With the ratification of Resolution no. 107/2023/QH15 ("Resolution 107") in 2023 and its having come into effect on 1 January 2024, the National Assembly has enacted an add-on corporate income tax ("CIT") that some multinationals that have received a tax holiday will nevertheless have to pay. This is in line with the Global Anti-Base Erosion (GloBE) Model Rules. GLoBE is focused on companies that invest large sums in a country and so qualify for a partial or total CIT holiday, thereby sometimes paying little or no CIT for a fixed number of years. The GloBE's objective is to guarantee that corporations pay a minimum income tax in each country that adopts GLoBE rules. There is a simple background for the GLoBE concept. Competition for investors has encouraged countries to compete by reducing the corporate income tax investors pay. Often the incentives are quite large. This has seriously reduced tax revenues in many countries.
The objective of Resolution 107 is to prevent companies from selectively generating profits in low-tax countries and thus reduce their taxes in those countries to a very small number – in some countries below the government's cost to support those companies.
In Vietnam, the normal CIT rate is 20%. Qualifying investors can receive a preferential tax rate less than normal CIT. In some cases, investors can be exempted from CIT. Below are examples of special investment incentives under Decision 29/2021/QD-TTg dated 6 October 2021:
| Qualifying Investments | Incentive CIT | ||||||
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Investment projects in business lines eligible for special investment incentives with an investment capital of at least VND 30,000 billion, of which at least VND 10,000 billion must be released within 3 years from the date of investment registration certificate/investment policy approval. |
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Newly established investment projects (including the expansion of newly established projects) of innovation centers, research and development centers with a total investment capital at least VND 3,000 billion of which at least VND 1,000 billion of investment capital must be released within 3 years from the date of the investment registration certificate/investment in-principle approval. |
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Investment projects in business lines eligible for special investment incentives with an investment capital of at least VND 30,000 billion, of which at least VND 10,000 billion of investment capital must be released within 3 years from the date of the investment registration certificate/investment in-principle approval and satisfy certain other conditions under the Decree (eg high technology project, technology transfer criteria). |
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This issue has been discussed for years among investee countries, but only recently have they begun to act together. GLoBE policy was formally adopted in 2021 by the Organization for Economic Cooperation and Development ("OECD"). The global minimum tax ("GMT") is not aimed at specific countries. It looks at worldwide income, not profits. Moreover, the formula that has been adopted gives relief to all countries that give large tax holidays, which may not be the most effective strategy. It imposes a top-up CIT in cases where the actual CIT tax rate is below the OECD's proposed minimum annual tax rate of 15%. Although Vietnam is not an OECD member, the National Assembly enacted Resolution 107 by which Vietnam will be a full participant. It is anticipated that the new rules will be incorporated into the forthcoming amendment to the CIT law.
Objective of the policy
Resolution 107 targets multinational corporations which have a subsidiary in Vietnam and which have substantial worldwide income. A multinational corporation that has overall worldwide income of at least €750 million (approx. US$800 million) in their consolidated financial statements -- including income from its business in Vietnam, for at least two of the four preceding fiscal years, with some exceptions, is subject to Resolution 107 and so must pay a minimum tax of 15% tax for the year in question. The intention is that small and medium-sized corporations will not be affected by Resolution 107.
There are exceptions. Resolution 107 does not apply to foreign governments nor to international organizations, non-profit organizations, pension funds, real estate investment organizations and investment funds that are the ultimate parent company.
In addition, Resolution 107 will not apply if a corporation's operations in Vietnam meet both of the following conditions:
- Average income of all their entities in Vietnam is less than €10 million; and
- Average profit of their all entities in Vietnam is less than €1 million (or there is a loss).
Will removing or diminishing incentives make it more difficult for Vietnam to attract foreign investment?
Indeed, the question remains open. The changes are expected to increase taxable income and tax revenue. The Resolution will certainly affect some corporations that already enjoy incentives. The Investment Law provides an undertaking that if any incentives have been granted and those incentives are removed, the Government will find a way to compensate. We expect that Vietnam will take its undertaking into account when it seeks to adjust the taxes on companies that have received incentives. How it will do so, however, remains open.
The objective is to find a balance between providing investment benefits for favored investments and the needs of the State budget. There are concerns, of course, that the GMT could limit Vietnam's attractiveness as an investment venue for the very types of investments that Vietnam wants to attract. The Government acknowledges that the application of GMT could have a negative impact on certain types of corporate investment. This concern has been the subject of intense discussion. The thought is that the Government can provide other incentives, such as land fee incentives, labor support policies, or technology usage benefits. It is acknowledged that these benefits are not as clear as reduced or zero taxes. The National Assembly has requested the authority to conduct a comprehensive review of policies and laws on investment promotion to find a way to offset the effect of diminished tax incentives.
Among other things, the Government is soliciting opinions on draft regulations concerning the establishment, management and use of an investment support fund. The primary purpose of this fund will be to stimulate investment, eg, to fund support for training and human resource development, as well as to provide preferential credits. The goal is to benefit investors in a way that will ensure that Vietnam remains an attractive investment destination.
Liability for tax declarations and payment
Taxpayers are required to declare Qualified Domestic Minimum Top-up Tax (QDMTT) and pay any top-up CIT within 12 months from the end of the fiscal year. Again, QDMTT applies to entities in Vietnam whose parent's worldwide income is €750 million or above if they pay an effective CIT in Vietnam of less than 15%.
Taxpayers are required to declare Income Inclusion Rules (IIR) and pay top-up CIT within 18 months from the end of the first fiscal year after they are subject to Resolution 107. And, the period is 15 months from the end of the fiscal for the following years. IIR applies to parent entitles in Vietnam that hold ownership in entities abroad if worldwide income exceeds €750 million per annum.
For fiscal years 2023 to 31 December 2026 ("Transition Period"), a company will not be required to pay top-up CIT even if it would be subject to a top-up CIT under Resolution 107.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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