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As the global economy expands in general and to maximize profits, reach new markets in particular, many multinational corporations have shifted their operations to countries with lower or no corporate taxes in order to avoid corporate income tax (the “CIT”). This practice has resulted in significant revenue losses for the home countries of these corporations. To create a fair tax system and increase government budget for countries, the Organisation for Economic Co-operation and Development (the “OECD”) has proposed Pillar 2 - a Global Minimum Corporate Tax Rate (“GMCTR”) ensuring that multinational companies must pay a minimum tax rate of 15% regardless of where they operate.

Accordingly, at the 6th session of the 15th National Assembly, the National Assembly passed Resolution No. 107/2023/QH15 on the application of supplementary corporate income tax under the profit shifting principle to prevent erosion of the global tax base.

1.   Positive and negative impacts of the GMCTR policy

       a. Positive impacts

• Multinational corporations will be required to pay a supplementary tax based on the common minimum tax rate which increases government budget, regardless of whether these countries apply tax exemptions, reductions.
• Previously, corporations often engaged in profit shifting to low-tax countries, leading to an unfair competition, especially between the domestic corporations and multinational corporations. Therefore, this policy is designed to prevent this unfair competition between multinational corporations and other businesses due to the race to reduce the CIT rates.
• By narrowing the tax gap through the GMCTR, investment decisions will be less influenced by tax incentives. This helps to allocate the global investment capital more reasonably, leading to higher efficiency in the use of economic resources, supporting economic growth, and promoting investment to be made effectively and substantially.
• This policy provides a consistent legal foundation, enabling countries to cooperate more effectively in tax monitoring and administration. This increases transparency as countries monitor each other to calculate effective tax rates and allocate additional taxes. This makes the international tax system fairer, more transparent and more efficient.

b. Negative impacts

• It reduces the competitiveness of low-tax countries in attracting investment from multinational corporations, slows down economic growth, and widens the gap between rich and poor nations.
• Developing countries, with their limited nation budget and heavy reliance on tax incentives, will be significantly affected.
• The implementation of this policy requires the significant investments in management systems and personnel to adhere to new tax regulations of corperations. The increased complexity of tax calculations, filings, and reporting, particularly for multinational corporations, can drive up operating costs and diminish global competitiveness.

2.    Solutions implemented by some countries in response to GMCTR policy

In general, many countries have used the incentive policies such as taxes, credits, and land to attract investment. However, income-based tax exemptions are often less effective in the long term. Many countries are shifting towards cost-based tax incentives linked to specific subsidies or grants related to investment costs to support sustainable economic development. These policies help reduce investment costs and promote continuous reinvestment, increase tax revenue and reduce the risk of transfer pricing abuse. Here are some policies of some countries under the impact of GMCTR policy.

a. The incentive policy of South Korea

South Korea's incentive policies include tax exemptions, reductions, cash subsidies, and tax deduction to attract foreign entities in the technology sector, specifically:

• CIT deduction policy for integrated investment based on investment costs in tangible assets, with a deduction rate ranging from 1% to 16% depending on the type and size of the enterprise.
• Tax deduction for research and development (“R&D”) and human resources development expenses: Businesses are eligible for tax deductions of 20% to 50% of their R&D expenses, contingent on the enterprise's size and technological focus. This policy prioritizes national strategic technologies including semiconductors, batteries, and vaccines.
• Furthermore, South Korea offers tax deduction to businesses that create new jobs. These deduction, ranging from 4 million KRW to 13 million KRW, depending on the quantity and type of employment generated. This policy is designed to stimulate the creation of full-time jobs.
• Foreign-invested enterprises in new growth industries are also supported by cash. The Ministry of Economy and Finance will determine the amount of funding after evaluating the application.

These policies enhance South Korea's appeal to foreign investors. It not only stimulates the investment in cutting-edge technologies, but also boosts international competitiveness, and promotes sustainable economic growth.

b. The National Competitiveness Enhancement Fund Policy of Thailand

The National Competitiveness Enhancement Fund of Thailand, as stipulated in the National Competitiveness Enhancement Act, supports enterprises in key sectors with a list that changes according to regional potential and needs, aiming to enhance sustainable competitiveness. Fund sources include Government capital, grants, and contributed assets, and from 07 March 2023, the Fund's sources will be expanded to include 50-70% of the additional tax revenue collected under Pillar 2.

Support can take the form of financial assistance for R&D, innovation, and human capital development, with payments provided upon successful project completion. Specific eligibility criteria are not publicly disclosed, but benefits will be considered based on the needs and effectiveness of encouraging the development of target industries. The policy board will evaluate support applications based on factors such as economic, social, and environmental benefits, as well as the level of R&D.

These policies help Thailand maintain and enhance its national competitiveness, especially in emerging industries, ensure the continued comprehensive and sustainable development of the economy and society.

c. The Refundable Investment Credit of Singapore

Introduced in the 2024 Budget Statement, Singapore's Refundable Investment Credit (“RIC”) policy aims to maintain competitiveness in attracting investment. This policy encourages large companies to invest in key and emerging sectors such as: investment in new manufacturing capabilities (new manufacturing plants, low-carbon manufacturing); digital services, professional services, supply chain management; establishment or expansion of headquarters or; establishment or expansion of commodity trading companies; R&D activities, and carbon reduction innovation.

The RIC policy supports eligible company expenses throughout the project duration, up to a maximum of ten (10) years. The support will be offset directly against the tax payable, and any remaining balance not offset within four (04) years will be paid out in cash.

The RIC support is based on a pre-determined support rate for eligible cost items, up to a maximum of 50% of the costs. The support rate corresponds to the project's economic impact, such as carbon reduction for environmental projects. Eligible cost items include capital costs, human resources, training, expertise, intangible assets, outsourcing, raw materials, and logistics.

3.    The impact of GMCTR policy in Vietnam

a. Impact on preferential policies, investment incentives, and the investment environment in Vietnam

Attracting foreign investment in Vietnam has decreased significantly due to the reduced effectiveness of current tax incentives. Despite enjoying tax benefits, enterprises are still required to pay additional supplementary taxes to reach the effective tax rate of 15% in Vietnam. Furthermore, these businesses face higher compliance costs and need to hire professional tax consultants. Especially, multinational corporation shall incur expenses to ensure regulatory compliance, manage intricate financial information from various countries, leading to increased workloads and complex tax management.

Consequently, Vietnam needs to promptly develop, perfect, and enhance non-tax incentives and investment support mechanisms to retain and attract investment, prevent capital outflow and mitigating the overall impact on the investment ecosystem, economic growth indicators, finance, employment, and other social issues of Vietnam.

b. Impact on tax and budget management policies in Vietnam

Despite not being obligated, Vietnam has willingly adopted the GMCTR policy to secure additional tax revenue, rather than permitting other nations to collect it. This proactive decision empowers Vietnam to impose taxes and bolster its fiscal resources.

4.    Some recommendations to ensure attracting and stabilizing the investment environment in Vietnam

From the above analysis, it is evident that Vietnam needs to enhance its legal framework and implementation guidelines for the GMCTR policy to align with its specific legal system and economic conditions. While Resolution 107/2023/QH15 provides general provisions on taxpayers, principles, calculation methods, tax declarations, and administration, detailed decrees and guidance are required to effectively implement the tax. These should cover specific calculations, reporting procedures, audit and supervision processes to ensure that businesses comply with their tax obligations. This will help minimize legal risks for businesses and foster a favorable investment condition.

Adjusting and supplementing new investment attraction policies as follows:

• Diversifying investment incentives policies by adding the cost-based incentives instead of income-based incentives, as many countries have successfully and effectively applied. For instance, providing support for research and development or high-tech production in order for effectively attracting investment in these sectors.
• Researching direct support measures that can be implemented without reducing the effective tax rate, such as direct cash subsidies or standardized tax deductions, to provide tangible benefits to businesses.
• Setting specific investment of the attraction targets and providing competitive incentives with others countries and avoiding a scattergun approach to optimize results.

To stay competitive, Vietnam needs promptly to adjust and issue the innovative investment incentives, focusing on attracting large enterprises with strong supply chains and ecosystems. Specifically, preferential policies in high-tech fields such as semiconductors and artificial intelligence, timely policy issuance is very important to seize opportunities to attract investment. Top of FormBottom of Form

Other incentives such as infrastructure support, workforce development, and improved business environments can effectively replace traditional tax incentives. This will help Vietnam maintain its attractiveness to investors and ensure long-term sustainability. 

Here is our advice on Global minimum tax rate - Experiences from other countries and recommendations for Vietnam. As a professional corporate lawyer team in the field of investment, we are always ready to provide our clients with optimal solutions in terms of efficiency, cost, and simplified legal procedures. Please visit our DIMAC website and other News category to get the latest updates on legal advice and market experience sharing.