Imposing suitable tax rules on cross-border providers

Multinational corporations will be liable to a minimum 15 per cent tax rate in every place of operation from 2023 as part of the long-anticipated agreement. It is rapidly approaching implementation, so as an emerging economy with a variety of favourable tax mechanisms to attract overseas funds, what would be the ramifications for developing nations like Vietnam, and how can the country prepare for such an event?

First and foremost, the corporate income tax rate in Vietnam is currently 20 per cent, which is above the minimum rate of 15 per cent. However, Vietnam offers many types of tax incentives, including four years of tax exemption, nine years of 50 per cent tax reduction, and a 10 per cent preferential tax rate for 15 years to companies/projects which invest in encouraged sectors and areas – for instance, scientific research and tech development; software production, manufacturing composite materials, light construction materials; clean energy, and more.

If the minimum global tax rate is applied, then any tax savings enjoyed by qualified multinationals in Vietnam will be muted.

Vietnam will gain global kudos from taxing tech giants without worrying about receiving retaliation by developed countries. Recently, the Ministry of Finance proposed a draft circular on tax that would compel tech giants like Google, Facebook, Amazon, and Netflix to pay taxes.

Further, the Ministry of Information and Communications has also proposed a draft decree of the amendments to a 2013 decree which elaborates on some articles of the Law on Advertising, which imposes tax obligations on cross-border service providers.

Accordingly, foreign-based enterprises that do not have a commercial presence in Vietnam but which provide goods or services to Vietnamese customers shall be considered to have permanent establishments (PEs) in Vietnam, and are therefore subject to 2-5 per cent of VAT and 0.1-10 per cent of corporate income tax on the revenues generated in Vietnam.

PEs may declare and pay tax by themselves or through tax agencies, bank and non-bank financial institutions, or Vietnamese customers. If the PEs do not declare and pay tax, the Vietnamese customers, which are the organisations, must declare and pay tax on their behalf.

With respect to Vietnamese customers being individuals, commercial banks or non-bank financial institutions are obliged to deduct tax from the payment to the PEs. The General Department of Taxation (GDT) has a so-called “blacklist” of PEs that have not registered, declared, or paid taxes and has sent this list to commercial banks and non-bank financial institutions to identify non-compliant establishments. In addition, if the payment is made via cards or other forms that the commercial banks or non-bank financial institutions are unable to deduct tax from, then the commercial banks or non-bank financial institutions must track the payments and report to the GDT.

There is a risk of double taxation. Most big tech groups are based in the United States. Vietnam and the US signed an agreement on avoidance of double taxation and prevention of fiscal evasion with respect to income taxes in 2015. However, the US government has still not ratified it. As a result, the revenues generated in Vietnam by US-based companies may be taxed in both Vietnam and the US.

Finally, although Vietnam is not a member of the OECD, transfer pricing is a major concern of the Vietnam tax authorities. In fact, Vietnamese lawmakers used to adopt the OECD’s concepts and principles on transfer pricing into its laws, which adopted the principle of the three-tiered transfer pricing documentation approach to collect more tax-related information on the business operations of multinationals. This is the principle set out in the OECD’s BEPS Action 13. Therefore, it would be likely that Vietnamese lawmakers and tax authorities may revise the laws on transfer pricing to be in line with the OECD’s new approach to transfer pricing and international practice.