OECD tax reform and what it means for Vietnam
On June 5, 2021, the G7 finance ministers issued a statement that establishes a high-level political agreement on global tax reform, including the reallocation of a share of the global residual profit of some companies to market countries and a Minimum effective tax rate in each country in which a company operates of at least 15%. On October 8, 2021, the Organization for Economic Co-operation and Development (OECD) announced a major step forward on a global minimum corporate tax rate of 15%. “The landmark deal, reached by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than $ 125 billion in profits from around 100 of the world’s largest and most profitable multinationals to countries around the world. , ensuring that these companies pay a fair share of tax wherever they operate and generate profitsThe OECD said in a statement on October 8, 2021. The inclusive OECD / G20 framework, adopted by 136 countries, is the vision of the OECD and the G20 for the international fiscal future. There are two aspects (called âpillarsâ):
The first pillar will introduce a new link rule which will replace the old permanent establishment rules and provide taxing rights when products are sold or services provided (called âmarket jurisdictionsâ). This aims to align the market value of goods and services with where they are consumed rather than produced. It will apply when: – the overall turnover of a multinational enterprise (MNE) exceeds 20 billion euros, and its profitability exceeds 10%, – 25% of profits exceeding 10% will be allocated to market jurisdictions, and – Multinationals should withdraw at least 1 million euros from this country (for smaller economies, with a GDP below 40 billion euros, the link will be 250,000 euros).
The OECD also announced that an agreement had been reached for the elimination of all existing digital service taxes and similar unilateral measures.
The second pillar will introduce an overall minimum tax rate set at 15% (i.e. the minimum floor below which the overall tax rate cannot fall), so that if countries have a rate tax below this threshold, other countries will have the right to impose an additional tax. It will apply to MNEs whose overall turnover exceeds 750 million euros.
How would a global minimum tax work?
The basic idea is simple: countries would legislate a minimum global corporate tax rate of at least 15% for very large companies, those with annual turnover exceeding 750 billion euros (1,200 billions of dollars). Then, if companies have untaxed or lightly taxed profits in one of the world’s tax havens, their home country would impose an additional tax that would raise the rate to 15%. This would make it unnecessary for a business to use tax havens since the taxes avoided in the paradise would be collected at home. For the same reason, this means that the minimum rate would still come into effect even if individual tax havens do not participate. Here is an example of how such a system might work, as explained in an article for the Atlantic Council by Jeff Goldstein, former special assistant to the chairman of the White House Council of Economic Advisers: âSuppose country A has a corporate tax rate of 20% and country B has a corporate tax rate of 11%. The worldwide minimum tax rate is 15% and Company X is headquartered in Country A but declares income in Country B. Country A would “top up” taxes paid on profits made by Company X in Country B equal to the difference in percentage points between Country B’s rate of 11% and the overall minimum of 15% (for example, Company X would pay in taxes an additional 4% of the profits declared in country B). This approach would set a floor on global tax revenue collection and help change incentives for businesses, as businesses would know that profits transferred to tax havens would face additional taxation.â.
A new approach to transfer pricing
Pillar 1 also implies that part of the residual profits be reallocated to market jurisdictions using formulary allocation concepts, which were rejected by OECD members only a few years ago. This profit allocation may not be the same as the current arm’s length profit allocation (ALP). Critics of the ALP generally view the principle itself as dead wrong because it defies reality. They point out that multinational groups exist for the purpose of generating profit by internalizing transactions that would be more costly if conducted with unrelated parties. Critics also argue that the principle’s application is complex and potentially subject to manipulation, giving companies the ability to locate their profits in low-tax countries. Among the various alternatives to ALP proposed by its detractors, the one that emerges most often is a pay-as-you-go system, where the taxable profit of a multinational group would be allocated to its constituent entities on the basis of formulas and factors. predetermined (often sales, employees and assets – the so-called form breakdown or âFAâ). According to its proponents, using an FA system would reduce compliance costs for both tax administrations and taxpayers, since it would be sufficient to calculate the overall profit of the multinational group and the value of the factors included in the formula. . Therefore, FA would give all parties involved more certainty about the amount of taxes to be paid on international business activities.
What does this mean for Vietnam?
First of all, Vietnam’s corporate tax rate is currently 20%, above the minimum rate. However, Vietnam offers tax incentives, for example, four years of tax exemption, nine years of 50% tax reduction and a 10% preferential tax rate for 15 years to companies / projects that invest in sectors and fields encouraged, for example scientific research and technological development; software production; manufacture of composite materials, lightweight construction materials; clean energy, etc. If the overall minimum tax rate is applied, then any tax savings enjoyed by qualified multinationals in Vietnam will be reduced.
Second, Vietnam will have the overall merit of taxing the Tech giants without worrying about reprisals from developed countries. Recently, the Ministry of Finance proposed a Draft Circular that would force tech giants like Google, Facebook, Amazon and Netflix to pay taxes. In addition, the Ministry of Information and Communications is also proposing a draft decree of amendments to decree No. 181/2013 / NDCP on the development of certain articles of the law on advertising (draft decree) which imposes tax obligations to cross-border service. suppliers. Accordingly, overseas-based companies that do not have a commercial presence in Vietnam but provide goods or services to Vietnamese customers should be considered Permanent Establishments (ES) in Vietnam and subject to 2% to 5 % value added tax and 0.1% to 10% corporate tax on income generated in Vietnam. POs can report and pay tax on their own or through tax agencies, bank and non-bank financial institutions, or Vietnamese customers. In the case of PEs do not declare and pay tax: – Vietnamese clients as an organization must declare and pay tax on behalf of the PE;
– Regarding Vietnamese customers being particular:
- commercial banks or non-bank financial institutions are required to deduct tax from payment to PEs;
- the Directorate General of Taxes draws up a “black list” (including name, website, etc.) of PEs which have not registered, declared and paid taxes and forwards this black list to commercial banks and non-bank financial institutions in order to identify non-compliant PEs and deduct tax from payment to PEs;
- if payment is made through cards or other forms that commercial banks or non-bank financial institutions are unable to deduct from tax, commercial banks or non-bank financial institutions are required to track payments and report to the General Tax Department.
Third, the risk of double taxation.
Most of the Big Techs are based in America. Vietnam and the United States signed the Agreement for the Prevention of Double Taxation and the Prevention of Income Tax Evasion (DTA) on July 7, 2015. However, the United States government does not. has not ratified, therefore, the DTA has not yet entered into force. As a result, income generated in Vietnam by companies based in the United States can be taxed in both Vietnam and the United States. Finally, although Vietnam is not a member of the OECD, transfer pricing is a major concern of the Vietnamese tax administration. In fact, Vietnamese lawmakers used to adopt the OECD concepts and principles on transfer pricing in their laws, for example Decree No. 20/2017 / ND-CP of February 24, 2017 providing for an administration Tax Applicable to Controlled Firms (Decree 20) adopted the principle of a three-tier transfer pricing documentation approach to collect more tax information on the business operations of multinational firms. This is the principle set out in BEPS Action 13 of the OECD. Therefore, Vietnamese lawmakers and tax authorities would likely revise transfer pricing laws to bring them in line with the OECD’s new approach to transfer pricing and international practice.
Relevant subject: A DRAFT DECREE ON TAX REDUCTION TO SUPPORT BUSINESSES AND POPULATIONS
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