceeding 750 million euros ($824 million) in two of four consecutive years.
Vietnamese MNEs would be required to comply with the GMT from 2024 and top up corporate income taxes on behalf of their overseas subsidiaries. It’s estimated that an additional 14.6 trillion Vietnamese dong ($600 million) yearly would be collected in terms of topped-up taxes under GMT implementation.
GMT is also aimed at reducing profit shifting within MNEs because tax gaps would be narrowed, and the advantages of tax havens would no longer be relevant when the 15% minimum tax rate takes effect.
In addition to lower labor costs and political stability, tax incentives are a major feature that Vietnam offers to attract foreign investment. Despite the 20% standard corporate income tax rate, the application of most incentives would result in effective corporate tax rates lower than 15% or even in tax exemption, but such benefits might be phased out when the GMT applies.
Because topped-up tax will be considered and submitted in home jurisdictions where MNEs are headquartered, Vietnamese tax incentive policies, especially those offered to large MNEs, would no longer appear attractive when GMT simultaneously takes effect on a global scale.
In terms of economic development, Vietnam is heavily dependent on foreign direct investment, whose revenue accounts for over 70% of the country’s exports. The country has also been putting major effort into emerging as the alternative global manufacturing location to replace China, and the GMT may consequently become a factor slowing down this process.
The tax authority estimated that about 112 MNEs in Vietnam will be impacted when the GMT takes effect and potentially reduces the country’s competitiveness. Further, an approximate 30% of Vietnam’s FDI from large MNEs such as Samsung Electronics Co., Intel Corp., LG Corp., Robert Bosch GmbH, will also be impacted by the GMT. MNEs would need to carefully consider this GMT factor in their future planning.
Samsung, which is the largest FDI enterprise in Vietnam, has an estimated additional tax obligation of up to $6.5 billion for the whole tax incentive period that the company has benefited from in Vietnam up to 2024. This amount will be contributed to South Korea’s National Tax Service once the GMT takes effect.
Unless compensation for this impact can be considered by the Vietnamese government, Vietnam would lose its competitiveness as well as tax revenue it should have been entitled to, and future potential investment opportunities.
It’s noteworthy that other countries, when considering the impact of the GMT, have proposed compensatory initiatives to keep investors in the short term while assessing the details of the effect of the GMT in the long term. For example, the Board of Investment of Thailand is considering the provision of cash grants to qualifying investors to compensate for the impact of the GMT.
Measures to alleviate the impact of the GMT should therefore be considered, and they need to be both effective and timely. A draft resolution dated Aug. 16, 2023 supporting high-tech companies, focusing on large projects and mentioning investment support in terms of tax credits or cash grants, has been considered by the government.
However, the business community—not only the high-tech giants—would require stronger and more comprehensive support as well as legal guidance.
First, it’s necessary to establish expert teams to collaborate with business communities to assess and evaluate the impact of the GMT on taxpayers in Vietnam.
Second, legalization guidance could be implemented into current tax law. Solutions for alternative incentives also could be considered and introduced at the same time to retain a favorable environment for investors and demonstrate commitment from the Vietnamese government to maintaining the investment environment.
In terms of such alternative compensation, both financial support and Pillar Two-focused solutions (such as policies on the income inclusion rule and qualified domestic minimum top-up tax) should be considered and applied simultaneously.
From a business perspective, the executives of MNEs should be aware of the GMT and study the specific impact on their businesses, collaborating with Vietnamese legislators to arrive at appropriate and realistic resolutions.
The GMT is inevitable and its application, despite certain benefits, will have significant impact on the Vietnamese tax system. Vietnamese legislators are recommended to take immediate action to carefully study its effects and provide timely measures to ensure that Vietnam remains attractive to foreign investors.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Do Vu Bao Khanh is Tax and Transfer Pricing Senior Manager of Grant Thornton Vietnam.
Source: Bloomberg Tax