Attracting FDI needs ‘non-tax’ factors

Attracting FDI needs ‘non-tax’ factors

Investor TS. Dao Hoang Tuan, Director of the Institute of International Training, Academy of Development Policy emphasized, in order to take full advantage of the global Minimum Tax Rule, Vietnam needs to work towards strengthening the capacity of non-tax factors” and adapting laws and policies to commitments.

Submitting a presentation to the conference, Dr. Dao Hoang Tuan, Director of the Institute of International Training, Academy of Development Policy, said: Recently, countries are debating major changes in international tax regulations applicable to multinational companies, specifically the global minimum tax (GMT). Large companies will pay more taxes where they have customers and less in the countries where they have their headquarters, employees, and ongoing operations. Moreover, the agreement of the countries also set a GMT level of 15%.

Accordingly, the major changes shown in GMT reflect changes in international tax regulations and should be implemented in 2023. Taxes on digital services and related policies will need to change. In particular, countries with digital service taxes need to have a favorable connection transition. Countries need to introduce new laws to be compatible with the new tax provisions approach and to abolish some policies that contradict to the new laws/regulations.”

It is this agreement of countries that makes big changes to tax competition and makes many countries need to rethink on their tax policies towards multinational companies,” Mr. Tuan spoke.

In December 2021, the OECD and the G20 restarted their agreement on comprehensive tax policy reform to respond to the tax challenges posed by the digitization of economies around the world. Soon after, the European Commission (EU) made a transition proposal to regulate EU law.

The seminar “Global minimum tax and problems with Vietnam” organized by Investor Magazine/Nhadautu.vn received the attention of the Government, the National Assembly, leading economic experts as well as enterprises.

After the OECD countries reached a consensus on imposing a global minimum tax rate of 15% on transnational corporations with revenue of $750 million or more. Under this agreement, tax incentives, such as corporate income tax exemptions and reductions, will become less effective, because if the business pays a tax rate of less than 15% in the host country, it will have to pay the difference tax in the country of investment.

Currently, governments are in the process of developing plans and adapting them to national laws, said the director of the Institute of International Training.

Currently, Vietnam is applying a tax rate of 10% for 15 years from the date of revenue, exempting corporate income tax for 4 years from the date of income and reducing 50% of the payable corporate income tax for the next 9 years for FDI enterprises investing in the fields of important infrastructure, high technology, large scale and production of goods with global competitiveness. Enterprises such as Intel, Foxconn, Samsung, LG … are the businesses that enjoy the incentives and will suffer the greatest impact from the tax commitment.

Mr. Tuan said that, compared with other economic sectors, FDI enterprises are currently benefiting a lot from tax incentives. According to the report of the Ministry of Finance (2019), in 2016, the proportion of corporate income tax incentives, exemptions and reductions of foreign-invested enterprises over the total amount of corporate income tax exempted and reduced of enterprises nationwide is 76%. The ratio of enterprise income tax incentives, exemption or reduction of foreign-invested enterprises to the total payable corporate income tax calculated at the common tax rate is 48%, while this ratio of state-owned enterprises is 4.6%, non-state enterprises is 14%.

Assessing the impact of the Global Minimum Tax Rule on Vietnam, Mr. Dao Hoang Tuan said that the Rule on the one hand limits the ability of Vietnam to use tax incentives to attract investment, but other countries in the region are also affected by this agreement. Therefore, this agreement does not put Vietnam in a more disadvantageous position in attracting FDI when compared to other countries in the region in attracting new investors.

When countries in the region, including Vietnam, cannot use tax instruments, other factors in attracting investment (factors related to FDI of the receiving country) will become more important for FDI enterprises.

“Vietnam has advantages in a number of these factors, such as a stable political environment, a stable macro environment, and the ability to access large markets thanks to signed free trade agreements. With countries in the region, except Singapore, Vietnam is the country that signed the most free trade agreements. However, for the factors of infrastructure, transportation costs and skilled labor, Vietnam has not yet caught up with the leading countries in ASEAN”, Dr. Dao Hoang Tuan recommended.

Accordingly, the goal of the investment attraction strategy in the coming time should be towards the above criteria. Tax exemption/reduction tools to attract investment can be replaced by prioritizing public investment in the infrastructure of production sites, or incentives and subsidies for labor training programs. Such tools may require better and closer inter-sector coordination, between the Ministry of Planning and Investment and relevant ministries/sectors, in investment promotion.

As for FDI enterprises already operating in Vietnam, Dr. Dao Hoang Tuan said that this agreement reduces the incentive of these enterprises to move production to another country. Without this agreement, after the end of the incentive period, these businesses can completely move to another country, with a more favorable tax rate. This may also be the reason why some FDI enterprises do not invest in building linkages with domestic enterprises. With the global minimum tax agreement, the incentive to move to another country after the end of the tax incentive period is no longer available. The Vietnamese government and the governments of many other countries will increase tax revenues. These additional revenue sources need to be promptly invested in factors that positively affect FDI attraction.

Policy suggestions for Vietnam, Dr. Dao Hoang Tuan emphasized: In the context of developing the digital economy, the agreement related to GMT is also a testament to the flexible adaptation and consensus of countries to changes in global policies. This tax policy is a clear example. Governments need to be proactive and flexible to both aim at the development goals of the digital economy, have policies to attract FDI for economic development in the new context, and create a favorable investment environment for FDI enterprises. It is important that the Vietnamese government adjust relevant policies to create compatibility between Vietnam’s tax incentives currently applied to FDI enterprises and the addition of GMT-related regulations in the current Vietnam scene.

Finally, Mr. Tuan said that, in order to make the most of the benefits from this Code, the strategy of attracting investment in the coming time should be directed towards strengthening the capacity of non-tax factors such as upgrading the infrastructure, reduce logistics costs and strengthen capacity and skills training for workers, and the government also needs to make adjustments to relevant laws and policies to adapt to changes from international tax regulations.

https://nhadautu.vn/thu-hut-fdi-can-nhung-yeu-to-phi-thue-d67023.html