On 9 February 2022, Vietnam signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Convention” or “MLI”), becoming the 99th jurisdiction to join the Convention.

1. Overview of the MLI and BEPS

The MLI was formed on the basis of the OECD’s initiative and the G20 on the establishment of the Project to Prevent Tax Base Erosion and Profit Shifting (“BEPS”).
The MLI covers over 1,800 bilateral tax agreements.

BEPS due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems affects all countries. BEPS practices cost countries 100-240 billion USD in lost revenue annually, which is equivalent to 4-10% of global corporate income tax revenue. Developing countries’ higher reliance on corporate income tax such as in Vietnam, suffers from BEPS disproportionately.

Business operates internationally, so governments must act together to tackle BEPS and restore trust in domestic and international tax systems.

2. Implementation of MLI in Vietnam

In the process of integration and participation in many multilateral and bilateral agreements, Vietnam has constantly improved its internal domestic legal system in order to comply with global demand. Regarding taxation laws, recently, the Prime Minister’s Decision 2072/QD-TTg dated 10 December 2021 approved the Project of “Reviewing and evaluating the effectiveness of the Agreements on avoidance of double-taxation, the impact on the tax policy space of Vietnam and adjustment orientation“.

Previously, Decree No. 132/2020/ND-CP stipulated transfer pricing doctrines, methods and processes for determination of transfer pricing factors; taxpayer’s transfer pricing rights and obligations, declaration procedures; responsibilities of state regulatory authorities for tax administration over taxpayers having related party transactions.

With the signing of the MLI, Vietnam commits to implement four minimum standards under BEPS: The four minimum standards are namely countering harmful tax practices (Action 5), countering tax treaty abuse (Action 6), transfer pricing documentation and country-by-country (CbC) reporting (Action 13), and improving dispute resolution mechanisms (Action 14).

As a result, potentially 75 of Vietnam’s double tax agreements (“DTAs”) could be altered once the MLI comes into effect. In parallel with current tax laws, taxpayers should be aware of these potential changes to DTAs and the impact these may have on their plans for structuring their investments and transactions to claim treaty benefits in Vietnam.

3. MLI and its effects to Vietnam

As a developing country, Vietnam’s corporate income tax plays a critical role in the development of the national budget, so BEPS could have a significant influence. In addition, because Vietnam prioritizes foreign investment attraction and strives to create an open and transparent legal framework in tax policy, joining the MLI will create a common tool to assist in expanding the tax base, preventing revenue erosion, and shifting profits, all of which are central tasks in Vietnam’s tax reform strategy.

Finally, as a member of the OECD, MLI contributes to the further development of the cooperation relationship between Vietnam and the OECD because of the unity of financial orientation through foreign trade policies.