Vietnam global minimum tax: what the 15 percent rule means

Vietnam global minimum tax is a short way to describe a new international rule that asks very large company groups to pay at least 15 percent tax on their profit in every country where they operate. If a group pays less than that in one country, the difference can be collected as extra tax. The rule is built for the biggest multinationals. Most Vietnamese firms will never meet its size test.

Still, leaders in Vietnam should know the basics. Foreign investors, suppliers and customers may be inside the rule, and it may shape how countries use tax breaks to attract investment.

What the 15 percent rule says

The rule comes from work led by the OECD, a group of governments that studies economic policy. Its model rules are often called Pillar Two. They were published in December 2021. The idea is simple. Each country can set its own tax rate, but a large group should not end up paying less than 15 percent on its profit in any one place.

To check this, a group works out its effective tax rate for each country. That is the tax it paid on its profit there, divided by that profit, using the rule's own accounting steps. If the result is under 15 percent, the group owes a top-up tax for the gap. The European Union turned the model rules into a binding directive in December 2022, which shows the rule is moving from paper to law.

The rule does not tell any country to raise its headline rate. It sets a floor for large groups. A country may keep a low rate or a tax break, but another country may then collect the top-up.

Sources: Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation (eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2523), which implements the OECD model rules in EU law.

How the top-up tax is collected

Two linked rules do the work. The first is called the income inclusion rule. Under it, the country where the parent company sits charges the top-up on the low-taxed profit of the group's units abroad. The second is called the undertaxed profit rule. It is a backstop. If the first rule does not collect the full amount, other countries where the group operates can share the rest.

A country can also charge the top-up itself, on the low-taxed profit earned inside its own borders. The EU directive lets member states choose a domestic top-up tax. The reason is plain. If the home country does not collect the extra tax, a foreign country may collect it instead. Many governments would rather keep that money.

Sources: Council Directive (EU) 2022/2523 (eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2523), for the two linked rules and the top-up tax.

Which groups it reaches

The rule targets large groups. The EU directive applies it to groups whose yearly consolidated revenue is at least 750 million euros in at least two of the four years before. That is a very high bar. A medium-sized company, even a successful one, is far below it.

Some bodies are left out. The directive excludes government entities, international organisations, non-profit organisations and pension funds. It also excludes certain investment funds and real estate investment vehicles at the top of a group. It sets a small-size exclusion for tiny operations in a country too. Shipping income is also excluded.

This means a Vietnamese company is covered only if it belongs to a very large group, or if it is the local arm of a foreign group that meets the test. A local unit can be covered even when its own revenue is small, because the test looks at the whole group.

Sources: Council Directive (EU) 2022/2523 (eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2523), for the revenue test and the excluded entities.

Where Vietnam stands today

Vietnam taxes company profit at a standard rate of 20 percent. That is above the 15 percent floor. Vietnam also offers tax incentives to some projects and sectors, which can lower the rate a company pays in practice. Those incentives are the part that matters most here.

A large foreign group with a Vietnamese factory might pay less than 15 percent on that profit because of an incentive. Under the model rules, that gap could be taxed elsewhere. For the group, the incentive would then be worth less. For governments, the question is whether to collect the top-up at home instead. Readers should watch for official announcements from the Ministry of Finance and the National Assembly on how Vietnam will respond.

This article describes how the rule is designed. It is general information, not tax advice. Rules differ by country and change often.

Sources: PwC Worldwide Tax Summaries, Vietnam, "Corporate: Taxes on corporate income" (taxsummaries.pwc.com/vietnam/corporate/taxes-on-corporate-income), for the standard 20 percent rate and the existence of tax incentives.

What leaders can do now

Start with a simple question. Is your company part of a group with more than 750 million euros of yearly revenue, or does it sell to or buy from one? If the answer is no, the rule does not apply to you directly.

If the answer is yes, take four steps. First, ask your finance team to work out the effective tax rate in each country where the group operates. Second, list any tax incentive you use in Vietnam and when it ends. Third, talk to your tax adviser about how the incentive fits the 15 percent floor. Fourth, follow official guidance, since countries are still writing their versions of the rule.

If you are a smaller firm, there is still a reason to watch. Large partners may change how they price projects, set up supply chains or choose where to invest. Knowing the rule helps you understand those choices and ask better questions.

Sources: Council Directive (EU) 2022/2523 and PwC Worldwide Tax Summaries, Vietnam, as listed above.

The short version

The global minimum tax sets a 15 percent floor on profit for very large groups, country by country. A top-up tax fills any gap. The size test is 750 million euros of group revenue, so most firms are outside it. Vietnam's standard rate is 20 percent, but its incentives may bring some projects under 15 percent. Leaders should check their group size, list their incentives and follow official news.

Sources: Council Directive (EU) 2022/2523, eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2523. PwC Worldwide Tax Summaries, Vietnam, taxsummaries.pwc.com/vietnam/corporate/taxes-on-corporate-income.