Tuesday , March 19 2024

New global tax to diminish Vietnam’s FDI attractiveness


The global minimum corporate tax rate of 15%, which is set to be applied next year in Vietnam, will likely make the country less attractive in drawing in foreign direct investment.

The 15% tax on profits, which was approved by 136 countries in 2021, is considered the deepest overhaul of cross-border tax rules in decades. The purpose of the overhaul is to ensure that tech giants such as Apple and Google will not have an unfair advantage by booking their profits in low-tax countries such as Ireland.

The tax applies to multinationals with total revenues of at least EUR750 million ($819 million) in two of the preceding four years.

This means that a company that invests in a foreign country will have be taxed by that country by at least 15%.

Vietnam, along with the United Kingdom, Japan, South Korea, and the E.U. plan to start collecting the tax next year.

It is estimated that 100 multinationals will be affected by the tax, which is expected to yield an extra $220 billions in tax income globally.

Nguyen Thi Thu Huyen, deputy director of publicity at Canon Vietnam, said that tax incentive is one of the key factors for the company to maintain its large-scale production in the country.

Canon has 130 suppliers in Vietnam, which accounts for 50% of its global production, she said.

Vietnam also needs to compete with other countries for investment, such as the Philippines, where many Canon factories are located, she added.

“If the global minimum corporate tax is applied,” Huyen said, “Vietnam should consider issuing other policies to maintain the incentive commitments it had made with businesses earlier to keep the current investors and attract new ones.”

Huyen said that Thailand, for example, had promised to give foreign investors electricity price discounts to compensate for the higher tax.

A representative of Foxconn Vietnam, which is a supplier for Apple, said that the company still has plans to expand its Vietnam investment, but it is concerned that it might have to pay for taxes in tha past that it had received incentives for.

“We want specific guidelines and commitments on the matter,” the representative said.

Some high-tech projects in Vietnam receive a 10% corporate income tax incentive instead of the regular 20%.

Policymakers are concerned that the new global tax will make Vietnam less competitive in the eyes of multinationals.

Deputy Minister of Planning and Investment Nguyen Thi Bich Ngoc said that when the 15% tax is applied, most current tax incentives in Vietnam will no longer be of value to multinationals.

“This will make Vietnam’s investment attraction policy less compelling to large corporations,” said Ngoc.

Vietnam, therefore, needs to make changes to its policies to ensure that multinationals still receive other kinds of incentives.

Prime Minister Pham Minh Chinh has set up a task force to study this issue. He told company representatives last week that Vietnam is studying the policies of other countries to come up with its own policies, He said that the new regulations could be issued as soon as this year.

The tax incentive race has been going on for years among ASEAN countries to attract foreign investment.

Vietnam’s corporate income tax is set at 20%, but it can offer a rate as low as 5% as well as lengthy grace periods in “special cases” to attract foreign investors.

In 2001, to persuade Canon to set up a manufacturing hub in the country, Vietnam offered to charge it no corporate income tax for 10 years.

In response the Philippines offered the same incentive for 8-12 years.

In 2014, when Indonesia offered to give multinationals a 10-year period free of corporate income tax, Vietnam offered up to 15 years.

Between 2010 and 2020 the average tax of ASEAN countries dropped from 25% to 21.7%, according to a report by Oxfam, Vietnam Institute for Economic and Policy Research and thinktank Prakarsa.

Tax incentives account for around 1% of GDP in Vietnam and the Philippines and 6% in Cambodia.

FDI companies in Vietnam are subject to an average corporate income tax of 12.3% against the regular 20%.

FDI plays a major role in Vietnam’s economy. Foreign companies contribute more than 20% of GDP and account for 72% of exports.

An earlier report by the Japan External Trade Organization (JETRO) shows that only 24% of Japanese companies find tax incentives attractive.

Takeo Nakajima, chief representative of JETRO Hanoi, said that the Vietnamese government should prioritize its incentives to small and medium foreign direct investment companies, which will not be affected by the new global tax.

Even though they do not have large amounts of capital, they have advanced technology that can promote Vietnam’s digital transformation, he added.

The American Chamber of Commerce in Vietnam said that lowering administrative procedure costs will also help reduce the burden on foreign investors.

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