One of the proposed solutions by the Ministry of Planning & Investment of Vietnam to cope with the changes in global minimum tax starting from 2024 is to provide financial support to FDI enterprises impacted by the global minimum tax in Vietnam with budget money.
The global minimum tax is a worldwide tax policy unanimously applied by more than 140 countries, aiming to impose a minimum tax rate of 15% on multinational corporations operating in countries with a lower tax rate than 15% when these companies generate profits in countries with a lower tax rate.
Proposed by the Organisation for Economic Co-operation and Development (OECD) with the main purpose of enhancing fairness in investment attraction policies and reducing budget deficits of countries worldwide, the global minimum tax policy is expected to be applied in 2023, as proposed in 2019 and agreed upon by 130 countries through 2021.
However, due to the global economic impact of the Covid-19 pandemic and various other objective reasons, the implementation of the global minimum tax policy has been postponed to 2024 in the majority of participating countries, which account for over 90% of the world’s economic power.
The global minimum tax policy consists of two main pillars, including content that allows taxing the profits of certain multinational corporations with revenue exceeding 20 billion EUR per year and setting the global minimum tax rate at 15% for multinational corporations with total revenue of 750 million EUR or more in 2 years out of the 4 most recent consecutive years.
Firstly, it allows countries to tax a portion of the profits of multinational corporations with revenue exceeding 20 billion EUR per year (approximately 20.7 billion USD per year) and a pre-tax profit-to-revenue ratio of 10% or higher (the revenue threshold can decrease to 10 billion EUR per year after 7 years from the effective date of the Base Erosion and Profit Shifting – BEPS – policy). Accordingly, if large companies generate profits above the 10% profit margin in a country, that country will have the right to tax at least 20% of the excess profit.
Secondly, it unifies the global minimum tax rate at 15% for multinational corporations with total revenue of 750 million EUR (or 800 million USD) or more in 2 years out of the 4 most recent consecutive years. Therefore, if large companies enjoy a tax rate below 15% from the Governments of certain countries (mainly developing countries like Vietnam), they will be required to pay the minimum 15% corporate income tax rate to those countries.
The proposal to pilot support for FDI enterprises affected by the global minimum tax in Vietnam with money
Ministry of Finance estimated that the proposal will result in an additional tax collection of 14.6 trillion VND in 2024 – the first year Vietnam implements this tax type. However, such a significant tax payment may discourage companies from continuing to invest, maintain cooperation with Vietnam, and Vietnam’s domestic business community, which is in urgent need of development from foreign capital.
To mitigate the impact of the global minimum tax on the policy of attracting foreign investment into Vietnam, when companies are subject to the 15% minimum tax rate as in Column 2, the Ministry of Planning & Investment has proposed two pilot support options using the state budget, including support based on the total investment amount and support based on revenue.
However, these solutions also have disadvantages, such as the risk of creating an adverse effect when controlling incentives based on the investment threshold, which may benefit companies with large investments but ineffective operations, low revenue, or losses. Large-scale companies with high profitability on investment, like Samsung, may encounter adverse scenario.
The second option of support based on revenue may be questioned by the OECD as support related to additional tax obligations, meaning a solution to avoid complying with the 15% minimum tax policy. If Vietnam is determined to intentionally support companies in such tax policies, it may face sanctions from OECD, while the FDI companies still have to pay the minimum tax to Vietnam, but this time, they might not pay it to Vietnam.