Vietnam attracts FDI in the context of implementing a global minimum tax policy

Dr. HOANG NGOC HAI
Ho Chi Minh National Academy of Politics

1. Results achieved in attracting foreign direct investment

The Covid-19 pandemic caused a shock to the world economy, reducing the economic growth rate of many countries, including Vietnam. After the pandemic was controlled, the socio-economic situation gradually stabilized and the Government’s macro adjustments have made Vietnam an attractive and safe destination amid the trend of the shifting flows of investment across the world.

After the Covid-19 pandemic occurred, the amount of registered foreign direct investment capital in 2020 decreased by 25% and the value of realized foreign direct investment (FDI) decreased by 2% compared to 2019. In 2021, there was an increase in volume of registered FDI capital (increasing by 9.2% compared to 2020’s) but decreasing in the realized value (decreasing by 1.2%). The years 2022 and 2023 marked a spectacular return in attracting foreign investment capital to Vietnam when the total registered FDI capital reached USD 27.72 billion and USD 36.61 billion respectively, and the level of realized FDI capital reached the record of USD 22.4 billion and USD 23.18 billion(1).

Achieving the above results is thanks to Vietnam’s many efforts in maintaining stable macroeconomic policies, ensuring the efficiency of the economy, as well as accompanying and supporting the business community in overcoming difficulties, and obstacles, while stabilizing and developing production and business. This has been a crucial driving force contributing to maintaining and promoting economic growth while the world economy is still subject to many fluctuations due to political conflicts, disruption of the global supply chain, and investment capital shifts, etc.; It affirms foreign investors’ confidence in Vietnam when deciding to expand ongoing projects and invest in new projects.

In 2023 alone, FDI was present in 18 out of 21 economic sectors. Leading the way was the processing and manufacturing industry, with total investment capital of more than USD 23.5 billion, accounting for 64.2% of total registered investment capital (increasing by 39.9% compared to 2022’s). This was followed by the real estate business sector, with total investment capital of nearly USD4.67 billion, accounting for more than 12.7% of total registered investment capital (increasing by 4.8% compared to 2022’s). Ranked 3rd and 4th were the electricity production and distribution and the finance and banking sectors, respectively, with over USD 2.37 billion (increasing by 4.9%) and nearly USD 1.56 billion in total registered capital (nearly 27 times higher).

2. Impacts of the global minimum tax policy on attracting foreign investment in Vietnam

In June 2013, the Action Program to combat base erosion and profit shifting (BEPS) initiated by the Organization for Economic Cooperation and Development (OECD) identified the global minimum corporate income tax (referred to as the Global Minimum Tax) as one of the two main pillars of this Program. The global minimum tax rate is set at 15%, applicable to multinational companies with total global consolidated revenue of EUR 750 million (USD 800 million) for at least two of the four preceding consecutive years. The purpose of setting this tax rate is to prevent these companies from transferring profits to countries with low tax rates to avoid taxation.

All 142 countries, including Vietnam, have agreed with the two-pillar solution framework and the majority of countries in the European Union, Great Britain, Switzerland, Australia, Japan, Singapore, South Korea, and Hong Kong (China), etc., have confirmed that they will apply the minimum tax rate of 15% starting in 2024. Among them, countries such as Japan, Singapore, South Korea, etc., have significant foreign investment capital in Vietnam and many large companies subject to the global minimum tax.

Challenges when applying global minimum tax policy

Before the implementation of the global minimum tax, foreign investors in Vietnam enjoyed many tax incentives, including: (i) preferential tax rates (10% up to 15 years and 20% up to 10 years); (ii) Tax exemption or reduction for a limited period (up to 9 years); (iii) loss carryforward for tax calculation purposes (within 5 years); (iv) tax exemption on transferring profits abroad; (vi) tax refunds for reinvested profits; (vii) accelerated depreciation and other tax incentives and land-rent reductions, and so on. With these incentives, the actual corporate income tax of FDI enterprises is only 12.3%, and the tax rate of some large corporations is as low as 2.75% - 5.95%.

When the global minimum tax is applied, the difference compared to the 15% tax rate, multinational companies investing in Vietnam will have to pay an additional amount to the country where their headquarters is located. Therefore, benefits from the previous tax incentives they enjoyed (or could enjoy) in Vietnam will no longer be available or will be significantly reduced. The attraction of tax incentives when investing in Vietnam by FDI “giants” will clearly diminish, and therefore will affect decisions to invest in Vietnam in the future. Although the Global Minimum Tax primarily targets large multinational corporations, smaller FDI enterprises that are part of the global production chain of these corporations will also be indirectly affected.

According to statistics from the Ministry of Finance, Vietnam currently has 1,015 foreign-invested enterprises, from 120 foreign corporations subject to the global minimum tax. When Vietnam implements this policy in 2024, more than 70/120 businesses will likely be affected. In 2024, it is estimated that more than VND 12,000 billion in additional tax differences will be collected if countries with parent companies implement the global minimum tax(2).

Data announced at the Conference, “Investment Promotion 2023 - Strategy to attract FDI in Binh Duong in the context of global minimum tax rates” shows that in Binh Duong, 44/4,000 FDI enterprises will be affected by the global minimum tax policy to be implemented in early 2024. At that time, these FDI enterprises can contribute an VND 2,000 billion/year to the budget, but alternative incentives also need to be urgently researched as the current tax preferential measures will lose their effectiveness, thereby posing a significant challenge to maintaining Vietnam’s competitiveness in attracting foreign investors(3).

In addition, there are currently about 335 projects with the registered investment capital of over USD100 million operating business investment activities in the field of processing and manufacturing industries in economic zones and industrial parks that are enjoying preferential corporate income tax incentives under 15%, most of which are businesses in the high-tech sector. The total registered investment capital of these projects’ accounts for nearly 30% of total FDI capital in Vietnam (about USD 131.3 billion)(4). Vietnam’s investment attraction policy currently prioritizes high-tech projects. When the global minimum corporate tax rate is implemented, it may disrupt the investment location and operating strategies of multinational companies as well as affect Vietnam’s investment attraction strategy.

Opportunities for Vietnam when implementing the global minimum tax

The implementation of the global minimum tax does not completely diminish Vietnam’s attractiveness in attacking FDI. In the general context, applying a global minimum tax is necessary and appropriate. The global minimum tax contributes to increasing tax revenue for the state budget, as well as minimizing the phenomena of profit shifting to evade taxes, etc., by multinational corporations operating in Vietnam.

According to the Ministry of Finance, in the 3 years from 2020 - 2022, 18% - 21% of total domestic budget revenue came from corporate income tax. Among this, the FDI enterprise sector contributed about 7.5% - 8.5% of the total domestic budget revenue and about 39% - 41% of the total corporate income tax revenue.

Vietnam has the right to impose additional taxes on FDI enterprises currently enjoying an effective tax rate in Vietnam that is lower than the minimum rate of 15% when applying the minimum tax policy from January 1, 2024, as committed. Each year, the state budget revenue can increase by billions of dollars. Therefore, Vietnam will have resources to invest in socio-economic development, contributing to increasing the competitiveness of the economy.

In the context of shifting capital resources around the world, with existing advantages (favourable geographical location, cheap labour source, many FTA agreements signed in a fast-growing economic environment and a stable and moderate political and legal system), Vietnam is still considered an attractive destination for FDI capital.

The report on the business environment index by the European Chamber of Commerce in Vietnam (Eurocham) has shown that the biggest obstacle in attracting investors is difficulties in administrative procedures (accounting for 70%). Factors that FDI enterprises are much more interested in than tax incentives are improving visa and licensing procedures for foreign experts working in Vietnam; upgrading infrastructure; human resource development and training; green-growth orientation; the elimination of petty corruption, etc. The report clearly states that among the factors that attract foreign investment, corporate income tax incentives ranked near the bottom. Therefore, there is a basis to assert that the global minimum tax does not completely negatively affect Vietnam’s ability to attract foreign investment.

In addition, the Vietnamese Government is actively researching other incentives to offset businesses’ tax obligations, such as supporting human resource training costs and developing plans to implement cash support, etc. The demand for industrial park land rental continues to show positive forecasts because Vietnam has signed many economic and trade cooperation documents and upgraded relationships with the world’s leading economies, as well as the fact that the revised Land Law was approved by the National Assembly on January 18, 2024.

Vietnam’s important diplomatic activities in 2023 continue to be catalytic factors in attracting FDI capital. Specifically, during the Korean President’s visit, 17 bilateral cooperation documents between Vietnam and South Korea were signed. In September 2023, Vietnam and the US upgraded their relationship to the level of comprehensive strategic partnership. In November 2023, Japan and Vietnam upgraded their relationship to a comprehensive strategic partnership. In December 2023, Chinese Party General Secretary and President Xi Jinping paid an official visit to Vietnam.

According to Decision No. 326/QD-TTg dated March 9, 2022 by the Government on “Allocation of national land use planning targets for the period 2021 - 2023, with a vision to 2050, the national land use plan for 5 years 2021 - 2025”, Vietnam has significant room to establish new industrial parks until 2025, with the North and the South both have about over 5,000 hectares. In particular, the provinces focused on expansion in the North include Hai Phong, Thai Nguyen, Bac Giang, and in the South include Binh Duong, Dong Nai, and Long An.

Currently, logistics costs in Vietnam account for about 16.8% of the value of goods, much higher than the global average of about 10.6%. The Government is accelerating the construction of transportation infrastructure projects with a series of public investment projects to help connect inter-provincial traffic and shift production activities to provinces out of the center such as: the North-South expressway, Ring Road 4 - Hanoi, Ring Road 3 - Ho Chi Minh City, and various seaport and airport projects, etc., currently being planned and implemented. This will help resolve “logistic bottlenecks” and have a direct impact on supporting the industrial park real estate sector.

3. Proposal to attract high quality FDI projects in the coming time

The competition to attract FDI among countries in the context of applying global minimum tax policy is gradually “heating up”. Many new policies have been studied and applied by countries to gain competitive advantage, aiming to the shifting global investment flows. Vietnam needs to reconsider its FDI attraction strategy and promptly implement appropriate and specific solutions:

Firstly, restructuring strategies and policies to attract FDI

On August 20, 2019, the Politburo promulgated Resolution No. 50-NQ/TW on orientations to perfect institutions and policies, improving the quality and efficiency of foreign investment cooperation until 2030. Additionally, the Foreign Investment Cooperation Strategy for the period 2021-2030 has been promulgated by the Government of Vietnam. In implementing the policy of attracting FDI in the new conditions, Vietnam focuses on attracting high value-added projects, projects that prioritize the use of high-tech and modern management and have positive spillover effects, connecting global production and supply chains, directly supporting the implementation of sustainable development strategies.

To achieve these goals, Vietnam needs to re-establish the country’s new competitive advantages in the coming period. Besides traditional advantages such as cheap labor and abundant workforce, new factors such as skilled labor, comprehensive infrastructure, simple and convenient administrative procedures for investors while ensuring legal compliance, environmentally friendly production processes, familiarity with technology projects, intellectual property protection requirements, and clear origin of products should be emphasized. Therefore, a carefully orientation for the selection of FDI projects, improving environmental protection standards, reducing emissions to reach Net-Zero, achieving sustainable development criteria, and complying with commitments to combat climate change, etc., will also impact FDI capital flows.

It is necessary to continue to build and improve mechanisms and policies directly related to high technology and technology transfer, in accordance with development trends, approaching advanced international standards and in harmony with international practices. Proactively reviewing incentives to attract high-quality foreign investment, including higher standards for high technology and technology transfer.

Vietnam needs to leverage its advantages in international relations when upgrading comprehensive strategic partnerships with South Korea, the United States, and Japan to create a spillover effect of FDI capital flows from these countries with high technology projects from major technology investors. At the same time, specific policies and measures should be in place to support Vietnamese businesses in improving their production and research capacity, absorbing technology transfer, and becoming an important link in the global production and supply chain.

Secondly, implementing other attractive incentive tools other than taxes and supporting incentives directly

According to its commitments, Vietnam will implement the global minimum tax from January 1, 2024. To take advantage of this opportunity, Vietnam should reserve the right to impose additional taxes on FDI enterprises, thereby increasing tax revenue for the state budget. Otherwise, the entire difference (between the preferential tax rate currently applied by Vietnam at the minimum rate of 15%) will be transferred to the foreign investors’ country and Vietnam will lose its tax receivable share, which should have received. Accordingly, relevant laws (Corporate Income Tax Law, Investment Law, Enterprise Law, etc.) need to be promptly reviewed and adjusted accordingly. At the same time, it is necessary to introduce other attractive tools to attract foreign investors instead of tax incentives such as: allocating the global minimum tax revenue to incentives in developing high-quality human resources, improving training quality; completing and synchronizing infrastructure to remove “bottlenecks” in logistics; Enhancing the transparency of institutions and administrative procedures, reducing production costs through technical support, and so on.

Dialogue and exchange activities with investors and businesses need to ensure substantial outcomes; Solving difficulties and problems for investors and businesses, rather than just listening. Local authorities should accompany businesses in implementing digital transformation. Maintaining a regular dialogue mechanism between leaders of localities, departments and branches and investors in the locality, and holding meetings with business associations to promptly handle difficulties and problems in the process of implementing investment projects in the locality, ensuring projects operate effectively, continuing to strengthen investors’ confidence in the local business investment environment, creating an effective spillover effect, and positive impact on new investors.

Regarding general incentive policies, Vietnam continues to orient itself according to Resolution No. 50-NQ/TW dated August 20, 2019 of the Politburo “On the orientation to perfect institutions and policies, improving quality and efficiency of foreign investment cooperation until 2030”; Resolution No. 41-NQ/TW dated October 10, 2023 of the Politburo “On building and promoting the role of Vietnamese businesspeople in the new era”. Accordingly, continuing to maintain a favourable investment environment, along with a new strategy for attracting FDI, businesses and entrepreneurs, ensuring the principle of equality between domestic and FDI enterprises. The Government should create and protect a healthy business investment ecosystem, joining hands and accompanying groups and businesses to overcome difficulties and challenges, and achieve long-term, stable development in Vietnam in the spirit of “harmonious benefits, shared risks”, investing for a new economy.

Thirdly, Rapid Enterprise Advancement on the Value Chain with Government and Self-Driven Support

Accordingly, the Government needs to intensify support for domestic enterprises to move up the global value chain by having state management agencies directly connect FDI enterprises and domestic enterprises through various forms: Building a high-quality online database of domestic suppliers (with priority industries such as electronics, computers, automobiles, footwear, textiles, etc.) and deploying services of effective connection among businesses; Designing and implementing a demand-based supplier program to enhance the capacity of domestic enterprises in important industries with significant linkage potential; Handling horizontal limitations, such as promoting investment facilitating factors, market entry, and especially creating a legal corridor for civil economic contract disputes; Continuing to effectively implement policies on developing supporting industries such as trade defense policies, market policies, and so on.

Government support will help develop a network of tier 1 - 2 - 3 domestic suppliers connected to the final assembly stages, helping them reposition their businesses towards more complex products. This will boost exports and enhance the impact of FDI, increasing the position of domestic enterprises in the global value chain.

To strengthen and establish close links with FDI and enhance their position, Vietnamese businesses must make substantial efforts to improve their ability to link and absorb technology. Criteria for FDI enterprises to choose Vietnamese partners include: facilities, supply capacity, human resources, and technological level. Currently, this is a limitation for the majority of Vietnamese businesses. Therefore, Vietnamese businesses need to: strengthen internal resources, ensuring stable product quality and quantity with competitive prices, being creative and innovate in technology. Pay special attention to improving the quality of human resources and labour structure to adapt and anticipate new market trends through linking and placing orders with universities and vocational training schools to have high-quality human resources to meet the requirements of FDI enterprises.

Establish connections among enterprises within specific industry groups to jointly propose institutional reforms that facilitate business model transformation, enabling them to secure higher positions in the value chain of Vietnamese industries. Develop essential operational capabilities of businesses in the supply chain, encompassing 6 key stages (renovation, planning, purchasing, production, transportation, marketing and sales) as a foundation to enhance their capacity to participate more deeply in the entire global value chain of FDI enterprises.

4. Conclusion

Implementing the global minimum tax policy is one of the two main pillars of the Base Erosion and Profit Shifting Program aimed at preventing the “race to the bottom” on preferential tax rates between countries in general, and localities in particular in attracting foreign investment sources. Thereby, limiting and aiming to eliminate loopholes in state management activities, preventing foreign investment enterprises from evading taxes and price transfer, and contributing to increasing national budget revenue.

Vietnam has participated and is the 100th member of the BEPS Forum since 2017, requiring Vietnam to be ready to adapt to new conditions in attracting foreign investment. The global minimum tax policy poses many challenges for Vietnam, affecting its competitiveness in attracting foreign investment in the short term. In the long term, the effectiveness and attractiveness of incentive policies for investment will diminish in many cases. The global minimum tax will primarily impact large FDI enterprises, influencing the attraction of new investment projects and decisions to expand existing investments.

Although the global minimum tax brings many challenges, it is also an opportunity for Vietnam to participate and assert itself in the international market. Regarding positive opportunities, imposing an additional tax to the minimum tax rate of 15% will contribute to strengthening Vietnam’s international integration in general, reforming the tax system in a direction consistent with common practice and international standards in particular. This will contribute to improving Vietnam’s business environment. At the same time, it will contribute to perfecting the legal framework for taxation and promote amendments to Vietnam’s FDI attraction policy in the direction of reducing tax incentives and enhancing competition through investment environments, infrastructure, human resources, and so on.

The global minimum tax is an opportunity for Vietnam to solve the current difficulties in management of price transfer, tax evasion and avoidance by multinational groups and companies. Applying the global minimum tax rules is an opportunity for Vietnam to review the current mechanisms and preferential policies on attracting foreign investment that are still appropriate in the new situation, replacing them with new competitive advantages to properly and accurately support the needs of foreign investors, especially large investors who are willing and capable to invest in Vietnam.

The global minimum tax indeed presents a complex challenge for Vietnam, as well as for developing countries, which have always used tax exemptions and reductions as a main tool to attract foreign investment. At the same time, it is a good opportunity for Vietnam to review the investment incentive system and implement reasonable reforms by designing cost-based incentives to maintain the attractiveness of the investment environment, continuing to retain and attract large investors in Vietnam.

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Received: January 29, 2024; Revised: February 22, 2024; Approved for publication: February 27, 2024.

Endnotes:

(1) Nguyen Dieu Anh: “Impact of foreign direct investment on economic growth in Vietnam”, Industry and Trade Journal, August 2023 issue.

(2) Hoang Yen: “Responding to the global minimum tax policy: Act early to protect revenue, maintain competitive advantage”, https://mof.gov.vn, accessed November 5- 2023.

(3) Anh Tuyet: “Global minimum tax affects 44 FDI “giants”, Binh Duong reforms to retain foreign capital”, https://vneconomy.vn, accessed on December 31, 2023.

(4) Nguyen Van Phung: “Impact of global minimum corporate income tax on FDI enterprises in Vietnam”, http://tapchitaichinh.vn, accessed on December 31, 2023.