Practical Impacts on Major FDI Enterprises in Vietnam and Alternative Investment Support Policies
From January 1, 2024, Vietnam officially implemented the Global Minimum Tax (GMT) framework pursuant to Resolution No. 107/2023/QH15. This represents a fundamental shift in the country’s Foreign Direct Investment (FDI) attraction strategy, effectively ending the era of tax-incentive-based competition.
The following analysis details the legal implications and the government’s strategic policy adjustments.
1. Mechanism and Legal Basis: The End of Traditional Tax Incentives
The Global Minimum Tax (Pillar Two of the OECD/G20 BEPS Project) mandates a minimum corporate income tax rate of 15% for Multinational Enterprises (MNEs) with consolidated global revenues exceeding EUR 750 million.
Direct Legal Impact in Vietnam: Qualified Domestic Minimum Top-up Tax (QDMTT)
Vietnam has exercised its right to impose the Qualified Domestic Minimum Top-up Tax (QDMTT). This mechanism fundamentally alters the tax liability of large FDI projects:
- Previous Legal Framework: Strategic investors (in high-tech, green energy, etc.) were often granted maximum statutory incentives, including:
- Corporate Income Tax (CIT) exemption for 4 years.
- 50% reduction of CIT for the subsequent 9 years.
- Preferential tax rates of 5% or 10% for 15 years (or the entire project duration).
- Consequently, the Effective Tax Rate (ETR) for these enterprises often ranged between 3% to 6%.
- Current Legal Framework (Post-2024): With the enforcement of QDMTT, if the ETR of an in-scope MNE in Vietnam is below 15%, Vietnam will collect the difference.
- Formula: Top-up Tax = (15% – ETR) x Excess Profit.
- Implication: The preferential tax incentives granted in Investment Registration Certificates (IRC) are effectively neutralized for in-scope enterprises. If Vietnam does not collect this top-up tax, the country where the MNE is headquartered will exercise the right to collect it under the Income Inclusion Rule (IIR).
2. Practical Impact on the Investment Environment
Loss of Competitive Advantage via Taxation
Vietnam’s traditional “fiscal tool” – offering low tax rates to attract capital – is no longer effective for large-scale projects. This necessitates a shift in competitiveness factors towards infrastructure quality, legal transparency, logistics, and human resources.
Re-evaluation of Investment Strategies
While retrospective application of laws is generally restricted, the GMT is an international standard that overrides domestic incentives. Large MNEs currently operating in Vietnam face increased operating costs. New capital inflows (Expansion or Green-field projects) may experience delays as investors await clear guidance on compensatory support measures.
3. Alternative Investment Support Policies: From “Profit-Based” to “Cost-Based”
To maintain competitiveness without violating OECD rules, the Vietnamese Government is drafting a Decree on the Establishment, Management, and Use of an Investment Support Fund. This marks a strategic shift:
Transition from “Profit-based Incentives” (Tax holidays) to “Cost-based Incentives” (Cash Grants/Direct Support).
Instead of reducing tax obligations (which would trigger the top-up tax), the State intends to utilize the revenue collected from the QDMTT to support enterprises based on their eligible expenditures.
Proposed Support Categories (Draft Regulations):
Support is expected to be provided in the form of direct monetary grants for high-tech enterprises, calculated based on:
- R&D Expenses: Support calculated as a percentage of actual Research and Development spending.
- Fixed Asset Investment (CAPEX): Partial support for investment costs in high-tech or green transition projects.
- High-Tech Production Costs: Support based on the turnover or manufacturing costs of high-tech products.
- Human Resource Development: Specific grants for training costs, particularly in the semiconductor and AI sectors.
Legal Note: These support measures must be carefully designed to ensure they are Qualified Refundable Tax Credits (QRTC) or direct grants under OECD rules, to avoid being classified as “tax benefits” which would reduce the ETR and trigger further top-up tax liability.
4. Strategic Recommendations for Enterprises and Legal Counsel
In this transitional period, FDI enterprises and legal advisors should implement the following actions:
- Tax Health Check & Impact Assessment:
- Conduct a comprehensive review of the corporate structure and consolidated revenue to determine if the enterprise falls within the scope of Resolution 107/2023/QH15.
- Recalculate the Effective Tax Rate (ETR) according to GloBE Rules/IFRS standards, distinct from Vietnamese Accounting Standards (VAS).
- Investment Agreement Review:
- For new projects: Negotiate “Investment Guarantee” clauses or specific mechanisms to access the Investment Support Fund in the future.
- For existing projects: Review the “Change in Law” provisions in signed Investment Agreements to assess grounds for requesting government support.
- Preparation for Support Claims:
- Closely monitor the promulgation of the Decree on the Investment Support Fund.
- Prepare rigorous documentation to substantiate expenses related to R&D, training, and fixed asset investment to facilitate immediate application for grants once the legal corridor is established.
CONCLUSION
The implementation of the Global Minimum Tax presents a compliance challenge but also drives a qualitative upgrade in Vietnam’s investment legislation. The competition has shifted from “tax rate minimization” to “efficiency of investment support mechanisms” and the overall quality of the business environment.
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Nguyen Hien Mai