As many countries plan to adopt the Global Minimum Tax Rate (GMTR) in 2024, experts are concerned that the entry into force of the rate would discourage foreign companies from locating their operations in low-tax countries.
Under GMTR rules, corporations with more than €750 million in annual revenue would be subject to an effective tax rate of at least 15 per cent, not including deductions for depreciation and certain tax credits. The introduction of GMTR is aimed to increase compliance costs and create a level playing field between developed and developing countries.
The European Union has unanimously agreed to implement the rate on January 1, 2024. Japan followed suit with the enactment date being April 1, 2024. Other countries are preparing their legislation for the adoption of GMTR in the short term, including Indonesia, Malaysia, and the Republic of Korea (RoK).
Experts worry that the introduction of GMTR in other countries would cancel out the tax incentives that Viet Nam has laid down for years and result in tax revenues being effectively exported to those countries.
Take RoK companies operating in Viet Nam for example. These companies are subject to a preferential tax rate of 7 per cent. Once GMTR comes into force in RoK, the companies would have to pay an additional rate of 8 per cent to RoK tax authorities, which is the difference between the Vietnamese rate and GMTR.
Dang Ngoc Minh, deputy director of the General Department of Taxation, estimated that 1,015 FDI companies operating in Viet Nam would be unfavourably affected by the broad-based tax rules.
He said global corporate heavyweights in the country are enjoying tax rates of between 2.75 per cent to 5.95 per cent, far lower than the GMTR of 15 per cent. As such, the implementation of GMTR abroad would cost Viet Nam a couple of billions of dollars in tax loss every year.
Thomas McClelland, country tax leader at the Deloitte Vietnam Company Ltd, urged Viet Nam to act quickly and decisively to adopt GMTR. Otherwise, the country would lose out to others on the differential tax revenues.
Some other experts share this view, saying that Viet Nam must be quick to bring GMTR into force to boost its tax revenues from FDI companies. But they also warn that the bandwagon would pose some new challenges for policymakers, who would have to find non-tax ways to attract FDI.
Can Van Luc, chief economist at the BIDV, believed that the implementation of GMRT would put developing countries at a competitive disadvantage, especially those using fiscal incentives as a magnet for FDI.
He urged Viet Nam to improve its business environment and investment climate to make up for the tax incentives that would diminish in the next few years.
"A sound business environment and investment climate are more beneficial to investors than the financial incentives offered in the form of tax cuts," said Luc.
It is also worth noting that GMRT can only be officially put in place next year under the circumstance that the Government proposes amendments to Corporate Law, Investment Law, and Tax Law to the National Assembly before October 2023. — VNS