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2022 tax outlook – shaping investment flows in the next five years

By Dung Nguyen

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Together with a series of new tax policies which have been deployed, changes in global tax policies will contribute to changing the taxation outlook as a whole and the flows of foreign investment into Vietnam in the next five years.

Important changes of the tax outlook

Recently, news about a post-pandemic economic recovery and development program costing some VND800 trillion has captured public attention. Obviously, the program will be discussed much before being implemented with new policies, including those on tax.

“It is too early to discuss the specifics, in terms of taxes, in this stimulus package, but there will certainly be important changes in tax policies in the coming years amid the expenditure increase and fiscal balance,” said Hoang Thuy Duong, Partner – Head of Tax, KPMG in Vietnam, on the threshold of the virtual Tax & Legal Institute (TLI) 2021, one of the annual flagship tax and law forums of KPMG in Vietnam, set to take place on November 11.

Nevertheless, policies in the post-pandemic economic recovery and development program can support the economic recovery in the short term. According to tax experts at KPMG, in the medium and long terms, new regulations at present will lead to significant changes in the market in the coming period. These will be the key issues that KPMG will discuss with enterprises and experts in the upcoming TLI.

Since early this year, there have been many changes in tax policies, but they have yet to create an obvious impact, due to the Covid-19 pandemic. Specifically, one of the biggest changes in the new Law on Investment, which took effect in early 2021, is the supplement to those entitled to investment incentives, including encouraged sectors, location, size of investment capital, high-tech, scientific and technological enterprises, innovation centers, and small and medium enterprises, etc.  

Within the framework of the common incentives stated in the new Law on Investment, Le Thi Kieu Nga, Partner – Head of Corporate Tax Services, said the Government has the authority to issue criteria for a special incentives package, such as the duration to enjoy preferential tax rates of up to 37 years, versus the maximum of 15 years under the prevailing regulations. “Decision 29 recently issued by the Prime Minister will create attractive tax and investment mechanisms and policies, aiming for high-quality investment projects on science research, innovation and technological development, or mega projects with an investment capital of VND3 trillion and above each”, Nga added.

From July next year, e-invoices, which have been piloted in six provinces since early November, will become compulsory countrywide in Vietnam. The use of e-invoices would compel enterprises to invest more in infrastructure but make economic transactions more transparent and prevent frauds efficiently in tax management, Nga noted.

In addition, the collection of taxes levied on digital services amid the fast development of the digital economy has caused multiple controversies, especially overseas e-commerce and/or digital platform-based businesses carrying out B2C transactions without having a commercial presence in Vietnam.    

Furthers, Circular 40 on taxing individuals and households, including those carrying out business in e-commerce and digital base platform effective from August 2021 also create various controversial issues in the implementation and is in the process of being amended by the Ministry of Finance. Nga said these were all major policies helping tax agencies collect taxes effectively, but enterprises have complained about obstacles, mainly caused by the deployment of regulations.

“In 2022, we will see many changes in tax and investment attraction policies in Vietnam. In the context of the “new normal” and important changes in tax management, enterprises should get updated on tax and investment policies to concurrently comply with the regulations and create driving forces for their growth,” Nga recommended.

Dealing with tax challenges in production shifting

Vietnam has benefited from production shifting since the outbreak of the United States-China trade war. Despite certain obstacles triggered by the Covid-19 pandemic, such as supply chain disruptions, tax experts at KPMG said the shift of investment inflows into Vietnam will be unchanged.

However, many obstacles in administrative procedures remain in place.  For example, many foreign invested enterprises have been considering expanding their manufacturing projects in Vietnam and converting themselves into export processing enterprises (EPEs) to enjoy Vietnam’s preferential customs and tax policies applicable to EPEs but conversion procedures could be quite time-consuming, according to Nhan Huynh, Partner – Head of Integrated International Tax.

Therefore, Nhan suggested Vietnam should consider simplifying administrative procedures and create favorable conditions for enterprises to export their products in line with the Government’s orientation to encourage export after signing many free trade agreements.

The reform of administrative procedures will help Vietnam benefit significantly from the shift of production. Otherwise, enterprises will become hesitant due to the difficulties, Nhan added.

Nevertheless, according to Andrea Godfrey, Partner – Head of Global Mobility Services, there is a high degree of uncertainty facing foreign experts who want to return to Vietnam post-pandemic to work. For these foreign experts, some companies offered the option to leave Vietnam, bearing expenses for their foreign experts and their family and adopting a flexible ‘work from anywhere’ approach. 

In addition, the administrative burden of obtaining an entry permit for them to travel to Vietnam remains in place, which is in a tangle of paperwork very time-consuming and has changed frequently. The plan to reopen international flights has yet to be approved, and there is still a requirement on quarantine for even fully vaccinated experts.

“We have observed that the government is taking steps to resolve the above uncertainties and hope that policies will be announced soon to support the re-opening of the country”, Andrea added.

Changes in global tax policies

Not only in Vietnam, tax policies worldwide have also been amended considerably. Duong said the world has been working on two major issues: Base Erosion and Profit Shifting (BEPS) actions, especially the near-completion work on addressing taxation challenges of the digitalized economy (BEPS 2.0) and tax initiatives for environmental, social and governance (ESG) matters, such as those coming out of the United Nations Framework Convention on Climate Change featured at the 26th United Nations Climate Change Conference of the Parties (COP26) in the United Kingdom, with the attention of Prime Minister Pham Minh Chinh.

According to Duong, the imposition of a global minimum tax rate of 15% on multinational enterprises may reduce the effectiveness of certain tax incentives for inbound investment into Vietnam, so revision of the tax incentive policy may be needed.

Moreover, enterprises’ adoption of ESG criteria will strongly affect the investment costs and funds for projects. Tax policies may change, such as the introduction of carbon taxes or incentives for renewable energy and alternatives to fossil fuel. 

These issues may be seen in reality in the next three to five years, Duong said, adding that KPMG has been an active participant in the debate and discussion shaping new global tax policies. These emerging tax issues will be discussed at the TLI on November 11.

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