Dang Ngoc Minh
Deputy Director-General, General Department of Taxation, Ministry of Finance
|Inside a workshop of the Global Powersports Manufacturing Incorporation in Giang Dien industrial park, Dong Nai province__Photo: Hong Dat/VNA|
Global minimum tax, initiated by the Organization for Economic Cooperation and Development, aims at dividing the taxation rights among countries, evaluating the distribution of profits of enterprises and setting principles for the global distribution of profits in order to ensure that all enterprises engaged in international investment activities pay the minimum tax rate. Currently, governments of many countries making or receiving investment have been taking drastic moves in formulating and enacting policies related to global minimum tax. For instance, in late 2022, the European Union officially approved a plan to apply the minimum tax rate of 15 percent from 2024; the Republic of Korea’s National Assembly has decided to apply global minimum tax regime from 2024; and the Japanese Government has also announced a tax bill, proceeding to enact global minimum tax from the 2024 fiscal year.
It can be seen that the above countries are those having poured large amounts of investment capital into Vietnam. Foreign investment recipients are, like Vietnam, considering formulation of policies in response to global minimum tax, such as the application of qualified domestic minimum top-up tax (QDMTT) to exempt multinational corporations from paying top-up tax on their subsidiaries’ income eligible for the tax rate lower than the minimum rate to the countries where their parent companies are based. These countries are also seeking financial support solutions to keep companies liable to global minimum tax staying in their countries while attracting new companies.
Therefore, the official application of the global minimum tax policy is anticipated to exert numerous impacts on foreign direct investment (FDI) enterprises in Vietnam. If Vietnam-based FDI enterprises continue to enjoy corporate income tax (CIT) incentives under current regulations, the countries where their parent companies are based will be able to collect the difference between actually paid CIT amounts and amounts calculated at the global minimum tax rate (15 percent). That’s why Vietnam needs to implement CIT policies in line with the regulations on global minimum tax so that Vietnam-based FDI enterprises currently entitled to tax incentives can pay such difference.
Vietnam’s current legislation on investment incentives
Under the 2008 CIT Law as well as its amendments and guiding texts, the common CIT rate is 20 percent. However, in order to attract investment, over the recent years, Vietnam has implemented investment incentive policies, including CIT incentives. Since January 1, 2014, the effective date of Law 32/2013/QH13 revising the 2008 CIT Law, CIT incentives are given for enterprises’ income generated from new investment projects (instead of incentives granted to legal entities (enterprises newly established from investment projects). Specifically, CIT incentives include:
(i) Preferential tax rate of 10 percent throughout the course of operation of projects: Eligible for this tax rate are income from activities in the fields of education and training, vocational training, health, culture, sports and environmental protection; income earned by enterprises from the implementation of projects to build social houses for sale, lease or lease-purchase to the subjects defined in Article 53 of the Housing Law; income generated by press agencies from publishing print newspapers, including also advertisements in print newspapers in accordance with the Press Law; income earned by publishing houses from publication activities in accordance with the Publication Law; and income generated by enterprises from forest planting, tending and protection and agro-forestry-fisheries activities in areas hit by socio-economic difficulties, etc.
(ii) Ten-percent tax rate for 15 years from the time of turnover generation, tax exemption for four years from the time of income generation, and 50-percent reduction of payable tax amounts in the subsequent nine years: These incentives are applicable to the application of high technologies on the list of high technologies prioritized for development investment in accordance with the Law on High Technology; production of composite materials, light building materials and precious and rare materials; generation of renewable energy, clean energy and energy from waste disposal; biotechnology development; environmental protection, etc.
(iii) Preferential tax rate of 15 percent throughout the course of operation of projects, which applies to income generated by enterprises engaged in crop production, livestock production and agro-fisheries product processing not in areas with difficult or extremely difficult socio-economic conditions.
(iv) Preferential tax rate of 17 percent for 10 years, two-year tax exemption, and 50-percent reduction of payable tax amounts in the subsequent four years: Entitled to these preferences are investment projects in areas with difficult socio-economic conditions provided in the Appendix to Government Decree 124 of 2008 and operating in the following fields: high-class steel production; production of energy-efficient products; manufacturing of machinery and equipment serving agro-forestry-fisheries and salt production; manufacturing of irrigation and drainage equipment; production and refining of feed for livestock, poultry and aquatic animals; and development of traditional trades (covering building and development of traditional trades in the production of handicraft and fine-art articles, processing of agricultural and food products, and cultural products).
(v) Two-year tax exemption and 50-percent reduction of payable tax amounts in the subsequent four years: These incentives apply to enterprises’ income earned from the implementation of new investment projects in industrial parks (except industrial parks located in inner districts of special-grade urban centers or centrally run grade-I urban centers and industrial parks located in provincially run grade-I urban centers).
(vi) Tax incentives for expanded investment projects, which apply to operating enterprises having expanded investment projects in the fields and geographical areas eligible for tax incentives. If meeting the law-specified criteria, these projects may choose to enjoy tax incentives applicable to the operating projects for the remaining duration of operation (if any) or enjoy tax exemption or reduction for additional income amounts earned from expanded investment activities. The tax exemption or reduction period for additional incomes earned from expanded investment activities is equal to that applicable to new investment projects in the same geographical areas and fields eligible for CIT incentives.
Worthy of note, the 2020 Investment Law allows application of higher CIT incentives for projects that are eligible for special investment incentives or supports. At the same time, Prime Minister Decision 29 of 2021 offered CIT incentives that are more preferential than those provided in the current CIT Law, which are:
- Nine-percent tax rate for 30 years, tax exemption for the first five years of operation, and 50-percent reduction of payable tax amounts in the subsequent 10 years, for the projects mentioned in Article 20.2.b of the 2020 Investment Law;
- Seven-percent tax rate for 33 years, tax exemption for the first six years of operation, and 50-percent reduction of payable tax amounts in the subsequent 12 years, for the projects listed in Article 5.2 of Decision 29; or,
- Five-percent tax rate for 37 years, tax exemption for the first six years of operation, and 50-percent reduction of payable tax amounts in the subsequent 13 years, for the projects listed in Article 5.3 of Decision 29.
The above regulations show that the common CIT rate of 20 percent is basically conformable with the global minimum tax rate. However, due to the application of lower tax rates or tax exemption or reduction policies in a certain period of time, the tax rate for investment projects of incentive-eligible FDI enterprises is actually lower than 15 percent. Therefore, in case of applying global minimum tax, the CIT incentive policy is no longer effective.
Other investment incentives
As per the 2020 Investment Law, in addition to CIT incentives, investment projects operating in the fields and/or geographical areas eligible for investment incentives will also be entitled to investment incentive and support policies, e.g., import duty exemption for goods imported to create fixed assets; raw materials, supplies and components imported to serve production activities in accordance with the law on import duty and export duty; and land use levy, land rent or land use tax exemption or reduction.
Moreover, investment projects are also entitled to incentives in different forms of investment support, such as support for development of technical and social infrastructure systems inside and outside the fences of investment projects; support for human resource training and development; and credit-related support.
Impacts of global minimum tax on investment activities
In the 2020-22 period, the total CIT revenue accounted for 18-21 percent of the total domestic revenue of the state budget; particularly, the total CIT paid by FDI enterprises represented 7.5-8.5 percent of the total domestic revenue of the state budget, and made up 39-41 percent of the total CIT revenue.
If Vietnam does not apply global minimum tax, the state budget revenue from CIT will not be affected. However, if applying the QDMTT, Vietnam may impose top-up CIT on Vietnam-based FDI enterprises currently enjoying the tax rate lower than 15 percent, which is expected to help increase the state budget revenue. If no top-up CIT is imposed in Vietnam, all revenue amounts eligible for tax incentives for enterprises will be remitted into the budgets of the developed countries that have enterprises investing in Vietnam. Furthermore, when Vietnam applies global minimum tax to local enterprises making offshore investment that are liable to global minimum tax and have subsidiaries in other countries and have the actually paid CIT amount lower than the minimum level, it will be able to collect top-up CIT from these enterprises, thereby increasing state budget revenues.
Regarding impacts of global minimum tax on Vietnam-based FDI enterprises, according to initial statistics from the Global Enterprise Database, at present, there are around Vietnam-based 1,017 FDI enterprises whose parent companies are liable to global minimum tax. As revealed in the 2022 account-finalization of CIT of enterprises, around 90 economic groups are likely to be affected by global minimum tax once this tax is applied from 2024. If all other countries commence applying global minimum tax from 2024, the countries accommodating parent companies of economic groups will be entitled to collect the tax difference in 2024 which is estimated at VND 10-20 trillion.
Regarding Vietnam’s offshore investment, statistics released by the Ministry of Planning and Investment show that by March 20, the country has 1,625 offshore investment projects with the total investment amount of nearly USD 21.9 billion. Of these projects, 141 are of state-invested enterprises with the total investment amount of nearly USD 11.67 billion, accounting for roughly 53.3 percent of the country’s total investment. Offshore investment is made mainly in the mining industry (31.8 percent) and agro-forestry-fisheries sectors (15.7 percent), while the main investment recipients include Laos (with the received capital amount representing 24.5 percent), Cambodia (13.5 percent), Venezuela (8.3 percent), etc.
Hence, when Vietnam applies the general regulation on minimum tax, it may impose additional taxes on local enterprises if they are liable to global minimum tax on offshore investment and currently enjoy the actual tax rate lower than 15 percent in other countries.
Vietnam’s response to impacts of global minimum tax
To deal with the above problems, Vietnam needs to proactively implement the Global Minimum Tax Program through issuing CIT policies in line with the regulations on global minimum tax for FDI enterprises currently enjoying tax incentives in Vietnam to pay the difference between actually paid CIT amounts and amounts calculated at the global minimum tax rate. Specifically, it is necessary to supplement the regulations on global minimum tax for application in Vietnam as follows:
Rules on top-up CIT should be enacted for application to Vietnam-based FDI enterprises in accordance with the regulations on global minimum tax (reaching the 15-percent rate according to the QDMTT) to respond to global minimum tax of countries making investment in Vietnam (applying global minimum tax from 2024).
It is also a need to issue regulations on global minimum tax, including the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR) for application to Vietnamese enterprises making offshore investment and other enterprises liable to global minimum tax in order to collect the difference (if any).
The above regulations will help institutionalize the contents of the Political Bureau’s Resolution 07 of 2016 on improving the state budget collection policy in association with the restructuring of state budget revenues toward covering all revenue sources and expanding revenue bases, particularly new revenue sources, in conformity with international practices, increasing the proportion of domestic revenues, ensuring a reasonable proportion between indirect taxes and direct taxes, and properly using taxes collected from property, natural resources and environmental protection activities, etc.
Moreover, it is suggested to adopt direct or indirect financial support solutions that are not contrary to the global minimum tax rule, thus ensuring conformity with international commitments and practices, publicity and transparency, and mitigation of adverse impacts on the investment climate.
Those support solutions may cover support for enterprises in the process of investing in basic infrastructure facilities for production activities or investing in the formation of fixed assets for industrial production and environmental protection activities; housing support for workers; support in terms of social insurance and health insurance for employees; and support for research and development, and application of high technologies and environmentally friendly technologies. To this end, the State should allocate financial and land resources and train human resources with a view to maintaining the attractiveness of and stabilize the investment environment.-