Vietnam’s impending acceptance of the global minimum tax regime for multinational enterprises could be a double-edged sword; the key is to ensure that imposing the minimum tax rate does not drive away major foreign investors.
The Vietnamese government is preparing to present a proposed piece of legislation regarding the global minimum tax (GMT) to the National Assembly this October. The GMT, proposed by the Organisation for Economic Cooperation and Development (OECD) and adopted by G7 member states in 2021, requires multinational enterprises (MNEs) with over €750 million (US$800 million) in annual revenue to pay a minimum tax rate of 15 per cent on their profits. This measure, which will come into effect from next year, seeks to reduce tax competition between countries and to discourage MNEs from engaging in tax evasion by transferring profits to low-tax jurisdictions. To date, 142 countries, including Vietnam, have expressed support for the GMT.
Applying the GMT offers some benefits for Vietnam. First, it would reinforce Vietnam’s reputation as a law-abiding, responsible, and dependable member of the international community. This is in keeping with Vietnam’s goal of international integration, which involves adhering to global standards and joining forces with other countries to combat common challenges, including tax evasion by MNEs. Second, Vietnam stands to gain a considerable amount of state budget revenue from taxing previously untaxed profits of MNEs. The Ministry of Finance has estimated that the GMT implementation would generate an additional VND14,600 billion (US$629 million) to Vietnam’s state budget in 2024. Without adopting the GMT, Vietnam would miss out on this revenue, as the home countries of MNEs would be entitled to collect such taxes instead.
However, the GMT implementation will adversely affect Vietnam’s ability to attract foreign direct investment (FDI), a major contributor to the country’s impressive economic growth over the past 30 years. The FDI sector makes up around 20 per cent of Vietnam’s GDP and accounted for 74 per cent of total export value in 2022. Last year, registered FDI capital in Vietnam reached nearly US$27.72 billion. Manufacturing and processing industries accounted for the majority of this sum, totalling over US$16.8 billion or 60.6 per cent of the registered capital.
Vietnam’s strategic location and political stability, combined with its low-cost labour and competitive corporate income tax rates, make it an attractive option for many foreign investors, including global giants and industrial icons such as Samsung, Intel, LG, Panasonic, LEGO, BYD and Foxconn. The standard corporate income tax rate in Vietnam is 20 per cent, but preferential rates of 10 to 17 per cent are offered, depending on the type of industry, scale, and location of investment. Some investors even enjoy special rates as low as 5 to 9 per cent if they invest in high-priority sectors. This results in an average corporate income tax rate of just 12.3 per cent, making Vietnam one of the most competitive countries in Asia in terms of investment attraction.
The GMT will nullify the allure of these preferential rates, as MNEs would be obligated to pay a 15 per cent tax rate regardless of where they operate. This will make investing in Vietnam less profitable, therefore raising concerns among foreign investors. It is estimated that at least more than 100 FDI enterprises in Vietnam would be affected by the GMT. In response, at the 2023 Vietnam Business Forum in April, Prime Minister Pham Minh Chinh pledged support for foreign investors if the GMT were to be applied in Vietnam. He revealed that a special working group and a team of experts from various sectors and business giants had been set up to study the issue and propose solutions.
In the long run, Vietnam must devise strategies to strengthen its domestic enterprises, especially in the manufacturing and export-oriented sectors, while gradually reducing external dependence and risks.
Currently, Vietnamese policymakers appear to be looking to non-tax incentives to offset the negative impact of the GMT on Vietnam’s FDI environment. For example, the Ministry of Planning and Investment has proposed several pilot financial support programmes for high-quality and large-scale FDI projects in high-tech and manufacturing sectors. This assistance would include training, research and development, infrastructure investment and hi-tech production costs. Additionally, experts have urged Vietnam to focus on building quality infrastructure, developing a skilled labour force, and increasing administrative efficiency to bolster its competitiveness.
However, focusing solely on solutions for foreign investment attraction may risk perpetuating over-reliance on FDI and exports, an issue that the government has sought to mitigate. FDI-driven export industries are highly vulnerable to the investment decisions of profit-seeking MNEs and supply chain disruptions, as seen during the COVID-19 pandemic. Moreover, an over-emphasis on FDI would constrain Vietnam’s domestic private sector, as few local private companies have the financial and technological capabilities to invest in large-scale projects and prioritised sectors that would enable them to compete with multinational giants or benefit from the preferential tax rates.
In the long run, Vietnam must devise strategies to strengthen its domestic enterprises, especially in the manufacturing and export-oriented sectors, while gradually reducing external dependence and risks. Revenue gained from taxing multinational corporations could be strategically used to fund initiatives such as human capital and technologies, which would help local firms integrate into the global value and supply chains, particularly in manufacturing and high-tech. Vietnam should also further promote innovation, technology adoption and knowledge transfers by linking foreign enterprises with local universities, research centres, and domestic firms.
That said, in the short to medium term, the FDI sector will continue to play an important role in Vietnam’s economic development. A balanced approach to the GMT based on mutual benefits will help to ensure MNEs’ continued contributions to Vietnam’s foremost aspiration of becoming an industrialised and high-income economy by 2045.
Le Hong Hiep is a Senior Fellow and Coordinator of the Vietnam Studies Programme at ISEAS – Yusof Ishak Institute.
Phan Xuan Dung is a Research Officer at ISEAS – Yusof Ishak Institute. He is also a member of the US-Vietnam Next-Generation Leaders Initiative at the Pacific Forum.