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The global minimum tax requires multinationals to bear a corporate income tax of at least 15 percent. If the countries where multinationals have offices or production bases impose tax rates below 15 percent, the corporations will have to pay the remainder to meet the 15 percent rate when they transfer profits to holding companies in home countries.

Offering preferential tax rates is one of the methods Vietnam has been using to attract foreign corporations. The current nominal corporate tax rate is 20 percent, but in fact, foreign invested enterprises (FIEs) pay 12 percent on average, while giant investors  pay far less.

With the global minimum tax, Vietnam has two options. First, continue the preferential tax rates promised to investors, which means that the remaining tax will be collected by the investors’ home countries. Second, raise the corporate income tax applied to multinationals to 15 percent.

The second option will be chosen. The Ministry of Finance (MOF) has submitted to the National Assembly a plan to implement the new tax scheme, expected to take effect by early 2024.

The problem is that if Vietnam raises the tax rate to 15 percent, it may face the risk of being sued by investors. However, analysts think the probability rate of that happening is not high. To claim for damages, the claiming parties must prove that the partner violated its commitments, causing damages, and that such damages occurred because of the violations.

If Vietnam doesn’t apply the tax rate of 15 percent, the investors will still have to pay tax to their home countries. 

Analysts thinks that investors would prefer to pay tax in Vietnam instead of being taxed in their home countries because if Vietnam collects more tax, it is likely to apply other measures to protect investors.

A question has been raised if Vietnam should continue to attract FDI (foreign direct investment) if it has to apply the global minimum tax scheme. The answer is ‘yes’. First, FDI brings jobs. Vietnam is in the golden population period and many people are expected to join the labor market.

Second, Vietnam prefers attracting long-term capital to short-term investment as it has learned from the 1997 Asian crisis, when short-term capital left Thailand, Malaysia, Indonesia and South Korea too quickly.

Third, the domestic financial market cannot satisfy the capital demand of the national economy. In such conditions, importing capital is a must.

As tax incentives will no longer be effective, Vietnam has to seek other measures.

Under the Investment Law, there are two measures used to attract FDI. First, offering investment incentives (exemptions/reductions in taxes, fees and charges). Second, supporting foreign investors by using the state budget to assist investors.

For many years, Vietnam has been using the first measure. However, from now, Vietnam has to think of the second measure.

In principle, Vietnam’s investment support policies must be ‘different’ from the tax remission policy applied in the past. But how different should the policy be?

It is still unclear. Which measures countries can and cannot apply will be determined based on consultancy and consensus. Countries will have to send tentative investment support measures to other countries for consultation.

It will be difficult work to compile investment support policies, and the work needs to be implemented with the cooperation of many parties.

Opportunity for Vietnam

Fair treatment is the principle of an investment support policy. This means that FIEs as well as Vietnamese enterprises in certain fields will also receive support.

In other words, domestic enterprises, paying either below or above 15 percent in tax, will have an opportunity to receive support under the nondiscriminatory treatment principle.

Such investment support measures will require better state administrative capability, but in return Vietnam can choose targets and address existing issues. This offers a great opportunity to attract investment more selectively, which can bring higher efficiency.

Manh Ha