As countries start to introduce legislation to adopt the Pillar Two Global Anti-Base Erosion model rules (GloBE model rules)[1],  a country like Vietnam, which has attractive tax incentives, will find that in some cases where a Vietnam subsidiary of a large multinational enterprise (MNE) is paying a low rate of tax in Vietnam, another country, usually the country where the ultimate parent entity is located, will impose a “top-up tax”. The broad concept is that a top-up tax will apply where the effective tax rate of the entity in a country is less than 15%.

The impact of this is that even if Vietnam chooses not to introduce legislation to implement GloBE model rules, tax incentives provided in Vietnam may be “clawed back” in another country. From a MNE perspective, it means that the investor will not receive the tax benefit from the incentives, tax is just paid somewhere else.

This raises the policy question of whether Vietnam should adapt its domestic law so that, in these situations, revenue derived in Vietnam is taxed in Vietnam, rather than in another country.

There are a number of ways this could be done. Vietnam could introduce its own form of minimum top-up tax. Another way could be to reduce or modify the tax incentives that are provided such that they are less likely to result in top-up tax applying under the GloBE model rules. This paper considers the first approach.

When considering the introduction of a domestic minimum top-up tax there are broadly two approaches. One approach is to introduce a minimum tax that meets the definition of a Qualified Domestic Minimum Top-up Tax (QDMTT) as defined in GloBE model rules or by a general domestic minimum top-up tax that achieves results broadly consistent with GloBE model rules, but does not satisfy the definition of the QDMTT.

What is a QDMTT?

The definition of the QDMTT is set out in Article 10.1 of the GloBE model rules and requires that to qualify as the QDMTT, a domestic minimum top-up tax must compute profits and calculate any top-up tax in essentially the same way as the GloBE model rules themselves. To ensure a level playing field, a domestic minimum top-up tax must be implemented and administered in a way that is consistent with the GloBE model rules with no collateral or other benefits provided. For example, a regime will not satisfy the QDMTT where a company that is subject to minimum tax is then entitled to some kind of compensatory benefit. 

Per the Administrative Guidance on the GloBE model rules, approved by the Inclusive Framework on 1 February 2023[2], the OECD have developed processes to help governments and tax authorities assess whether a proposed minimum top-up tax will constitute the QDMTT. 

In general, a domestic minimum top-up tax must be functionally equivalent to the GloBE model rules to be treated as a QDMTT. Specifically, in order to be considered functionally equivalent to the GloBE model rules, a minimum top-up tax must be structured so that it is in line with the architecture of the GloBE model rules and does not systematically result in an incremental top-up tax for the jurisdiction that is less than what would have been determined under the GloBE model rules. This means that in designing the domestic minimum top-up tax, modifications can be made to the GloBE model rules, provided that the outcome of any modifications is that the tax arising is equal to or more than the tax that would have applied if the GloBE model rules had been followed exactly.

Certain aspects and implications of the QDMTT have not been covered and the Inclusive Framework will consider providing further guidance on the design and operation of the QDMTT. The Inclusive Framework will undertake further work on the development of a QDMTT Safe Harbor. Furthermore, in 2023 the Inclusive Framework will develop a review process to assess whether a domestic minimum top-up tax is sufficiently similar to the GloBE model rules to qualify as a QDMTT.

What are the benefits of applying the QDMTT?

As stated in the introduction, the overall benefit of introducing a domestic minimum top-up tax in light of the GloBE model rules, is that it means that a country where otherwise low-taxed revenue is being derived, will tax that revenue, rather than top-up tax it being taxed in another country. To put it another way, if the revenue is going to be taxed anyway, it would be preferable for it to be taxed in the company where the work is performed, in this context, Vietnam.

A domestic minimum top-up tax that meets the definition of the QDMTT has a number of additional benefits. Firstly, it is fully creditable against any other minimum top-up tax arising under the GloBE model rules in another country. This means that if Vietnam introduces the QDMTT, no further top-up tax should be levied under the GloBE model rules in any other country in respect of the income derived by a subsidiary in Vietnam.

Where some other form of domestic minimum top-up tax is introduced, that is not sufficiently similar to the GloBE model rules to qualify as a QDMTT, there is a risk that the tax paid in Vietnam may not be fully creditable against the top-up tax arising under the GloBE model rules and hence an additional amount of taxation may be payable. This will surely be the case if the additional tax does not fall within the definition of Adjusted Covered Taxes.

Another advantage of introducing a domestic minimum top-up tax that meets the definition of the QDMTT is that it allows a country to introduce an additional tax that is just sufficient to prevent any top-up tax arising in a third country, without going beyond that. For example, the QDMTT may be designed to only apply to subsidiaries of MNEs that are within the GloBE framework (global revenues of greater than EUR750 million). That is, companies that would not otherwise be subject to the GloBE model rules would not be subject to the domestic minimum top-up tax in Vietnam. It would therefore be very targeted.

Similarly, the QDMTT could include the substance-based income exclusion (SBIE). The SBIE provides a reduction in the top-up tax that applies where a company has greater substance. In the first 10-year transition period, the SBIE is set at 8% of the carrying value of tangible assets and 10% of payroll costs. Effectively this means that companies with significant assets and employee costs will have a lower top-up tax, all other things being equal, than companies with less substance. Given many manufacturing companies in Vietnam have large employee numbers and significant machinery and equipment, this is likely to be relevant to a number of companies. 

Finally, we expect that large MNEs who are subject to the GloBE model rules may prefer a domestic minimum top-up tax that is the QDMTT as they will be required to understand, implement and comply with the GloBE model rules in all the jurisdictions in which they operate. We expect they will set up processes and design systems to capture the relevant information to allow them to comply with a GloBE based minimum tax. Hence it may be easier for such MNEs to calculate a top-up tax in a way they are used to, rather than a different way.

The trend of countries on the application of the QDMTT?

In addition to the application of the GloBE model rules, a number of countries have expressed an intention that they are likely to introduce the QDMTT.

How does the QDMTT affect corporate income tax rates?

The benefit of the QDMTT is that governments can maintain their existing tax rates and the tax incentive system. The QDMTT can be designed so that it applies only to subsidiaries that are subject to the GloBE model rules, meaning that other companies can continue to benefit from existing tax rates and tax incentives.

What are the disadvantages of applying the QDMTT?

The GloBE model rules are complex. There are a number of rules and regulations that apply to take into account very specific circumstances. Some of those circumstances may not be relevant to Vietnam. Therefore, if the GloBE model rules were very closely followed, there could be unnecessary detail and complexities contained within those rules. That could be challenging in terms of tax authorities administering laws, and taxpayers complying.

Having said this, as mentioned above, we expect large MNEs who will be subject to GloBE model rules, will need to implement processes and capture the relevant information to comply with the GloBE model rules, so the introduction of a domestic minimum top-up tax with similar features, may not be so problematic.

QDMTT Safe Harbors

Under the proposed GloBE model rules, it is expected there will be a number of safe harbors that are designed to reduce the compliance burden of MNEs in certain situations. For example, if a MNE’s revenue in a country is less than EUR10 million, and profits are less than EUR1 million, the top-up tax is deemed to be zero. Other safe harbors are also proposed[4].

A country that incorporates the same safe harbors into a domestic minimum top-up tax should still be able to meet the definition of the QDMTT. It is recognized that it does not make sense for a company to have to apply complex and detailed tax computations under a local domestic top-up tax, if such computations would not be required under the GloBE model rules.

The Inclusive Framework will undertake further work in relation to how the safe harbor rules could be designed into the QDMTT.

What are the specific actions for Vietnam?

The Vietnam Government’s Task Force, which researches and proposes solutions regarding global minimum tax rate from OECD, should prioritize a careful study on OECD rules and guidelines to assess whether to introduce the QDMTT to ensure that Vietnam does not lose its taxing rights on Vietnam income to another country.

Summary

The Vietnam Government’s Task Force, which researches and proposes solutions regarding global minimum tax rate from OECD, should prioritize a careful study on OECD rules and guidelines to assess whether to introduce the QDMTT to ensure that Vietnam does not lose its taxing rights on Vietnam income to another country.