The Group of Seven (G-7) has reached a historic agreement on reforms in the global corporate income tax system, which may help to tackle tax evasion, especially among technology firms. Will this help Vietnam?
The global corporate income tax comprises two pillars. The first pillar ensures that multinational firms must pay corporate income tax in countries where they generate income instead of where their headquarters are located. Under this pillar, countries where these titans reap income are given the right to impose corporate income tax on at least 20% of the profit beyond the 10% margin for the biggest firms and those with the highest profit (the 20% and 10% figures still need to be agreed upon)(1).
Meanwhile, the second pillar allows countries to apply a minimum global corporate income tax of 15%. This will leave more significant impacts on governments’ tax revenue but their effects on multinational firms differ. In particular, the impacts may be more pronounced when most of the revenue generated comes from sectors without tax. However, such impacts will be lessened if the first pillar prompts multinational firms to redistribute part of their income away from tax havens(2).
The new tax agreement is unlikely to benefit Vietnam since the tax sharing mechanism for countries with free markets requires capable tax management systems and international coordination. This poses a concern to the OECD (the Organization for Economic Cooperation and Development) Forum on Implementation of Measures to Counter Base Erosion Profit Shifting when stakeholders discuss detailed plans for the first pillar. Developing countries with limited tax management capabilities will struggle with this pillar.
How will the global tax agreement affect Vietnam?
The agreement will lead to the redistribution of investment resources, with impacts on several fronts.
The agreement may make Vietnam less alluring to foreign investors. Although Vietnam’s corporate income tax is 20%, higher than the proposed minimum, foreign investors enjoy many incentives such as 10% tax for 15 years, tax reduction and exemption for up to nine years, loss transfer (within five years), tax refunds for reinvestment and so on. If the minimum tax of 15% is imposed, these incentives will no longer apply.
However, the impacts on Vietnam’s tax incentives hinge on other factors such as those affected by the global tax agreement. There are quite a few who are eligible for incentives but not affected by the global tax agreement, so Vietnam’s incentives still apply to them.
The agreement can benefit Vietnam as she can, to some extent, tax multinational firms in general and technology titans in particular (especially if, despite their lack of a representative in Vietnam, they still generate income there).
The minimum corporate income tax of 15% can affect the profile of internal transactions for multinational firms since transfer pricing often takes place according to internal valuation instead of pricing by independent parties—the aim is to transfer profit from high-tax countries to low-tax countries or countries without tax so as to evade taxation.
What should Vietnam do?
At present, according to Double Taxation Avoidance (DTA) agreements that Vietnam has signed, the country can request foreign technology investors and firms to have headquarters in Vietnam in line with the Cybersecurity Law. This will serve as the basis for imposing tax in line with DTA.
However, according to global trends, focus is on countries where profit is generated instead of where headquarters are situated. The review of legal frameworks, as well as bilateral and multilateral agreements, is important and requires an appropriate road map.
To that end, Vietnam needs to improve her legal system, such that domestic regulations on tax management can be assessed and a road map for legal provision fleshed out. Global taxation trends can be a source of reference, too. The aim is to ensure consistency in the implementation of tax laws.
When it comes to location-related provisions, domestic laws can be aligned with DTA agreements that Vietnam has signed or will sign, so that there will be more consistency with global norms(3).
Vietnam needs to enhance administrative discipline and compliance to incentivize small and medium enterprises to adhere more closely to tax regulations(4).
It is also important to formulate and implement laws to tackle transfer pricing in a consistent, clear and easy-to-enforce manner. A transnational database will be useful, as will greater collaboration with other governments to collect, provide and exchange information, including that on prices and markets, to combat transfer pricing more effectively(5).
The global tax agreement should be studied carefully in terms of impacts on Vietnam’s legal attributes and taxation structure. There can be a guide on how to align local and international tax practices—for example, how to identify those with ties to multinational firms, how disputes can be settled and what arbitration mechanism can help to address disputes on the implementation of DTA agreements.
Besides, although Vietnam’s laws include provisions on the registration, declaration and payment of tax, as well as penalties on offenders, tax collection remains problematic. It is therefore necessary to (i) develop a comprehensive, clear and updated database on tax payments; (ii) improve the competency of taxation officers; (iii) enhance information exchange among taxation agencies in various countries to facilitate data search and prevent tax evasion or transfer pricing; (iv) develop e-invoice management software and (v) deepen international collaboration in information and experience sharing to capitalize on support from other countries to improve Vietnam’s capabilities, in view of integration needs, especially in taxation.
(*) Phuoc & Partners
(3) Should Developing Countries Sign the OECD Multilateral Instrument to Address Treaty- Related Base Erosion and Profit Shifting Measures? Page 9
(4) Asian Development Bank Institute 2018, Edited by Satoru Araki and Shinichi Nakabayashi, Tax and Development: Challenges in Asia and the Pacific