Global minimum tax rate to impact FDI firms in Vietnam
HCMC – At least 1,015 foreign direct investment (FDI) enterprises will be affected by the global minimum
Vietnam with trillions of tax incentives
Thanks to tax incentives, the annual income tax amount that an electronics company with many multi-billion dollar projects in Vietnam must pay ranges from 400 to 500 billion VND. Compared to the pre-tax profit (95-100 trillion VND), the company pays a corporate income tax rate of less than 5% in Vietnam.Also, another technology company is a 100% foreign-funded enterprise, with a corporate income tax of 158 billion VND in 2020 and a pre-tax accounting profit of over 5.7 trillion VND. Therefore, the company must pay less than 3% of the corporate income tax in Vietnam.
Compared to the ordinary tax rate of 20% in Vietnam, the corporate income tax rates of the two companies are so low. These are 100% foreign-funded enterprises that have received many tax incentives.
However, these foreign direct investment companies are concerned about the global tax policy implemented in early 2024: the global minimum tax.
It was born in October 2021. At that time, 136 countries participated in negotiations organized by the Organization for Economic Cooperation and Development (OECD). They agreed on two major "pillar tax reform solutions", including the second "pillar" with a global minimum tax rate of 15%. The highest parent company's annual revenue of 750 million euros per year (equivalent to nearly 20 trillion VND per year) will be applied.
It can be seen that the global minimum tax policy will benefit many large countries where companies invest overseas. They are mostly developed countries. Developing countries, like Vietnam, mainly receiving foreign direct investment - will face enormous difficulties.
The global minimum tax only targets 3% of active and tax-preferential projects in Vietnam
According to the State Administration of Taxation, about 3% of Vietnam's 36500 foreign direct investment projects/enterprises enjoy tax incentives, mainly for large projects located in industrial and economic zones.Therefore, the 15% global minimum tax policy only targets 3% of active and tax-preferential projects in Vietnam.
The income tax for ordinary enterprises in Vietnam is 20%, while the actual income tax for foreign direct investment enterprises is 12.3%. Especially, large foreign companies are only required to pay corporate income tax of 2.75% to 5.95%. Many large foreign direct investment projects are exempt from 10% corporate income tax throughout their entire lifecycle and will be reduced by 50% over the next nine years.
The tax rate in Vietnam is much lower than the minimum tax rate. Therefore, countries will require the highest parent company of enterprises with investment projects in Vietnam to pay residual taxes on an income lower than the minimum tax rate for Vietnamese subsidiaries.
Vietnam's Difficult Choice: Raising Tax Rates to a Minimum of 15% or Losing Tax Rights?
If Vietnam does not want to be subject to the above-mentioned difference tax by other countries, there is only one way to increase its corporate income tax rate to the minimum level of Pillar 2: 15%. This is a way for Vietnam not to tax other countries.But this is likely to conflict with the "Eagle", which has many large projects and enjoys many discounts in Vietnam. To appease investors, Vietnam will have to consider many solutions.
We can choose not to participate in the policy. However, even in this case, if Country A participates, it still has the right to impose a different tax on companies conducting business projects in Vietnam.
Anyway, this will be a new challenge for Vietnam's strategy of attracting foreign investment. Tax incentives will no longer be a preference. Therefore, Vietnam will persuade investors through non-tax incentives, or actively improve the investment environment, infrastructure, human resources, etc. The more difficult new path in attracting foreign investment competition is officially launched!
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