The global minimum corporate income tax (“CIT”), also known as the Pillar 2 of the Two-Pillar Solution, which was initiated by the Organisation for Economic Cooperation and Development (“OECD”), has become a “burning” issue ever since its introduction.  Vietnam is one of the numerous jurisdictions that have been affected by the astonishing reach of this new tax legislation, especially in light of the fact that Vietnam has pledged to follow such a tax rule.

Basically, Pillar 2 establishes a global minimum CIT rate of 15% for large multinational enterprises (“MNEs”).  Wherever tax incentives drive an MNE’s effective tax rate (“ETR”) in a jurisdiction below 15%, the MNE would potentially be subject to a top-up tax in its home country, bringing the rate to 15%.  This also means that such an MNE investing in a foreign country would have to be taxed by that country by at least 15%.  For a detailed professional analysis of this rule, please kindly refer to our previous article at the following link: Pillar 2 of the Two-Pillar Solution to international tax reform.  By committing to such a tax rule, Vietnam will raise the CIT rate to 15% for many of the MNEs operating in the country and who have currently been taxed at a much lower rate due to tax incentives.  Giants’ interests will undoubtedly be seriously impacted by this upcoming change, and it is inevitable that these giants would react negatively.

According to a reliable source, in April 2023, Vietnamese Government officials had a meeting with tech titans doing business in Vietnam including Samsung Electronics (Korean), LG Electronics (Korean), Intel (U.S.), and Bosch (Germany).  It seems that all these giants are dissatisfied with the proposed changes to tax policy and demand measures or compensations from the Vietnamese Government to defend their interests, in exchange for the economic and social benefits that these giants have brought, are bringing, and will continue to bring to Vietnam.  It appears that the Vietnamese Government is putting together a plan to make up for the loss of these giants in response to these demands.  Since no official document has been published, the discussion of such a plan may be premature, but it is likely that the Government will permit companies with significant investments in Vietnam to receive after-tax cash handouts or refundable tax credits to help defray their manufacturing or research outlays.  The total cost of the compensatory measures is not anticipated to be low, but it should nearly match the extra revenues that Vietnam is expecting to earn from the increased taxes it will impose on MNEs in conformity with the new global tax rule.  Smaller companies that are not within the scope of the new global rule are also expected to receive handouts to reduce potential conflicts with the OECD rule.

In addition to the big firms mentioned above, there are other giant corporations doing their business in many different countries including Vietnam, whose voices on the new global tax rules haven’t been recorded, e.g. Grab. In Vietnam, Grab is present under the name Grab Co., Ltd (“Grab Vietnam”).  Just a minor capital of Grab Vietnam is believed to be owned by Grab Holdings Inc (Singapore), while the rest is contributed by a Vietnamese individual.  This may be the reason why Grab Vietnam and Grab Holdings Inc may not be within the scope of Pillar 2 as well as the upcoming changes to the tax policy of Vietnam.  However, since the new global tax rule is expected to be internalized and take effect in 2024, it will be necessary to wait until then to know exactly how Vietnam’s CIT regulations will be changed and whether the predictions and assumptions are accurate.

Many believe that Vietnam’s commitment to apply the new global tax rule would not harm the country’s standing with foreign investors, but rather that it will give Vietnam a chance to increase its tax collection.  On the contrary, many people hold opposing viewpoints.  Nevertheless, if the information about the Government’s indemnification cited above is accurate, Vietnam’s financial situation won’t allegedly significantly change as a result of the commitment.

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