Progress Report: Vietnam’s Response to the Global Minimum Tax

The global minimum tax (GMT) has put many emerging markets in a spin. Whereas tax incentives were once one of their greatest assets, the GMT looks set to limit how effective these can be moving forward. Here’s how Vietnam is approaching this new paradigm.

In terms of its economic development, Vietnam wasn’t much when the Republic of Korea’s Samsung set up shop in the country’s north in 2009. Its gross domestic product was just US$99 billion, which isn’t even a third of the US$360 billion or so that it is now.

Thai Nguyen and Bac Giang, which are now the backbone of Samsung’s global manufacturing operations, were little more than sleepy backwaters that relied on farming and agriculture to support their relatively small populations.

Fast forward 15 years and northern Vietnam is a hive of manufacturing activity.

Since its first project was approved, Samsung has invested US$18 billion in building its manufacturing supply chain in the region and has become incredibly important to the booming Southeast Asian nation – it now accounts for nearly 20 percent of Vietnam’s exports and employs over 100,000 people.

Undoubtedly, in terms of Vietnam’s economic development, Samsung has been pivotal.

But it has not been a one-way street. Vietnam has provided for Samsung too. Its low-cost and abundant labor, proximity to China, and its sheer will and determination to develop have been integral to Samsung’s growth into a world leader in electronics products.

That said, there is one other crucial element that has driven Samsung’s investment in Vietnam: tax incentives.

For some time, Vietnam has offered foreign investors very generous tax breaks to encourage them to open factories and plants around the country. This, in turn, has helped Vietnam to cement its place as an important block in global supply chains and a major global manufacturing hub.

But what has worked in the past may not be possible in the future. The tax incentives that have drawn businesses like Samsung or Nike or Apple to Vietnam are now under threat from the global minimum tax (GMT).

Spearheaded by the Organization for Economic Cooperation and Development (OECD), the GMT will see multinationals with revenue over EUR 750 million (US$820 million) pay tax of at least 15 percent, regardless of where their operations are. This means that if Vietnam taxes multinationals like Samsung less than 15 percent, the difference will be collected in the multinational’s home country. In Samsung’s case, that would be South Korea.

This isn’t necessarily a bad thing. If tax breaks are replaced with increased infrastructure spending or even other alternative investment incentives, foreign investors could stand to benefit more broadly.

At this stage, however, Vietnam has still not set anything in stone, and it is coming down to the crunch. For the EU and South Korea, the GMT will apply from the beginning of 2024 giving Vietnam just a little over six months to define exactly how this challenge will be met.

See also: The Global Minimum Tax and Potential Implications for Vietnam

The tax breaks that powered Vietnam’s development

It would be difficult to deny that tax incentives have been instrumental in attracting large tranches of foreign direct investment to Vietnam. This is particularly true of companies investing in priority sectors like science and technology or software production.

Mostly, these tax incentives follow a fairly standard timeline – four years of not paying tax at all, and then nine years of paying tax at half the standard rate. The standard tax rate is currently 20 percent.

Individual provinces, however, can also provide their own tax breaks. In the case of Samsung, Thai Nguyen gave the conglomerate an extra three years at half the standard rate.

Under these conditions, Samsung didn’t pay any tax until 2013, at which point it started paying tax at half the standard rate (10 percent), which it will continue to do until 2025. Only then will it shift to paying the full corporate income tax rate of 20 percent.

This will change, however, when the GMT comes into force with the 5 percent difference being collected by the Republic of Korea next year if there are no changes made to tax law domestically.

Samsung will not be the only big-name impacted either.

It’s estimated that 335 foreign-invested enterprises, mostly in manufacturing and processing, are paying less than 15 percent tax. Among them are leading brands like Intel, LG, Bosch, Sharp, and Foxconn.

Shifting gears away from tax incentives in Vietnam

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Tax offsets and cash support have been floated as one possible way to make Vietnam a more attractive investment destination, though it may take some work to ensure these incentives comply with OECD rules and regulations.

It has also been suggested, however, that the costs of the GMT could also be offset by simply improving the ease of doing business in Vietnam.

Infrastructure, administrative hurdles, regulatory barriers, and human resources in terms of both quantity and quality are all key areas that foreign firms look at when investing in the country. With tax incentives limited, these will likely play an even more central role in the decision-making process.

Therefore, designed to cut short the race to the bottom, the global minimum tax could, in fact, steer Southeast Asian economies into a race to reform. This could pay dividends not just for big multinationals but for small and medium enterprises as well.

Indeed, in many ways Vietnam could benefit over the long term, however, that is only if the extra tax revenue generated stays in the country.

Legal and regulatory reform needed

With respect to the GMT in Vietnam, companies like Samsung have been both very active and very vocal about their support of a Qualifying Domestic-Minimum Top-Up Tax (QDMTT). This initiative laid out by the OECD, would ensure that the increased tax due to be paid by foreign firms to bring them up to 15 percent would remain in Vietnam as opposed to being collected in a multinationals’ home country.

But as it stands, little progress has been made toward implementing the QDMTT and if it is not in place by the end of the year, then Vietnam will miss out on millions of dollars in tax revenue.

The QDMTT is not the only change that needs to be made, either.

International Trade Specialist, Tran Thanh Hai, noted in an opinion piece in VN Express earlier this year that implementing the GMT would mean modifying the Law on Investment, the Law on Enterprises, and the Law on Corporate Income Tax as well as a slew of other smaller Decrees and Circulars.

“This is a big challenge in the context that the process of building and amending legal documents in our country takes a long time,” he wrote.

But time is running out. Amendments to these laws need to be before the National Assembly by October 2023 if they are to be implemented in January 2024. This leaves lawmakers about five months to get their house in order or risk losing both the ability to drive investment through tax incentives and the additional revenue the GMT is set to create.

The current state of the GMT in Vietnam

On April 22 of this year, Vietnam’s Prime Minister Pham Minh Chinh told a conference of foreign investors that Vietnam would come up with alternative investment incentives for foreign firms beyond tax breaks. He did not, however, elucidate on exactly what those incentives would be.

A solution to this challenge, which state media aptly dubbed a ‘head-scratcher’ back in March, still appears to be alluding policymakers. But regardless, the deadline is drawing closer.

As it stands, it has been reported that the tax authorities have said the GMT will be in force in Vietnam by January 1st, however, there does not seem to be a clear roadmap in place nor a timeline for implementation as yet. In this light, foreign firms, for now, will need to sit tight and wait patiently as the decision-making machine continues to move through the motions.

They can, however, prepare for any eventuality with support from the tax professionals at Dezan Shira and Associates.

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