I.
Overview of GMT
1. Definition and Purpose
1.1. Definition
GMT is a tax proposed by the Organization for Economic
Cooperation and Development (OECD), requiring corporations and
multinational enterprises with over €750 million (US$800 million) in
annual revenue to pay a minimum tax rate of 15 percent on their profits, in
any countries (SBLaw, 2024).
Therefore, this tax will be applicable to companies’ overseas
profits, which implies that if a global minimum is applied, governments
can still set the local corporate tax rate as per their choice. Countries
would legislate a global minimum corporate tax rate of at least 15 percent
for large companies, those with annual revenues over €750 million
(US$800 million). Then, if companies have earnings that go untaxed or
lightly taxed in one of the world’s tax havens, their home country would
impose a top-up tax that would bring the rate to 15 percent, eliminating the
advantage of shifting profits to a tax haven. For the same reason, it means
the minimum rate would still take effect even if individual tax havens do
not participate (Pritesh, 2021).
1.2. Purpose
GMT aims to divide taxation rights among countries, evaluate the
distribution of profits of enterprises, and establish principles for the global
distribution of profits in order to ensure that all enterprises engaged in
international investment activities pay the lowest tax rate (Dang, 2023)
2. Historical context
Multinational companies substantially reduce their corporate tax
burdens by legally shifting assets to low-tax jurisdictions and moving
losses to places that receive high deductions. For example, although not
alleging any illegal activity, Congress held a hearing to condemn Apple
for its methods of reducing United States tax obligations. According to
Congress, from 2010 to 2013, Apple has avoided about US$10 billion
taxes per year by keeping money in foreign countries instead of financing
its domestic investments with borrowed money (Gleckman, 2013).
Apple’s tax reduction methods are representative of many multinational
companies in the US. Therefore, responding to the unfairness and
distortions caused by this tax avoidance and desiring to protect
governmental revenue, OECD published a report in July 2013 entitled the
Action Plan on Base Erosion and Profit Shifting (BEPS). The Action Plan
endeavors to make corporate income taxation internationally coherent,
beneficial, and transparent through international cooperation. To achieve
these goals, the Action Plan makes fifteen specific, overlapping
recommendations for harmonizing the tax codes across countries, with a
particular emphasis on curbing double non-taxation and promoting
transparency. The fifteen actions can be divided into five broad categories:
1) addressing the digital economy’s tax challenges, 2) establishing the
international coherence of corporate income taxation, 3) restoring the full
effects and benefits of international tax standards, 4) ensuring
transparency, and 5) swiftly implementing the measures (OECD, 2013).
On 5 October 2015 the OECD published guidance on domestic
legislative and administrative changes to address all 15 of the Plan’s
action points and achieve The Group of Twenty (G20)’s approval by the
end of 2015. A series of recommendations adopted by G20 countries
created from this BEPS initiative is now being implemented in many
jurisdictions around the world to lessen the gaps and mismatches in the
international tax systems. However, it hasn't tackled the digital taxation
issues because of insufficient tools, particularly around the allocation of
taxing rights between countries (OECD, 2015). The central question is
where should a company be mainly taxed, where it does business, or
where it is based.
As a result, in 2019, BEPS instituted two pillars to address digital
taxation issues and allow equitable taxing rights across countries,
reforming the international tax system. Pillar 1 is a framework for
allocating taxing rights between countries based on where the largest
multinational corporations (MNCs) generate their profits. This means that
big companies will pay a fair share of tax where they do business even if
they do not have a physical presence there. Pillar 2, also known as the
minimum global tax, is focused on establishing a GMT rate that the MNCs
must pay on their profits regardless of where they are located with a view
to creating a level playing field for all countries and reducing the incentive
of companies avoiding paying tax by shifting profit to tax havens (OECD,
2021).
As of July 9, 2021, the United States and 132 other countries
supported this proposal. With the Oct. 8, 2021 agreement, the signatories
grew to include Estonia, Hungary, and Ireland—establishing support from
all OECD, EU, and G20 member countries. In October 2021, 136
countries and jurisdictions agreed on a GMT of 15% for corporations. As
of May 2022, 137 countries signed on to the plan. United States Treasury
Secretary Janet Yellen continues to promote the plan and meet with
foreign leaders to urge their adoption of laws to make it effective (P. Scott,
2023).
In July 2023, 138 members of the OECD/G20 Inclusive
Framework on BEPS representing over 90% of global GDP - agreed an
Outcome Statement recognising the significant progress made and
allowing countries and jurisdictions to move forward with historic, major
reform of the international tax system (OECD, 2023a).
On 29 November 2023, the Vietnam National Assembly adopted
Resolution No. 107/2023/QH15, regarding the application of top-up
corporate income tax according to the Global Anti-Base Erosion rules
("Resolution 107"). Resolution 107 covers both Qualified Domestic
Minimum Top-Up Tax (QDMTT) and Income Inclusion Rule (IIR). It
takes effect from 1 January 2024 and be applicable from fiscal year 2024
(Huong Giang, 2023).
3. Implementing GMT in the Current Context
3.1. Covid-19
3.1.1. Impacts on the global economy
The economic impact of COVID-19 has been profound; "the
COVID-19 pandemic sent shock waves through the world economy and
triggered the largest global economic crisis in more than a century,"
according to the World Bank (World Bank, 2022). The global economy
contracted by around 3.5% in 2020, plunging numerous countries into
recession and leaving many struggling to recover (IMF, 2021), with the
most severely impacted industries, namely airlines, hotels and restaurants,
and tourism,... This economic downturn has been accompanied by a
significant decline in government revenues due to stalled economic activity
and the implementation of support measures for individuals and
businesses.
Governments worldwide have faced the challenge of increased
public spending to combat the pandemic's effects, leading to a surge in
budget deficits and public debt burdens (Makin and Layton, 2020). The
need for expanded healthcare infrastructure, income support programs,
and economic stimulus measures has strained fiscal resources, exacerbating
concerns over long-term fiscal sustainability.
 3.1.2. Impacts on GMT implementation
During the global pandemic, the GMT encountered severe
challenges. Nations dealing with economic downturns saw the GMT as a
viable tool to boost tax revenues for recovery. However, gaining
consensus on GMT specifics proved difficult because of the complexity of
the situation and the array of national preferences, which ranged from
public health measures to economic stimulus programs. Concerns about
the GMT's influence remained as the economy slowed due to Covid-19.
Facing unprecedented uncertainty, businesses were hesitant to invest due
to stringent tax legislation, thus jeopardizing recovery efforts. Investor
confidence was weakened by perceived barriers to investment, such as
unfavorable tax legislation. Hence, careful tax policy calibration was
critical to prevent unintentionally limiting investment and slowing
economic recovery.
3.2. Conflicts between Russia-Ukraine and Israel-Hamas
3.2.1. Impacts on the global economy
Wars and conflicts have driven up crude oil and natural gas prices
due to supply concerns, increasing production, and consumer costs.
Supply chain disruptions in Ukraine and Russia have also spiked food
commodity prices, fueling inflation. These shortages create commodity
scarcity, raising consumer prices and contributing to inflation. Global
inflation forecasts surged around 3% from February to March 2022, with
Russia experiencing the highest impact (3.3%), followed by the United
States (2.8%) and the United Kingdom (1.6%) (Statista 2022).
Additionally, precious metals like gold are also on the rise as investors
seek safe havens amid unpredictable market fluctuations.
The soaring energy costs are a growing concern, with Brent crude
oil hitting a 14-year high at over $130 per barrel, and European natural gas
prices quadrupling compared to 2021 (Macheel and Stevens, 2022). The
conflict in Gaza in 2023 escalated oil prices by $5 per barrel, despite no
apparent impact on production. Oil supply shocks could hamper economic
activity, with a 10% price increase potentially reducing global growth by
0.15 percentage points, according to IMF estimates. This surge in prices is
amplifying pressure on production and consumer costs, fueling inflation
and adversely affecting the global economy (Milesi-Ferretti, 2023).
Financial sanctions imposed during the Russia-Ukraine conflict
have harmed global banking, particularly for banks heavily involved in
Russia. These sanctions hampered international banking (Gurvich and
Prilepskiy, 2015); potential losses from a worldwide payment system
attack might be $1.8 billion per day (Ellyatt, 2022). Rising tension between
Israel and Hamas has an impact on global risk, widens spreads and
strengthens the dollar. Tightening global financial conditions damage
economies that are vulnerable to external shocks (Milesi-Ferretti, 2023).
3.2.2. Impacts on GMT implementation
Current conflicts in Ukraine and Gaza are exerting significant
economic instability (World Bank, 2024), complicating the
implementation of the GMT. Nations may redirect resources away from
GMT initiatives towards conflict resolution efforts, diverting attention and
hindering progress. Investor apprehension about economic conditions
amidst ongoing warfare could lead to hesitation in GMT investment.
Moreover, conflicts prompt policy shifts in affected countries, potentially
altering investment landscapes for GMT. Protective trade measures and
restrictions on foreign investment may disrupt GMT operations, impacting
multinational enterprises. These ramifications underscore the intricate
relationship between contemporary warfare and the adoption of global tax
policies, emphasizing the need for comprehensive strategies to navigate
economic challenges amidst geopolitical turmoil.
II. Necessity and Benefits of Implementing GMT for
Vietnam 1. Enhancing International Integration
1.1. Global trends in GMT Adoption by countries
According to the results of the "Global Tax Issues 2022" survey
conducted and recently published by Deloitte, the GMT rate is considered
by MNCs as one of the outstanding tax topics in 2022. Up to 56% of the
surveyed MNCs believe that many countries will implement the Pillar 2
solution by 2024 and up to 55% of the surveyed corporations have actively
consulted to implement the OECD's Pillar 2 solution. Up to now, all G7
countries, the EU, some G20 countries, and many other countries have
made their own plans to amend their domestic laws to apply the Pillar 2
Model Rules (Deloitte, n.d).
The United States has been a key proponent of a GMT. The Biden
administration has advocated for a minimum corporate tax rate as part of
its tax reform agenda. In fact, the U.S. Treasury has proposed a minimum
tax rate of 21% on the foreign earnings of U.S. MNCs, irrespective of
where those profits are booked (The White House, 2024). While major
economies, including all 27 European nations, the UK, and Japan, have
followed the pledge, adopting or preparing to adopt legislation that raises
their tax rates, the US Congress has still not approved it and made any real
moves to adjust tax law to make sure no U.S. company pays less than 15
percent as required by the deal.
The EU as a whole has expressed support for the OECD/G20
initiative on a GMT. The EU's adoption of the so-called "Pillar 2" rules,
which were agreed upon as part of the worldwide agreement on
international tax reform in 2021, will be formalized with the entrance into
force of the minimum effective taxation standards, which have been
unanimously agreed upon by Member States in 2022. The framework will
modernize the tax system and make it more equitable and stable both
domestically and internationally, better fitting the current, digitally
connected, and globalized society (Brussels, 2024).
Regarding ASEAN+3 (includes 10 Southeast-Asian countries,
China, Korea, and Japan), Japan enacted a 15% GMT for large
multinationals (sales over €750 million) as part of its fiscal 2023 tax
reform. The Japanese IIR will be effective for fiscal years beginning on or
after April 1, 2024 (Masuda, 2023). Japan and Korea are the first two
economies to have enacted legislation for the full implementation of Pillar
Two in 2024. Vietnam, which is home to over a hundred multinational
enterprises, also passed a resolution in November 2023 to implement Pillar
Two beginning in January 2024. Hong Kong and Singapore, whose
economies host large multinational companies and which also serve as
regional headquarters for other large MNCs, are preparing their domestic
tax systems to implement global tax reforms from January 2025. Thailand
and Malaysia have also committed to introducing a top-up tax under Pillar
Two starting from 2025. While ASEAN+3 jurisdictions endorse the
implementation of a GMT, they are also exploring potential tax and non-
tax measures to maintain FDI competitiveness.
1.2. Why implementing GMT is essential and mandatory for
Vietnam
With over 130 countries committing to a universal minimum
corporate tax rate, Vietnam, as a member of the Multilateral Convention to
Implement Tax Treaty Related Measures (MLI) (Thu Ha and Tien Nhat,
2022), will be required to adopt the GMT system. Failure to do so may
result in additional taxes imposed by investors' home countries. To ensure
national interest, Vietnam should participate in implementing the GMT by
2024, aligning with other convention countries to ensure taxing rights and
promote global integration. This move will enhance Vietnam's reputation,
strengthen cooperation, and boost international economic integration.
1.2.1. Enhancing National Reputation
 Vietnam's adoption of the GMT stands as a testament to its
commitment to international norms and responsible governance. Aligning
with over 130 nations participating in the OECD/G20 Inclusive
Framework on BEPS (O’Sullivan and Cebreiro Gómez, 2022), Vietnam
actively contributes to the global fight against tax avoidance. The GMT
acts as a crucial safeguard against unfair competition caused by techniques
such as profit shifting and transfer pricing, which are frequently used by
multinational firms to reduce their tax liabilities. The introduction of GMT
will help to improve Vietnam's reputation by encouraging fair competition
and strengthening the country's commitment to appropriate taxation. This
action not only displays its commitment to following international tax
norms but also paves the path for a more transparent and equitable global
tax system. By establishing a minimum tax threshold of 15%, the GMT
effectively levels the playing field for businesses operating across borders.
Moreover, Vietnam's embrace of the GMT signals to the global
business community that it offers a stable and predictable investment
environment, thereby attracting FDI and facilitating long-term economic
development. The adjustment of transfer pricing strategies by many MNCs
operating in Vietnam, as reported by PricewaterhouseCoopers (PwC)
(PwC, 2023), further underscores the significance of the GMT in shaping
corporate behavior and fostering compliance with international tax
standards.
The GMT's additional tax revenue can fund long-term growth in
infrastructure, education, and healthcare, improving citizens' quality of life
and Vietnam's global reputation. Infrastructure expenditures such as roads
and public transport improve connectivity and drive economic growth;
improved education and skill training empower workers and promote
creativity; healthcare spending enhances both access and public health
outcomes. Prioritizing sustainable development accords with UN goals
and demonstrates Vietnam's commitment to growth. This proactive
posture benefits residents and strengthens Vietnam's position as a
responsible global actor, fostering a prosperous future. Furthermore,
Vietnam's participation in the GMT strengthens its position as a reliable
and trustworthy partner in the international community, potentially
attracting greater foreign investment and fostering deeper economic
integration.
1.2.2. Strengthening Cooperation and Promoting
International Economic Integration
GMT acts as a catalyst for closer collaboration and knowledge
exchange among national tax authorities, as the implementation will
require significant international cooperation, including information
exchange and coordinated audits (OECD, 2023b). This collaborative
approach is essential for effectively monitoring compliance and preventing
tax avoidance practices across borders. Under the GMT framework,
countries are encouraged to implement mechanisms such as the Automatic
Exchange of Information (AEOI) (OECD, 2019), facilitating the seamless
sharing of predetermined tax data among jurisdictions. This proactive
sharing enables authorities to identify potential cross-border tax evasion
schemes and monitor the movement of taxable income more efficiently.
Moreover, joint audits and investigations involving tax authorities
from multiple countries capitalize on combined expertise and resources to
address intricate tax arrangements and uncover potential evasion tactics
employed by MNCs. Initiatives such as knowledge sharing programs,
training sessions, and collaborative research endeavors are promoted
within the GMT framework. These initiatives aim to bolster the capacity
and expertise of tax authorities in effectively administering the minimum
tax regulations. Furthermore, establishing robust communication channels
among authorities enables real-time information exchange and facilitates
prompt responses to emerging tax avoidance activities. The concerted
efforts made under the GMT framework contribute to the improved
detection of tax avoidance schemes, fostering greater transparency and
fairness in the international tax arena. Ultimately, these collaborative
endeavors strengthen international cooperation and pave the way for a
more efficient and stable global tax system.
The adoption of the GMT also presents an opportunity for Vietnam
to engage in joint initiatives with other nations aimed at combating tax
evasion and ensuring the effective enforcement of minimum tax
regulations. The implementation of GMT holds the potential for a more
streamlined tax environment and easier information sharing, paving the
way for future collaboration. Such collaborative efforts hold the potential
to strengthen international cooperation and foster a more stable and
efficient global tax environment.
In light of these developments, Vietnam's engagement in the GMT
implementation offers a chance to enhance collaboration with other
countries' tax authorities. By actively participating in global efforts against
tax evasion and enforcing minimum tax standards, Vietnam advances its
national interests while contributing to a fairer global tax framework.
Through ongoing cooperation, Vietnam can play a key role in shaping
international tax governance and fostering mutual trust among nations.
2. Increasing State Budget Revenue through Implementation 2.1.
Government's estimation of Budget Revenue from GMT
implementation 2.1.1. Current State Budget Revenues in
Vietnam
Accumulated state budget revenue estimated until December 31,
2023, is expected to reach 1,752.5 trillion VND, exceeding the budget
estimate by 8.1% (131.75 trillion VND) (Central budget exceeded by
5.9%; Local budget exceeded by 10.6%). The majority of state budget
revenue comes from domestic sources, accounting for 82.3%, and balanced
revenue from import-export activities, accounting for 14.8% (Ministry of
Finance, 2024). Particularly, the ratio of mobilization into the state budget
from taxes and fees is about 13.3%, equivalent to over 200 trillion VND
(Tue Anh, 2022).
Although the state budget revenue in 2023 exceeds the initial
estimate, this process still faces many difficulties, causing the state budget
to reach the finish line at the last minute, specifically by the end of
December 25, 2023, may the state budget exceed estimation by 4.5%. The
cause of this is said to stem from lower-than-expected economic growth,
policy packages to exempt, reduce, and extend taxes, fees, charges, and
land rent in 2023 with a scale of about 200 trillion VND (of which VND
79 trillion is exempted or reduced; VND 121 trillion is extended),
economies around the world continuing to face the risk of recession (Anh
Tuyet, 2023).
2024 is the 4th year of implementing the goals of the Socio-
Economic Development Plan and the National 5-year Financial Plan for
2021-2025 according to National Assembly resolutions; therefore, it is
necessary to take some measures to improve the above difficulties. In
addition to maintaining the macroeconomic foundation, controlling
inflation, ensuring major balances, and promoting sustainable
development in economic and social fields (Anh Tuyet, 2023), applying
GMT can also become a solution.
2.1.2. Government's estimation of Budget Revenue from
GMT implementation
Vietnam has applied the GMT since January 1, 2024, according to
a Resolution approved by the National Assembly on November 29th, 2023
(Huong Giang, 2023). GMT payers are any company or organization of a
multinational corporation, as well as any permanent establishment of
them, that generates at least €750 million in revenue for at least two of the
four years preceding the fiscal year, according to the consolidated financial
statement of its ultimate parent entity, except for the following cases:
Governmental entities, international organizations, non-profit
organizations; pension funds, any investment fund that is an ultimate
parent entity, any real estate investment vehicle that is an ultimate parent
entity, and any entity in which at least 85% of its asset value is owned
directly or indirectly through a chain of excluded entities. These are rules
prescribed in Resolution No. 107/2023/QH15 and regulations of the
Government in conformity with the GMT regulations of Inclusive
Framework on BEPS of which Vietnam is a member (Minh Hung, 2023).
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 (Huong Giang, 2023). As the
number of firms impacted by the GMT is low at about 122 in Vietnam
(Anh Minh, 2023), the authorities should negotiate with them to make
tailored policies to offset the impacts.
2.2. How the government can utilize GMT-generated budget
revenue
Since Vietnam applied GMT, Vietnamese multinational
enterprises have been required to comply with the GMT. According to
Vietnam’s Law on Investment (Section 1, Article 15.1), there are three
forms of incentives are applied to enterprises: applying a lower rate of
Corporate Income Tax (CIT) for a certain period of time or throughout the
project execution; exempting import duties or tax on goods imported as
fixed assets on raw materials used for the project; exempting and reducing
land rents and land levy (Vietnam Briefing, n.d.). Unfortunately, GMT
will neutralize key tax incentives that attract most large foreign investors,
which can have a negative effect on Vietnam since this country is heavily
dependent on attracting foreign investment, whose revenue accounts for
over 70% of the country’s exports (Do Vu, 2024).
As a result, Vietnam’s Ministry of Planning and Investment has
released a draft decree of an Investment Support Fund, outlined in
Resolution 110/2023/QH15 to solve the negative impacts and to attract
more international enterprises. The implementation of GMT would
increase the tax collected, thereby widening the budget for attracting
foreign investment. The Investment Support Fund would use the top-up
tax collected to promote investment in research and development. This
fund should also be for domestic enterprises in fields that the government
has chosen to focus on. Besides, the additional tax collected is intended to
be used for training and upskilling workers. For example, if a firm has
disbursed 1.5 trillion Vietnam dong in the first three years, the training
costs can be up to 50% (Barnes, 2024).
A group of economic experts from National Economics University
advise that this program should be applied to utilize the GMT-generated
revenue. They also suggest assisting enterprises by increasing deducted
expenses when calculating CIT. The expenses include training, research
and development, investment and environmental protection (Anh Tuyet,
2024).
3. Combating Tax Evasion, Transfer Pricing, Profit Shifting
3.1. Current situation of Tax Evasion, Transfer Pricing, and
Profit Shifting in Vietnam
According to Associate Professor, Dr. Pham The Anh - Chief
Economist of the Institute for Economic and Policy Research, tax evasion,
transfer pricing, and profit shifting among FDI enterprises are a matter of
concern in Vietnam (VEPR, 2020).
From 2013 to 2017, tax losses from the FDI sector in Vietnam
were estimated at VND7 – 8 trillion (US$300.2 – 342 million), accounting
for 3.4 – 4% of total corporate tax revenue in Vietnam (Nguyen, 2020).
In just over 2017-2019, the tax audit has inspected about 10% of
the total number of FDI enterprises and has collected, refunded, and fined
over 6,036 billion VND, reduced losses by over 23,722 billion VND,
reduced deductions by 188 billion VND. (Tạp chí Công Thương, 2023)
According to statistics from the Ministry of Finance in 2020, there
are more than 14,100 FDI enterprises, accounting for 64% of the total
number of FDI enterprises in Vietnam, reporting losses (Nguyen, 2022).
However, these FDI companies still significantly expanded their business
operations and had total assets increasing by 8.1% compared to 2019,
reaching 2.91 million billion VND (Tạp chí Công Thương, 2023). This is
mainly because FDI enterprises take advantage of loopholes in tax
regulations to evade and commit tax evasion.
Many FDI enterprises use sophisticated tricks to avoid taxes (Tien
Phong, 2020). Among them, the most used tactic is transfer pricing,
raising production input costs much higher than reality, thereby reducing
profits. Besides, subsidiaries often retain profits to convert to passive
assets, then lend them back to the parent company at preferential interest
rates, using these profits to continue investing in another country with
higher tax rates to enjoy tax deductions in that country. Tax transfer in
FDI enterprises is also done in the form that they will sponsor or conduct
research in countries with high tax rates, and then transfer profits to
countries with low-income tax rates to avoid tax.
A fining example of tax evasion is Coca-Cola Vietnam. Their
accumulated losses as of September 30, 2011, reached around
US$160,340,425, exceeding the initial investment capital of US$125
million, despite the regular 20 to 30 percent increase in annual turnover.
Although there was no corporate income tax to be paid due to such
consistent losses, Coca-Cola Group still had plans to make another US$
300 million investment in Vietnam in 2018. Long story short, Coca-Cola
Beverages Vietnam had to remit almost US$35 million, including tax
remedy and interest penalties to the country's budget (Vu, 2023b).
Tax evasion among FDIs has resulted in a huge loss of budget
revenue which could be spent on other necessary sectors. This
phenomenon also caused doubts to the effectiveness of the tax policy and
gave rise to unfair competition in the economy, causing "domestic"
enterprises to lose market share. A number of social problems have arisen,
including FDI enterprises maintaining low salary regimes, limiting salary
increases. According to the Institute of Workers and Trade Unions, in
2018, it showed that the highest average salary in the country
owned enterprise sector is over 5.2 million VND/month, while the FDI
enterprise sector only reaches 4.2 million VND/month (Duong, 2020).
Tax evasion in FDIs has negative impacts on many aspects of
Vietnam. If there are no better measures to deal with this, many complex
economic, social, and political problems may arise, affecting the
Vietnamese economy.
3.2. The role of GMT in combating Tax Evasion, Transfer
Pricing, and Profit Shifting in Vietnam
Firstly, by setting a minimum tax rate, the advantage of these tax
havens is reduced. A subsidiary's effective tax rate in a low-tax nation is
calculated by dividing its income (GloBE income) by the taxes the
subsidiary has paid. The group must pay a top-up tax to raise the
subsidiary's effective rate of tax to 15% if it is less than the 15% minimum.
The differential between the subsidiary's effective tax rate and the 15%
top-up tax is applied to the subsidiary's GloBE income. This is done after
accounting for modifications to the tax base and top-up taxes in the low-tax
nation (Janeba and Schjelderup, 2023). This makes tax evasion and profit
shifting less attractive because there is less benefit to be gained. In
addition to that, GMT also makes it more difficult for MNCs to erode their
tax base in any one country; therefore discourages tax base erosion. In
Vietnam, Minister of Finance Ho Duc Phoc has also emphasized this
advantage of GMT at the 26th session of the National Assembly's
Standing Committee (Hoang Yen, 2023).
Secondly, the GMT comes with a crucial transparency
requirement: MNCs must disclose their profits and activities in each
country they operate in. This increased transparency is a powerful tool that
combats tax avoidance in several ways (OECD, 2021). In the past, MNCs
could exploit inconsistency in reporting standards between countries. They
might under-report profits in high-tax countries and over-report expenses
in low-tax havens. The GMT's transparency measures require standardized
reporting, making it harder for MNCs to hide profits or manipulate their
financial statements.
Moreover, with detailed reports, tax authorities gain a clearer
picture of an MNC's global operations. This allows them to identify
potential red flags and inconsistencies that might indicate tax avoidance
practices. Additionally, the disclosed information often becomes publicly
available or accessible to investors. Shareholders and stakeholders become
more aware of how much tax an MNC is paying in different countries,
potentially leading to criticism or boycotts if tax avoidance is discovered.
In Vietnam, before the government released Providing tax
administration applicable to enterprises having controlled transactions
(‘Decree 20’) in April 2017, followed by Decree 132/2020/ND-CP
(Decree 132) in November 2020, which replaced Decree 20, transfer
pricing rules were lax. Without being concerned greatly with the transfer
pricing regulations, investors might join the market. Nowadays, businesses
seeking investment opportunities in Vietnam as well as those who are
already doing business there must abide by the more stringent regulations
outlined in Decree 132, based on BEPS activities and OECD standards
(Bortoletti, 2021).
III. Challenges and Recommendations for Vietnam in
implementing GMT 1. Challenges
The implementation of GMT poses a multitude of challenges,
particularly for developing countries such as Vietnam. To be specific,
those challenges can be broadly categorized into two key areas: the
challenges associated with applying the GMT within Vietnam's context
and the undesirable impacts of GMT implementation on Vietnam.
1.1. Challenges of GMT enforcement within
Vietnam's context 1.1.1. Vietnam's
economic development
Vietnam has been experiencing rapid economic growth and
industrialization, transitioning from a low-income to a middle-income
country. According to the World Bank, Vietnam's GDP per capita
increased from US$1,684 in 2010 to US$4,163 in 2022, reflecting
significant economic progress. However, its economy may be more
sensitive to changes in tax policies, including the introduction of a GMT
due to the lack of resources (data accessibility and human resources) as
well as infrastructure (technology infrastructure and tax administration
infrastructure) to compete with industrialized nations (World Bank, n.d.).
a. The limitation of resources
The new landscape with GMT, the new global tax policy, demands
data from diverse sources, including Enterprise Resource Planning System
(ERPS), forecast systems, asset registers, human resources, and entity
management systems. Through these data, governments, and tax
administrations can access the financial reports of MNCs, thus controlling
their tax payment activities. However, these data are not available to every
country. Tax authorities in developing countries like Vietnam have yet to
access it. In addition, tax expenditure reports and databases built by
ministries of finance may provide an indication of the level of foregone
revenue from profit-based tax incentives in a specific country, but they
typically would not distinguish between in-scope and out-of-scope
companies (Christians et al., 2022). As a consequence, managing this
influx of data will be a pivotal task, which poses difficulties for
developing countries like Vietnam.
Regarding human resources, compared to other countries,
Vietnam’s labor force is still at a low level of quality and productivity. For
example, in terms of labor skills, Vietnam got only 46 out of 100 points,
ranking 103 out of 141 countries and the training quality ranked 102 out of
141 countries in 2022 (Tran Thuy, 2022). In 2023, Vietnam was placed
75th out of 134 countries on the 2023 Global Talent Competitiveness
Index (VOV, 2023). Despite making considerable progress, the quality of
human resources in Vietnam still has not met the requirements for GMT
implementation since GMT's complex tax regulations as well as its influx
of data need a high level of accuracy in interpreting, analyzing and
applying. This requires a highly skilled labor force, of which Vietnam has
a shortage. Therefore, human resources can be a challenge for Vietnam
when implementing GMT.
b. The limitation of infrastructure
In terms of technology needs, it can be seen that a key aspect of
implementing a GMT is the ability to collect, analyze, and share data on
multinational corporations' global operations and income. Therefore,
without adequate technology infrastructure, Vietnam may struggle to
gather and process the large volumes of data required for assessing tax
liabilities accurately and detecting potential instances of tax evasion or
avoidance. Moreover, weak technology infrastructure may expose
Vietnam's tax administration systems to cybersecurity threats, including
data breaches, hacking attempts, and unauthorized access to sensitive
taxpayer information.
In addition, implementing a GMT requires robust tax
administration infrastructure to ensure compliance, enforcement, and
collection of taxes. However, Vietnam's infrastructure does not meet the
requirements of tax management in the new economic situation. The
limitation of tax administration infrastructure can be observed in the
inconsistency of the quality management process and data processing
model, affecting the modernization of quality management work in the
past period as well as the level of centralized collected database. The tax
system is still complicated, with many exemptions and reductions, but still
existing a number of shortcomings and limitations affecting the
effectiveness of tax management (Tạp chí Tài chính, 2021).
1.1.2. Tepid responses from several nations
According to the Financial Times, the GMT agreement, targeting
the world's largest companies, is now facing difficulties in implementation
due to the risk of political influence in the US and the withdrawal of
support from some other key countries.
In the US, the reform has been blocked by fierce pushback from
Republicans, who claim that it threatens the country’s tax sovereignty and
would hit US competitiveness (Dettoni and Myles, 2023). Although
President Joe Biden's administration supports global tax reform, it isn’t
enough for the GMT to be ratified by the US Senate. Without US
ratification, the minimum basis required for the agreement to enter into
force will not be met (An Huy, 2024).
Moreover, Cesare Zingone, CEO of Zeta Group Real Estate, a
developer of free zones in Central America, argues that the reform’s
rationale of leveling the playing field rests on the “flawed assumption”
that all countries are equal. Ricky Shah, head of Middle East consulting at
OCO Global claims that it is not realistic to compare the FDI prospects of
large, advanced economies with deep talent pools and strong market
access with smaller, less-developed markets that lack these features. These
developing countries have also complained that they have been corralled
into a global reform led by advanced countries in the form of the OECD
(Dettoni and Myles, 2023).
The tepid reactions from the US and other developing countries to
the implementation of a GMT could create uncertainty, reduce incentives
for tax reform and pose challenges in tax enforcement, potentially
disadvantage Vietnamese businesses, and influence domestic policy
considerations in Vietnam.
1.2. Undesirable Impacts of GMT on Vietnam
1.2.1. Impact on the attractiveness of Investment
Environment
For many years, Vietnam has been offering investment incentives
as the main policy to attract FDI (Manh Ha, 2023). The GMT could higher
the tax, thus disintegrating this benefit and decreasing FDI in Vietnam
since investors might be less drawn to Vietnam if they can find
comparable advantages and lower taxation rates somewhere else. The tax
authority estimated that about 120 MNCs in Vietnam will be impacted
when the GMT takes effect. This could prompt a decrease in FDI, which
accounts for over 70% of the country's exports in 2020, therefore
significantly affecting the country's revenue, the unemployment rate, and
other economic aspects (VietnamNews, 2021). The effect may be
especially extreme for trade arranged businesses that depend intensely on
foreign investment, mainly from East Asia, including South Korea, Japan
and Singapore. When the GMT is applied, Vietnam's efforts to attract
foreign investment through corporate income tax exemption and reduction
will no longer be effective and its investment environment will become
less attractive. Moreover, concerns in regard to compliance complexity
and administrative burdens associated with the GMT could further deter
potential investors (Vu, 2023a).
1.2.2. Impact on businesses investing in Vietnam
Vietnam has a generous regime of tax incentives, which are based
on location (industrial zones, difficult socioeconomic areas), incentivised
sectors (such as high-tech, agribusiness, energy-saving) and the size of
projects, therefore significantly attracting a number of MNCs. This is
because while the standard tax rate is 20% in Vietnam, the actual tax rate
for FDI companies during the average incentive period is 12.3%
(VietnamNet Global, 2023). Samsung, Intel, LG, Bosch, Sharp, Panasonic,
Foxconn, and Pegatron are typical examples of companies who enjoy a
corporate income tax benefit of less than 15% (BTA, 2023). What's more,
Dao Thi Thu Huyen, deputy general director of Canon Vietnam, revealed
that the company currently provides more than half of the conglomerate’s
production output, and one of the reasons why Canon funds large-scale
production in Vietnam is to enjoy tax incentives (Thanh Ha, 2023).
However, when GMT is implemented in Vietnam, those previous tax
incentives will no longer exist or be significantly reduced and MNCs in
Vietnam will face a steep increase in tax payments, which is not a
preferred choice of these corporations. In fact, it is estimated that more
than 120 MNCs in the country will be affected by the GMT (Thời báo Tài
chính, 2023).
1.2.3. Impact on current legal policy
The complex nature of MNCs' structure and operations makes it
hard for tax authorities to manage transactions between member
companies. This is especially true when new business models emerge,
requiring tax authorities to adapt management methods and strengthen
cooperation with other tax authorities worldwide. Although the GMT has
been agreed upon in principle, some details that may affect MNCs need to
be specified. Implementing the GMT may require reforming tax
management systems, administrative procedures for investments, and
careful scheduling by relevant ministries, sectors, and localities. Sharing
information and tax obligations among multinational corporations requires
a strong tax management system with international cooperation and
capacity, which can pose challenges for developing countries like Vietnam
that lack adequate tax management capacity.
2. Recommendations
2.1. Implementing QDMTT
Firstly, to protect tax collection, Vietnam could consider the
immediate solution of implementing a QDMTT to gain the right to collect
the top-up tax rather than the tax going to another country. A QDMTT that
meets the definition as defined in GloBE model rules is more beneficial to
both Vietnam and the corporations subject to GMT (King, 2023).
As stated, the overall benefit of introducing a QDMTT in light of
the GloBE model rules is that it is fully creditable against any other
minimum top-up tax arising under the GloBE model rules in another
country. To elaborate, this means that were Vietnam to levy a tariff on the
income derived by a subsidiary in Vietnam, no further top-up tax under
GloBE rules should be introduced on the same subsidiary or its parent in
any other country, including the country where the ultimate parent entity
resides. Another advantage of introducing a QMDTT is that it could be
very targeted - in other words, companies that would not otherwise be
subject to the GloBE model rules would not be subject to the domestic
minimum top-up tax in Vietnam, thus ensuring their benefits when
operating here.
Considered a rapid response measure, the application of such a
QDMTT should be considered carefully. Concerns have arisen over the
potential dissolution of the investment tax incentives hitherto enjoyed by
foreign companies since the standard corporate income tax rate in Vietnam
is 20%, yet for certain enterprises, the effective tax rate ranges from 5% to
10%, creating a disparity. In the event of paying taxes on the difference,
the existing tax reduction benefits are offset (Anh Minh, 2024).
Several countries have expressed an intention to introduce the
QDMTT, alongside the application of the GloBE model rules. These
include Malaysia, Singapore, Hong Kong, and Canada among others, but
as of yet there has not been sufficient information regarding their progress.
2.2. Revisiting incentive policies
Secondly, regarding foreign investment, Vietnam should revisit the
incentive policies, such as introducing cost-based schemes and policies to
support businesses that are enjoying tax incentives and are affected by
Pillar Two (McClelland, n.d.).
Currently, the Vietnamese regulations on CIT incentives are not
manifold, focusing mainly on income-based incentives such as tax
incentives and tax exemptions. Cost-based incentives, especially cash
grants, are still limited. Cash grants may include partial support for
investors’ expenditures on infrastructures such as buildings and machinery,
human resources, research and development, and intellectual property.
Such grants are considered effective measures in promoting preferential
sectors as they directly support businesses affected by the GMT by helping
them reduce the burden, and encourage substance-based and long-term
investments.
However, the impact of such a scheme on the state budget is the
key concern of developing markets, given budget restrictions and
difficulties in making upfront payments. The issuance of a new incentive
regime would create additional administrative procedures, such as
processes of incentive application and evaluation, as well as post-
inspection to ensure the regime is implemented appropriately, and meets
its objectives without losses.
Several nations have provided cash grants to enterprises to support
their operations, promote growth, and stimulate the economy. These cash
grants can take various forms and may be targeted towards specific sectors
or business types. This paper cites Singapore as an example due to various
factors this economy has in common with the Vietnamese economy.
Apropos Singapore, whose economy is export-oriented,
diversified, affected by strategic geographic location and proactive
government-led initiatives like Vietnam’s, grants are typically
administered by government agencies such as Enterprise Singapore, the
Economic Development Board, and the Infocomm Media Development
Authority. Notable grants include:
The Global Innovation Alliance Grant supports companies that
promote joint research and development, technology commercialization,
and market expansion.
The Enterprise Development Grant supports foreign companies in
their growth and transformation efforts for projects in areas such as
innovation and productivity improvements, market expansion, and
business model innovation.
The Startup SG Founder Grant, while primarily targeted at
Singapore-based startups, may also be available to foreign entrepreneurs
willing to establish their businesses in Singapore (Tan, n.d.).
Vietnam has taken steps in this direction. A draft decree
announced on December 19, 2023, by Vietnam’s Ministry of Planning and
Investment (MPI) outlines plans for establishing an investment support
fund for implementing the GMT, along with the associated support
benefits, support scope, and methods. However, the draft has attracted
criticism over the ambiguity of the support criteria and the limitations on
the eligibility for support (Anh Minh, 2024). Further study should be
conducted to assess the most appropriate incentives based on both lessons
learned from other countries and Vietnam’s specific circumstances.
2.3. Minimizing administrative procedures & establishing legal
framework
Thirdly, another way to ensure a smooth and hitchless addition of
GMT would be to minimize administrative procedures that impede
business investment and progress. In an effort to control and prevent
corrupt acts, the government has concurrently implemented reforms to
state administrative procedures over the past few years. These reforms
include e-business registration procedures and electronic tax procedures.
Additionally, the government has established investment support
infrastructure systems that have the potential to attract investment and
provide advantages in the field of foreign investment. Moreover, to
maintain the balance between national and international interests, policies
preparing for the implementation of the GMT must be established and a
comprehensive legal framework in both the substantive and formal laws
must be prepared, both to help investors and prevent litigation between
investors and State management agency (Le, 2023).