GLOBAL MINIMUM TAX, COMPLIANCE WITH INTERNATIONAL COOPERATION FRAMEWORK AND HARMONIZATION WITH INVESTORS’ BENEFITS

Global Minimum Tax Policy is expected to take effect from January 1, 2024, with a minimum tax rate of 15%. It is expected that the execution effect of the new policy will have far-reaching and strong impacts on the operations of multinational corporations and foreign direct invested enterprises (FDI) in Vietnam.

What is the Global Minimum Tax?

a. Background:

The Global Minimum Corporate tax (or “Global Minimum Tax”) policy was initiated by the Organization for Economic Co-operation and Development (OECD) and approved by the heads of state of the G20 countries. This is the second pillar of the two main pillars of the Base Erosion and Profit Shifting (BEPS) initiative, including:

(i)         Distributing taxing powers, conducting a review of the distribution of profits, and developing global profit allocation principles;

(ii)        Ensure that all businesses engaged in international investments pay a minimum tax rate.

The policy was formulated in the context of extensive globalization, the development of new economic models that have a great impact on changing traditional business models. Meanwhile, multinational companies take advantage of opportunities to avoid tax obligations through profit transfer, transfer pricing activities, etc., seriously eroding budget revenues of countries taking advantage of many countries who implementing the policy of lowering preferential tax rates in order to retain foreign investors. This leads to a situation where Multinational Enterprises (MNE) benefit from high profits, but pay very little or no corporate income tax.

Currently 142/142 member countries, including Vietnam (participating as the 100th member) have agreed.

b. Contents of the Global Minimum Tax Policy:

Regarding the applicable tax rate, the Global Minimum Tax is agreed at 15%. Accordingly, MNEs with at least 2 years of consolidated revenue in the 4 consecutive years preceding the year of review reach at least EUR 750 million (or USD 800 million) based on the  financial statements of the corporation, will be taxed in addition to the difference in actual tax rates from the Global Minimum Tax.

Specifically, the country where the MNE’s supreme parent company is headquartered will be allowed to tax the supreme parent company in case the income of the subsidiary located in another country with a lower tax rate than the Global Minimum Tax (Income Inclusion Rule).

If the country of all parent companies has not yet adopted the Income Inclusion Rule (IIR), then countries with a intermediary company belonging to the corporation have the right to tax the intermediary parent company in that country on the income of its subsidiary in other countries that are taxed below the Global Minimum Tax (Undertaxed Payment Rule – UTPR).

The Subject to Tax Rule (STTR) allows the country where the income is generated (loan interest, royalties, and certain other payments) to tax it at the same rate with a minimum rate of 9% on the above income payments to an associate is taxable below this minimum tax rate of 9%. To exercise this right, countries must sign a multilateral agreement amending the provisions of agreements to avoid double taxation between countries.

According to the OECD model rule, countries with actual corporate income tax rates lower than the Global Minimum Tax are enacted by domestic legislation to collect additional taxes under the Qualified Domestic Minimum Top-up Tax (QDMTT). Investment recipient country will be given priority to collect CIT before the investment country applies a tax of at least 15%, ensuring:

–           To determine the minimum taxable income (after deducting basic income associated with tangible assets and labor) of member companies in a country (minimum domestic taxable income) in a manner equivalent to the global minimum tax;

–           Provisions to increase the domestic tax liability on the domestic minimum taxable income to the minimum amount charged to member companies in that country during the fiscal year;

–           To implement and manage to match the results specified in accordance with global minimum tax regulations and interpretive documents, provided that the country does not provide companies with any benefits which are directly related to the provisions of additional income tax.

However, there are some exclusions that are not subject to the Global Minimum Tax, including: (i)- The business does not meet the revenue and profit thresholds; (ii)- Enterprises have the actual tax rate higher than the minimum 15%.

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Discussion on the impact of the Global Minimum Tax on Vietnam

Vietnam is still an importer of foreign investment capital, with investment capital coming from 142 countries and territories and especially from Korea, Japan and Singapore thanks to its preferential tax policy (tax exemption up to 4 year, reducing up to 50% of tax payable in the next 9 years…), along with the advantages of stable political economy, large labor force…

Compared with the currently applied tax policy, which is quite competitive and attractive, the implementation of the Global Minimum Tax policy will certainly have a significant impact on capital flows and the operation of successful FDIs established and operating in Vietnam. Through the additional taxation mechanism, these corporations may be required to pay additional taxes to ensure the Global Minimum Tax of 15% applied. At the same time, administrative procedures and additional costs that need to be complied with may be applied to the target group within the scope of the policy.

This will also be a significant challenge for the State when it is necessary to re-adjust the domestic law system to ensure compliance with the Global Minimum Tax regulations, stabilize tax revenue while finding solutions to retain, ensure legal rights and interests as well as attractiveness to foreign investors. Because the current preferential tax policy is in danger of being forced to adjust and lose its effectiveness in competing to attract foreign capital flows.

Vietnam’s orientation towards the implementation of the Global Minimum Tax towards investors support and harmonization of interests

As for the impacts of the Global Minimum Tax applied in the coming time, the Government of Vietnam is actively researching solutions to solve it satisfactorily and promptly respond to the actual situation.

Firstly, extensive research and detailed and accurate assessment of the scope and extent of the impact of the Global Minimum Tax policy on the investment environment of the country. From there, come up with specific and appropriate solutions.

Secondly, to review, develop, complete and update the domestic law system. Legal policies need to pay attention not only in the field of Taxes, fees and charges but also need to expand in the field of Investment and related fields.

The purpose is “retaining existing investors, attracting new investors, ensuring equality between domestic and foreign investors, direct investors and indirect investors”. Towards “creating a level of trust between businesses and the Government so that businesses can continue to invest and expand investment in Vietnam; demonstrates progress and transparency in the tax administration system and business investment environment that is close to international standards”.