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Global Minimum Tax (GMT) regulations will not reduce Vietnam's investment attractiveness, but focusing on overcoming core issues and considering offering alternative incentive packages is necessary.
GMT will not reduce Vietnam's investment attractiveness
The Organization for Economic Co-operation and Development's (OECD) introduction of model rules to combat global tax base erosion (Pillar 2) on GMT regulations has a strong impact on emerging markets and this principle has became a hot topic in the past two years.
Financial economists say that GMT will not reduce Vietnam's investment attractiveness and is unlikely to have a significant impact on foreign direct investment (FDI) flows into Vietnam in the near future. Because Vietnam also has many other competitive socio-economic factors besides taxes.
We would like to add some noteworthy points from the perspective of tax consultants and based on our experience in supporting foreign investors to penetrate the Vietnamese market over the past many years.
The GMT applies to businesses where the ultimate parent company has a consolidated turnover exceeding the threshold of 750 million euros and gives the tax authorities of those companies the right to impose additional tax at the rate of additional tax multiplied by the excess profit threshold. This method of imposing taxes has the potential to significantly impact potential FDI inflows from large investors that Vietnam is seeking to attract.
According to the Ministry of Finance, more than 1,000 FDI enterprises in Vietnam have parent companies that are subject to GMT application. Whether or not this will negatively affect the decision to invest in Vietnam of large international corporations is difficult to predict.
First, GMT will neutralize key tax incentives that most large foreign investors care about. If tax incentives in Vietnam are disabled and no appropriate measures are taken, other countries will benefit from the imposition of additional taxes and collect billions of dollars in taxes that would otherwise flow to the government budget. Vietnam.
Second, we need to look at the problem from the perspective of the Vietnamese Government. Pillar 2 is implemented by the European Union, the United Kingdom and South Korea in 2024. Malaysia and Thailand also implement Pillar 2 in 2024 and 2025 respectively. Therefore, Vietnam must have the most consistent measures to protect its taxing rights and maintain investment capital flows by offering other preferential policies.
In August 2023, the Ministry of Finance issued a Draft Resolution on applying GMT for public comments before submitting to the National Assembly for approval in October 2023. The two main rules proposed in this draft are the Qualified Domestic Minimum Top-Up Tax (QDMTT) targeting foreign investors in Vietnam and the regulation on income aggregation subject to Income Inclusion Rule (IIR) targeting Vietnamese investors abroad.
On the other hand, no alternative incentives have yet been officially announced to offset the additional taxation of foreign invested enterprises. Current information about new preferential policies is still very vague and the public only knows that those policies relate to land, R&D costs and administrative procedure reform.
Finally, we can look from the perspective of foreign investors. In the process of supporting foreign investors in planning their investment strategies in Vietnam, the most common questions we often encounter are about preferential policies and tax refunds.
Focus on overcoming core problems
As long as we have a little doubt about the conditions for tax incentives, we will immediately see that investors' interest in the Vietnamese market has decreased significantly and almost ignored the fact that Vietnam has many Competitive advantage in labor costs, young human resources and strategic position in the Asia-Pacific region.
In addition, foreign investors and our customers have given many candid comments about the challenges they encountered during the market research and operational stages. Some notable comments include that the current minimum wage does not reflect actual living standards, which often leads to labor disputes between foreign-invested enterprises and factory workers.
Foreign investment companies can only rely on statutory data and are not obliged to have a clear understanding of workers' basic living standards. To overcome this situation, the minimum wage must be periodically reviewed and adjusted to suit the basic living standards of workers.
The value added tax (VAT) refund process has been extremely slow in recent times. VAT refund is one of the important elements in the cash flow planning strategy of an export business or a new investment project. Simplifying and speeding up the VAT refund process is an alternative incentive that Vietnam can consider, in addition to other business support policies.
Finally, although Vietnam has an Anti-Corruption Law, its actual implementation still does not meet investors' expectations and that is one of the main reasons why foreign investors are concerned about what to decide.