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The Impact of the Different ETR Calculation for Investment Funds

The Thorny Issue of Pillar Two in Vietnam

Key Issues in Vietnam

Article 10 of the Law on Corporate Income Tax provides that the standard corporate income tax rate in Vietnam is 20% (rising to 32% to 50% for extractive activities). However, in order to attract foreign direct investment (FDI), Vietnam offers significant tax incentives. 
 
For example, Article 13(1)(a) of the Law on Corporate Income Tax provides for a 10% corporate income tax rate on taxable income from new investment projects in areas with extremely difficult socio-economic conditions, economic zones and hi-tech parks.  In addition, Article 14(1) of the Law on Corporate Income Tax provides for an initial four-year tax exemption for these activities and a 50% reduction in the tax rate for the next nine years. 
 
This has contributed to Vietnam attracting inward investment from some of the largest MNEs including Samsung, Panasonic, and Intel. 
 
However, jurisdictions that use tax incentives as a key policy to attract FDI are at particular risk from the Pillar Two Global Minimum Tax. 
 
In scope MNE’s with a jurisdictional GloBE effective tax rate (ETR) of less than 15% may be subject to top-up tax under the income inclusion rule or under-taxed payments rule, effectively negating the benefit of the tax incentives.  This is subject to the impact of the substance-based income exclusion which we consider below.
 
Without policy changes this could result in Vietnam having to administer ineffective tax incentives and also losing out on tax revenue that would be paid to an overseas jurisdiction (eg in the UPE’s jurisdiction).  In addition, and perhaps most importantly they could see a decline in FDI and potentially see existing FDI also moving elsewhere. 

Vietnam's Tax Incentives and Pillar Two

Income-based tax incentives, such as those offered by Vietnam are a key driver of a low GloBE ETR and will be a significant issue in a post Pillar Two environment. 
 
In Vietnam’s case they offer broad-based incentives for companies that invest in these areas. The combination of a broad-based tax holiday and reduced rates for a number of years could lead to significant Pillar Two top-up tax. 
 
The jurisdictional nature of the Pillar Two ETR calculation means that broad income-based tax incentives have a substantial impact on the jurisdictional ETR calculation. More limited base-narrowing provisions allow more room for the blending of other high-taxed in the jurisdiction to push the overall effective rate up. 
 
This is in contrast to expenditure-based tax incentives which are typically more targeted and have the benefit of incentivising investments into capital assets.  This is important as tangible capital assets and payroll in a jurisdiction increase the substance-based income exclusion which in turn reduces Pillar Two top-up tax even when there is a low ETR. 

Policy Options For Vietnam

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Lee Hadnum

Lee is a qualified Chartered Accountant and a former Senior Tax Analyst at Bloomberg Tax. Lee began his career in Ernst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience.

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