New rules aim at eliminating tax havens

On October 8, 2021, the global cooperation forum on Base Erosion and Profit Shifting (BEPS) program, of which Vietnam is a member, issued a statement on the two-pillar framework to address challenges arising from the digital economy with the consensus of 136 member countries.

Of the two pillars, Pillar 2, which sets the global minimum tax rate of 15 percent, is expected to be applied from 2023. 

The principle allows investing countries to levy a 15 percent minimum tax rate on income that enjoy tax reductions or exemption in the investment receiving countries.

The General Department of Taxation (GDT) said this would have a big impact on developing countries like Vietnam.

According to GDT Deputy General Director Dang Ngoc Minh, the principles have been figured out, but many issues remain questionable - for example, which fields would be excluded and which fields would apply the principle.

Many large corporations register their investments in Vietnam through companies established in “tax shelters” such as Hong Kong, Singapore and British Virgin Islands, where the tax rate is zero percent.

With the new policy, Vietnam will have to be sure that the corporate income tax is equal or higher than the minimum tax rate of 15 percent applied all over the globe.

Analysts say that the new rule targets these tax havens.

American enterprises invest in Vietnam, but they make the investment from tax havens such as British Virgin Islands. When the rule is applied, if Vietnam offers tax remissions for investors, the US will impose a tax of 15 percent on projects of this kind.

Possible impact

According to GDT, of 36,500 foreign invested projects in Vietnam, 3 percent of the projects/enterprises enjoy tax incentives. They are mostly large projects located in industrial zones (IZs) and economic zones (EZs). As such, the 15 percent minimum tax rate would only target 3 percent of enterprises in Vietnam.

The general corporate income tax (CIT) in Vietnam is 20 percent, while the real CIT that foreign invested enterprises (FIEs) have to pay is 12.3 percent. Meanwhile, large foreign corporations bear tax rates of between 2.75 percent and 5.95 percent (many foreign invested projects can apply the preferential CIT rate of 10 percent only for the whole life of projects, and enjoy tax exemption for 4 years and 50 percent reduction in the next nine years).

“As such, the tax rates applied to them are very low if compared with the 15 percent minimum tax rate that countries plan to apply,” Minh explained.

The global minimum tax policy would reduce the efficiency of Vietnam’s tax incentives offered to FIEs. The representative of GDT warned that if Vietnam continues to offer tax incentives, it would directly “sponsor” developed countries such as the EU and US.

The new policy would also affect existing FDI (foreign direct investment) projects in Vietnam and reduce the power of new investors.

“When considering a new project, investors would consider many factors, including tax incentives. They will thoroughly consider the minimum tax policy,” he said.

The attraction of large-scale hi-tech FDI projects would face challenges, which would affect Vietnam’s export and international payment balance.

“Large corporations like Samsung make products for export. When exporting products, their forex reserves are left in Vietnam. If there is no such item, this will immediately affect the payment balance,” he explained.

However, challenges always come with opportunities. If the global minimum tax rate policy is applied, Vietnam would be able to collect higher taxes from Vietnamese outward investment projects as well as investment projects in Vietnam.

In the long term, Vietnam, as a member of BEPS, will have to raise the CIT rate to 15 percent at minimum and this would bring higher collections. 

The current tax collection from FIEs is VND206 trillion with an average tax of 12.3 percent. If the tax rate is raised to 15 percent, Vietnam would collect hundreds of trillions of dong from the removal of tax incentives.

Nguyen Mai, chair of the Vietnam Association of Foreign Invested Enterprises (VAFIEs), also said that the global minimum tax policy would bring both challenges and opportunities, and that Vietnam needs to take initiative in joining the new mechanism and take full advantage of the new opportunity to accelerate its reform and create a new driving force to attract higher-quality FDI.

Duy Anh