Vietnam’s proactive adoption and swift implementation of the GMT position it among the pioneering nations in Asia, highlighting the country’s steadfast commitment to this global tax initiative. This move underscores Vietnam’s transparent legal framework and facilitates efficient business planning for investors looking to invest in Vietnam.

Vietnam currently stands out as a distinguished destination for foreign capital in the region, known for its variety of incentives aimed at attracting overseas investors. These incentives, including tax exemptions, reductions, and competitive tax rates, have been particularly appealing.

Nguyen Thanh Vinh, partner, Baker McKenzie Vietnam (left) and Dao Thanh Hoa, special counsel, Baker McKenzie Vietnam

However, with the introduction of the QDMTT, investors with projects benefiting from tax incentives in Vietnam will be directly affected. Essentially, the QDMTT mechanism reduces the attractiveness and advantages of existing domestic tax incentive policies.

This raises concerns about potential negative impacts or reductions of foreign direct investment (FDI) inflows into Vietnam in the foreseeable future. To thoroughly evaluate the GMT’s impact on FDI inflows into Vietnam, several technical aspects merit careful consideration.

Not all of Vietnam’s investors will be affected by Pillar Two. Pillar Two applies specifically to entities within multinational corporation (MNC) groups reporting annual consolidated financial statement revenues of €750 million (around $815 million) or more in at least two of the past four fiscal years.

This means that Pillar Two targets large multinational groups characterised by substantial and consistent annual consolidated revenues, rather than universally applying across all multinational groups.

Furthermore, these entities will only face the top-up tax if their effective tax rate falls below 15 per cent, indicating they currently benefit from tax incentives resulting in an effective tax rate in Vietnam below 15 per cent.

According to Vietnam’s Ministry of Finance, approximately 122 multinational groups are expected to fall under Pillar Two in Vietnam. Therefore, it is expected that the GMT regime will primarily impact a limited number of foreign ventures in Vietnam, specifically those attributed to large multinational entities, while leaving the majority of the projects unaffected.

The GMT imposes a tax of up to 15 per cent on excess profits but exempts Substance-Based Income Exclusion within the country imposing the top-up tax. This exclusion covers the carrying value of tangible assets and payroll costs of eligible employees in that jurisdiction. Hence, significant expenditures on acquiring fixed assets and labour for a foreign-led project in Vietnam will effectively reduce the amount of top-up tax payable in the country, based on a fixed rate.

Vietnam is known for its attractive income-based tax incentives aimed at projects in preferential sectors, locations, or large-scale projects. However, these incentives are selectively applied and come with intricate conditions, offering substantial advantages primarily to specific industries or major projects. Therefore, the introduction of the GMT in Vietnam will not uniformly impact all enterprises currently benefiting from tax incentives.

Furthermore, amid the global trend of simultaneous adoption of the GMT across numerous countries and jurisdictions, making decisions solely based on Vietnam’s adoption of the GMT is impractical. The GMT is designed for global implementation, as its name suggests. Consequently, regardless of the investment location, MNCs falling under the scope of Pillar Two may still be required to pay the top-up tax under Pillar Two rules in any other jurisdictions.

Therefore, investors will need to consider Vietnam’s non-tax advantages when making decisions, such as free trade agreements, policy transparency, and a young labour force.

In light of this, the current environment also necessitates Vietnam to review and reform its investment attraction policies to enhance the attractiveness of its investment climate and sustain capital inflows from MNCs covered under Pillar Two.

Vietnam is currently considering the introduction of a new investment support fund. This initiative aims to reimburse expenditures related to workforce development, investment in fixed assets, research and development (R&D) costs, production of high-tech products, and investments in social welfare infrastructure.

It targets high-tech businesses, manufacturers of high-tech equipment, entities with high-tech applications, and companies hosting R&D centres, aligning with Vietnam’s existing investment incentive policy focusing on high-tech industries. However, as this policy is being developed, it must adhere to Pillar Two rules, which require that any jurisdictional top-up tax must be “implemented and administered in a way that is consistent with the outcomes” provided for under Pillar Two.