Investment law perspective on Vietnam's response to global minimum tax

This article was written by Lawyer Nguyen Van Phuc and Legal Assistant Pham Luong Khanh Linh (from HM&P Law Firm) published in the Legal Electronic Magazine on September 18th, 2023. Below is the English version:

The term Global Minimum Tax (“GMT”) is no longer unfamiliar in Vietnam. Recently, the Ministry of Finance has issued a proposal to draft a resolution of the National Assembly on the application of additional corporate income tax as per the global anti-base erosion rules, which is currently in the process of soliciting comments. The main content of this draft focuses on Vietnam’s intention to introduce a Qualified Domestic Minimum Top-up Tax (“QDMTT”) and the Income Inclusion Rule (“IIR”) for additional domestic corporate income tax. In addition, Clause 2 of Article 7 of the Draft also outlines the Government’s responsibility to consider and address matters under the investment laws to ensure a balanced interest between the State and enterprises in cases where taxpayers apply for guaranteed investment incentives in accordance with this Resolution. In this article, we will not discuss the specifics of the QDMTT or IIR. Instead, our focus will be on the additional solutions and policies that Vietnam could implement for enterprises after the tax policies are legislated domestically, viewed through the lens of the Law on Investment 2020.

1. Solutions to secure investment incentives

According to Clause 2 Article 13 of the Law on Investment 2020, if new legal documents provide investment incentives that are lower than the incentives previously enjoyed by investors, those investors may continue to apply the previous incentives for the remaining duration of their investment projects. It can be observed the enterprises affected by the GMT policy in Vietnam must be subsidiaries of multinational enterprises (“MNEs”), and one of the criteria is that the corporate income tax rate actually borne by the enterprise is lower than the minimum tax rate of 15%. Currently, many investment projects of MNEs in Vietnam benefit from corporate income tax incentives such as exemptions or reduced tax rates for a certain period of time. Therefore, if Vietnam applies the QDMTT, it’s obvious that investment incentives for MNEs' subsidiaries will be affected. This seems to contradict the provision mentioned in Clause 2 Article 13 of the Law on Investment 2020.

In practice, many foreign business associations in Vietnam have raised this concern at forums and seminars on GMT. However, this issue has not been clearly resolved so far. Some opinions suggest that if Vietnam does not participate in the GMT project (meaning it takes no action), the subsidiaries of MNEs operating in Vietnam will still be subject to additional taxes in the countries where the MNEs’ parent company of is located if that country applies the GMT, or in other countries where the MNEs' subsidiaries are located if the country where the MNEs' parent company is located does not apply the GMT. In other words, if Vietnam does not take action, subsidiaries of MNEs operating in Vietnam will still be subject to additional taxes because their effective corporate income tax rate is below 15%.

In our view, however, this view is not entirely convincing. The reason is that the programs against budget erosion and global tax avoidance, of which the GMT is one policy, are not international treaties or commitments and do not require countries to apply them. Vietnam has chosen to apply these policies in order to prevent a potential loss of tax revenue that could otherwise be collected by other countries. In addition, since "establishing, amending, or abolishing tax matters" falls under the jurisdiction of the National Assembly, this authority must issue legal documents to establish the GMT in this case. The issuance of legal documents related to QDMTT and IIR has rendered obsolete the previously enjoyed investment incentives (tax exemptions, reduced tax rates). Therefore, it's reasonable for foreign investors, i.e. subsidiaries of multinational companies, to refer to the provisions of the Law on Investment 2020 to secure investment incentives. Relevant authorities in Vietnam need to consider this provision in order to make appropriate decisions and prevent disputes between foreign investors and state authorities in investment activities.

2. Compensation solutions for affected MNE subsidiaries

2.1. Monetary compensation solutions

At present, many subsidiaries of MNEs that fall under the category affected by the GMT policy are hoping for various forms of financial support or compensation from Vietnam. However, according to the draft resolution proposed by the Ministry of Finance, there is no specific content regarding the support or compensation policy to be applied by Vietnam.

According to the provision in Article 10.1 of the GloBe Model Rules, the QDMTT is a minimum tax established in a country's domestic law, which must be enforced and complied with in accordance with the rules and interpretations of the GloBe, provided that the country does not provide any benefits related to the QDMTT. This provision poses some challenges for competent authorities in selecting support or compensation measures for affected companies. If some form of financial assistance is not cleverly constructed, QDMTT may be deemed inappropriate under the Globe Model Rules.

Instead of direct monetary compensation for affected enterprises, the state may choose other incentives provided for in the Law on Investment 2020. Specifically, the State may adjust legal provisions to allow affected enterprises extended exemptions or reductions in land use fees, land lease fees, and land use taxes, or adjust provisions regarding depreciation of assets and increased deductible expenses in calculating taxable income.

In addition, the government can provide appropriate support policies based on the business field of each enterprise, such as support for investment costs, research and development costs for technology-related or environmentally friendly sectors.

2.2. Other solutions

Currently, in addition to investment incentives, the Law on Investment 2020 also provide for investment support policies such as[1]:

• Development of technical infrastructure, social infrastructure systems within and beyond the boundaries of investment projects;
• Training and development of human resources;
• Providing credit support;
• Facilitating access to production and business premises; supporting the relocation of production and business facilities based on the decisions of state authority;
• Facilitation scientific, technical, and technology transfer;
• Supporting market development, providing information;
• Support for research and development.

In practice, these investment support measures have not yet been widely implemented yet. Therefore, in the context of the need for specific policies to compensate for affected enterprises, competent authorities can focus on drafting detailed regulations for the application of these measures.

In the long run, Vietnam's concern should not be limited to the rights of existing businesses affected by the GMT; it must also consider attracting investment from new investors. It is clear that the GMT will have a significant impact on attracting foreign investment in developing countries like Vietnam, where taxes remain one of the most important policies for attracting investment. However, due to the characteristics of a developing country, Vietnam still has a lot of potential for foreign investment. To continue attracting foreign investment in the coming period, the relevant authorities must also consider other "intangible benefits" for investors. For example, investing in infrastructure, implementing more significant reforms of administrative procedures in the investment sector, improving the quality of human resources training to meet investors' needs, etc.

It is clear that domestication of GMT policies is becoming almost mandatory for Vietnam to safeguard its national interests. However, the relevant authorities still need to carefully calculate the legal risks in applying the GMT and weigh the "gains and losses" in localizing these policies. From this perspective, solutions can be proposed to ensure incentives and support for affected enterprises/new investors while complying with the general rules of the global arena.