Implementation of Global Minimum Tax from January 1, 2024

To combat base erosion and profit shifting, on July 9, 2021, finance ministers and central bank governors of the G20 agreed on the principles of the Two-Pillar Solution to address tax challenges arising from the digitalization of the economy (referred to as the Global Minimum Tax Agreement). The second pillar establishes a global effective corporate income tax rate (ETR) of 15% for multinational companies, aimed at preventing these companies from shifting profits to low-tax jurisdictions to avoid income taxes. On November 29, 2023, the National Assembly of Vietnam officially passed a resolution to implement an additional corporate income tax in line with the global minimum tax regulations. The tax rate of 15% will apply to multinational companies with consolidated revenue of 750 million euros (approximately 800 million USD) or more over a two-year period in the four most recent years. The resolution will take effect from January 1, 2024, applying to the 2024 fiscal year. According to preliminary calculations by the General Department of Taxation, over 120 foreign corporations (with more than 1,000 companies) investing in Vietnam will be affected by this regulation.

Vietnam's Dilemma

Experts assess that the minimum tax rate of 15% will impact Vietnam, as the country currently offers various tax incentives to foreign direct investment (FDI), leading to effective tax payments below 15%. This new tax rate raises concerns about Vietnam's attractiveness to FDI companies, as tax exemptions and reductions have been key factors in attracting foreign capital. For many years, tax incentives have been crucial in attracting FDI in Vietnam. The standard corporate income tax rate has been reduced from 32% to 28%, then 25%, 22%, and currently stands at 20%, alongside many policies offering corporate income tax incentives. For eligible companies, both in terms of tax rate and duration, the effective tax rate is below 15%.

Under the GMT agreement, FDI companies that fall under its scope will have to pay additional taxes to the home country of their ultimate parent company, directly affecting their capital and business plans, as well as the attractiveness of Vietnam's investment environment. As a result, if investors become less interested in Vietnam due to the imposition of additional domestic taxes, they will begin to focus on other advantages that different countries offer: infrastructure, labor costs, government support, legal protections, streamlined administrative procedures, and new incentive policies. These are areas where Vietnam has weaknesses in attracting FDI, despite significant improvements in recent years.

However, the degree of impact from the GMT in Vietnam will depend on the investment goals of the companies, the level of incentives through tax rate reductions and deductions, as well as their global consolidated revenue. The GMT agreement is expected to have both positive and negative effects on Vietnam.

Adjusting Policies to Adapt to the New Context

• To effectively implement the GMT, it is necessary to develop and refine related regulations.
• To offset some of the impacts of the GMT, Vietnam needs appropriate policies and measures for the two groups of investors affected.
• A prompt review, update, and amendment of legal regulations related to FDI attraction is essential.
• Proactively enhancing the effectiveness of international economic integration.
• Urgently prioritizing the improvement of tax management capacity and enhancing the investment-business environment.
• Establishing a roadmap for the phased implementation of the GMT in Vietnam.

>>> VNU UNIVERSITY OF ECONOMICS AND BUSINESS
Assoc. Prof. Dr. Nguyễn Anh Thu
Dr. Nguyễn Thị Vũ Hà
Dr. Nguyễn Thị Thanh Mai