If the CIT is raised to the minimum rate of 15 percent, Vietnam would be able to collect more tax but would face reactions from large foreign-invested enterprises. 

An electronics manufacturer operates multi-billion dollar projects in Vietnam. Thanks to substantial investment incentives, the total taxes the company pays every year is just VND4-5 trillion. Compared with a pre-tax profit (95-100 trillion), the CIT rate the company bears in Vietnam is less than 5 percent.

Another tech firm, also a 100 percent foreign owned company, reported that the total CIT it paid in 2020 was VND158 billion, while its pre-tax profit was VND5.7 trillion. As such, the CIT rate applied was less than 3 percent.

Both companies enjoy very low CIT rates compared with the common tax rate of 20 percent applied to normal enterprises in Vietnam. And both are foreign invested enterprises (FIEs).

Such enterprises may be worried about a new policy applied globally by early 2024 – the global minimum tax, which was proposed in October 2021.

At that time, 136 countries participated in negotiations organized by OECD (the Organization for Economic Cooperation and Development) and agreed to a two-pillar tax reform solution. 

Pillar 2 says the global minimum CIT would be 15 percent, and the revenue of one year of the ultimate parent company must be 750 million euros (VND20 trillion) to be covered by the policy.

The policy would have a significant impact on the subsidiaries of multinationals now present in Vietnam, like the two companies mentioned above, because their ultimate holding companies have global revenue exceeding the stated 750-million-euro level.

This means that if the global minimum tax policy is applied, electronics manufacturing corporations would have to pay 10 percent more tax in the country where their head offices are located, because the tax paid in Vietnam is less than 5 percent.

After deducting costs for salaries (10 percent) and tangible assets (8 percent), the company would have to pay more tax in the country where it has a head office, and the amount would be up to trillions of VND.

As for the technology firm, as it only has to pay 3 percent in tax in Vietnam, it would have to pay another 12 percent in the country where its head office is located, or about VND500 billion.

The amount of taxes the two companies would have to pay in the countries where their head offices are located will increase as their tangible assets continue to depreciate.

Analysts say the global minimum tax policy will benefit big countries with many corporations making outward investments. These are mostly developed countries. 

Meanwhile, developing countries like Vietnam will face difficulties.

Tax to target only 3% of FDI projects in Vietnam

According to the General Department of Taxation (GDT), of 36,500 FDI (foreign direct investment) projects in Vietnam, 3 percent of projects of enterprises enjoy tax incentives, and most are large projects in industrial zones (IZs) and economic zones (EZs).

As such, the 15 percent global minimum tax policy would target only 3 percent of operational projects enjoying preferential tax rates in Vietnam.

Vietnam’s usual CIT rate is 20 percent, but the actual CIT of FIEs is 12.3 percent. In fact, large foreign corporations only bear tax rates of 2.75-5.95 percent, because some large projects enjoy a CIT of 10 percent for the entire life of their projects, tax exemption for 4 years, and a 50 percent tax reduction in the following nine years.

The actual tax rates in Vietnam are much lower than the global minimum tax. As such, countries will ask the ultimate parent companies of the enterprises that have investment projects in Vietnam to pay the remaining tax.

Raising tax to 15% or lose the right to tax?

If Vietnam doesn’t want to lose the right to collect tax to other countries, it needs to raise the CIT to 15 percent, or equal to Pillar 2.

However, if it raises the CIT, it may trigger a conflict with major foreign investors that operate many investment projects in Vietnam and enjoy generous incentives.

In order to please investors, Vietnam has to think of many solutions. It could refuse to become a member of the policy. However, even in this case, if country A joins the policy, they still have the right to collect taxes from the companies that have investment projects in Vietnam.

A Prime Minister’s special taskforce has been set up to research and suggest solutions related to the OECD initiated global minimum tax.

The Ministry of Finance (MOF), when collecting opinions about the draft CIT Law, emphasized that Vietnam needs to attract foreign capital, and the countries’ implementation of Pillar 2 will have big impacts on Vietnam’s CIT preferential policy. 

It suggested to amend regulations related to CIT law, to erode the tax basis and serve the goal of attracting foreign investments.

“If Vietnam doesn’t take prompt actions or it is slow in deploying global minimum tax, it will miss the opportunity to obtain the right to tax,” according to the Ministry of Planning and Investment (MPI).

Luong Bang - Bach Han