The emergence of the Global Minimum Tax (GMT) has triggered a significant paradigm shift in the realm of international taxation, particularly affecting Foreign Direct Investment (FDI) in Vietnam. Understanding the implications of GMT is crucial in navigating the evolving landscape of taxation. With its profound impact on various aspects of the global economy, GMT's significance in the context of Vietnam's taxation landscape cannot be overstated. This introduction sets the stage for a comprehensive exploration of the intricate effects and implications of GMT on foreign investment in Vietnam.

The Effects of GMT on FDI in Vietnam

GMT's Impact on Vietnam: Reshaping Taxation and Foreign Investment

The introduction of the global minimum tax (GMT), also known as the Pillar 2 solution, carries significant implications for Vietnam's tax landscape. In December, the European Union officially ratified a directive, stipulating that companies must adhere to a minimum tax rate of 15% starting in 2024. Countries with substantial foreign investments in Vietnam, such as South Korea and Japan, are set to implement new tax policies or announce draft tax reforms, marking a shift towards GMT for the fiscal year 2024.

In Vietnam, the state budget revenue from Corporate Income Tax (CIT) in the years 2020-2022 ranged from 18% to 21%. Foreign Direct Investment (FDI) enterprises contributed between 7.5% and 8.5% of this revenue. If the global minimum tax is not applied, Vietnam may introduce top-up CIT for FDI enterprises currently enjoying lower tax rates, thus bolstering state budget revenue. However, if GMT is applied, revenue eligible for tax incentives will be redirected to the budgets of more developed nations. Furthermore, when GMT is applied to local enterprises engaged in offshore investment with subsidiaries in other countries and paying CIT below the minimum threshold, Vietnam can collect top-up CIT, thereby augmenting state budget revenues.

Vietnam's alluring corporate income tax incentives have been pivotal in attracting FDI, with around 335 projects in the processing and manufacturing industries enjoying tax rates below 15%. These projects collectively represent 30% of the total FDI inflow, estimated at $131.3 billion. The country houses 619 multinational enterprises (MNEs) with 1,017 subsidiaries that reported consolidated revenue exceeding 750 million euros in 2021. As of 2024, if GMT comes into effect, 112 MNEs in Vietnam will be directly affected, with South Korea and Japan collectively collecting over $462.5 million in additional taxes.

As of March 20, data provided by the Ministry of Planning and Investment reveals that Vietnam currently has 1,625 offshore investment projects, among which 141 state-invested enterprises constitute a significant portion, accounting for 53.3% of the nation's total investment. The application of GMT could lead to additional tax obligations for local enterprises involved in offshore investments.

GMT Impact on Tax Incentives and Strategies for Attracting FDI

First and foremost, the adoption of GMT measures is set to nullify the very tax incentives that have consistently piqued the interest of significant foreign investors. Presently, numerous corporations in Vietnam benefit from tax incentives ranging from 2.75 to 5.95 percent, considerably lower than the stipulated 15 percent tax rate. The looming application of GMT in 2024 will necessitate tax rate adjustments for at least 1,015 Foreign Direct Investment enterprises operating within Vietnam.

Discussion surrounding the global minimum corporate tax reveals the potential adverse impacts on multinational companies, including those actively investing in Vietnam. In response to this impending change, experts suggest that Vietnam should formulate an investment policy geared towards attracting strategic foreign investors.

To mitigate the implications of global minimum tax (GMT) on foreign enterprises, Vietnamese tax officials are actively exploring tailored support mechanisms. The General Department of Taxation (GDT) under the Ministry of Finance is engaged in discussions concerning resources that can be allocated to assist Foreign Invested Enterprises (FIEs) impacted by the impending GMT regulation, slated for implementation in early 2024. Vietnam's extensive list of foreign partners, hailing from 142 countries and territories, with a significant concentration in East Asia, underscores the importance of these support measures. The forthcoming support is designed to align with each enterprise's unique characteristics, helping them compensate for the tax incentives affected by the GMT regulation. Enterprises will have access to this support mechanism through registration procedures, following the fulfillment of their tax obligations. Proactively participating in the GMT implementation process is crucial for Vietnam's international integration efforts, tax system reforms, and overall economic and social development.

Implications of GMT from the Tax Administration Perspective

Implications of GMT under Tax Administration

The implementation of GMT has far-reaching implications for tax administration in Vietnam, including:

• Impact on Revenue: GMT introduces a minimum global tax rate that corporations must adhere to. This adjustment can positively impact Vietnam's tax revenue as companies may find themselves paying higher taxes, thereby bolstering the state budget.
• Changes in Taxation: Tax authorities in Vietnam are tasked with adapting to the new tax regulations, aligning them with global standards, and ensuring that multinational enterprises (MNEs) comply with GMT rules. This adjustment may necessitate changes in tax codes and policies to maintain conformity with evolving international tax standards.
• Monitoring Foreign-Invested Enterprises: Vietnam's tax administration will need to intensify monitoring of foreign-invested enterprises (FIEs) to assess their tax liabilities under the GMT framework. FIEs, which often benefit from various tax incentives, may experience changes in their tax obligations, necessitating a reassessment.
• Policy Reforms: The introduction of GMT in Vietnam is poised to expedite policy reforms and intensify the country's international integration efforts. Tax administration plays a pivotal role in implementing and enforcing these reforms to ensure effective compliance with global standards.

In summary, the implications of GMT under tax administration in Vietnam encompass changes in revenue, adaptations in taxation policies, heightened monitoring of FIEs, and the imperative need for policy reforms to harmonize with evolving global tax standards.

Recommendations for Foreign Investors in Vietnam

As foreign investors navigate the evolving tax landscape shaped by GMT, several strategic considerations come to the forefront:

• Policy Follow-Up and Advocacy: Foreign investors should closely follow the development of GMT regulations and advocate for policies that align with their business objectives. Staying informed and actively participating in policy discussions can help businesses adapt effectively.
• Proactive Impact Assessment: Each business needs to proactively assess the impact of GMT, particularly at the group level, to prepare for impending policy changes. Understanding how GMT affects their tax obligations and operations is instrumental in developing strategies to manage this new tax era effectively.

Final Thoughts

In summary, the advent of Global Minimum Tax (GMT) heralds a transformative era in international taxation and its far-reaching effects on foreign direct investment (FDI) in Vietnam. This new global tax landscape carries implications for both local and foreign companies, from revenue changes to policy reforms. Navigating this shift in tax rates and administration is complex, making expert guidance and compliance support vital. Viettonkin is your partner in successfully managing taxation and compliance matters in the GMT era, ensuring that your foreign investment ventures in Vietnam thrive.