How Pillar Two is reshaping tax compliance for in-scope multinational enterprises

Vietnam’s adoption of the Global Minimum Tax signifies a transformative shift in its tax landscape, aligning with the OECD’s Pillar Two initiative, which seeks to establish a minimum global tax rate for multinational enterprises (MNEs). This move brings Vietnam into closer alignment with other developed countries.

Under Resolution No. 107/2023/QH15, Vietnam will implement a minimum tax rate of 15 per cent for MNEs with consolidated revenue exceeding €750 million ($780 million), in any two of the four preceding years, starting January 1, 2024. The two main rules under this framework are:

• The Qualified Domestic Minimum Top-Up Tax (QDMTT), applicable to in-scope MNEs with inbound investments in Vietnam.
• The Income Inclusion Rules (IIR), targeting Vietnamese-headquartered MNEs with outbound investments.

To guide implementation, the Ministry of Finance released a draft decree on November 12, 2024, for public consultation until December 6, 2024. The final decree is expected by late 2024 or early 2025.

Could you elaborate on the context of the QDMTT and its significance for MNEs in Vietnam?

The introduction of the QDMTT reflects Vietnam’s proactive alignment with OECD global tax standards. This ensures that Vietnam’s tax regime remains competitive while promoting greater tax equity. MNEs operating in Vietnam, especially those benefiting from preferential tax incentives, will now face stricter requirements to meet the 15 per cent effective tax rate (ETR) threshold.

The QDMTT’s implementation allows Vietnam to retain taxing rights that might otherwise shift to other jurisdictions with similar top-up taxes. While this demonstrates Vietnam’s commitment to international standards while preserving its attractiveness as an investment destination, MNEs must carefully assess the practical implications, particularly regarding jurisdictional ETR calculations and the broader impact on their tax positions.

With the upcoming compliance requirements, what will be the key considerations that in-scope MNEs should take into account?

Acknowledging the complexity of the new tax regulations, businesses need to focus on thorough preparations for compliance obligations, which will take effect in less than two months. The following considerations are essential.

First, understanding the ETR is critical. In-scope MNEs must determine how their jurisdictional ETR aligns with the QDMTT rules. Accurate ETR calculation may be more complicated than it initially appears, requiring adjustments for allowable deductions, tax credits, and income inclusions, as outlined in the draft decree released by the Ministry of Finance (MoF). MNEs should prepare to re-evaluate their ETR calculations under the new standards, including the application of the accounting principles of the Ultimate Parent Company rather than standard Vietnam Accounting Standards.

Second, leveraging transitional safe harbor provisions can ease the initial compliance burden. The OECD’s Pillar Two rules include transitional provisions, and Vietnam’s QDMTT framework under Resolution No. 107 and the draft decree also adopts similar measures. These provisions can simplify compliance for eligible MNEs, such as by allowing simplified ETR calculations or reliance on existing Country-by-Country Reporting (CbCR) data, provided specific criteria are met. Assessing eligibility for these provisions and understanding the required documentation can give businesses a valuable adjustment period.

Third, meeting compliance and documentation requirements will be a significant focus. Compliance with the QDMTT involves substantial documentation, particularly for ETR calculations and substantiating qualifying income and expenses. The draft decree specifies the need for detailed financial records, reconciliations, and alignment with CbCR data where applicable. MNEs must allocate sufficient resources to ensure accurate and comprehensive reporting, as higher compliance costs are likely.

Fourth, evaluating the impact on tax incentives and investment decisions is essential. Vietnam has historically attracted investors with favorable tax incentives. However, the QDMTT diminishes the impact of these incentives, particularly for MNEs whose ETR falls below 15 per cent due to preferential policies. For businesses currently benefiting from tax holidays, preferential rates, or other incentives, recalibrating tax strategies is necessary. Strategic planning and scenario analysis will help MNEs assess the implications for current projects and future investments.

Finally, managing risks and preparing for regulatory changes will be critical. Post-transition, MNEs may face increased scrutiny and potential penalties for underreporting or non-compliance. Reputational risks and the possibility of further regulatory action underscore the need for robust compliance systems. Implementing strong internal controls, including periodic ETR reviews and tax assessments, will help mitigate these risks.

Looking ahead, Vietnam’s regulatory environment is expected to evolve as authorities monitor and adapt to global best practices. Maintaining open communication with advisors and staying informed about regulatory updates from the government will be essential for MNEs to navigate these changes effectively.

What should the in-scope MNEs do from now to prepare for QDMTT compliance?

To stay ahead of QDMTT compliance requirements, in-scope MNEs should take a strategic approach based on several key actions.

First, conducting a comprehensive review of the ETR. This includes determining whether the company meets the 15 per cent threshold after accounting for all required adjustments. Such adjustments may involve allowable deductions, tax credits, or income inclusions, which can significantly impact the calculations.

Second, evaluating eligibility for transitional safe harbor provisions. This requires reviewing CbCR data and financial records to assess whether these provisions can simplify compliance during the initial implementation phase. Safe harbor measures can reduce the immediate compliance burden, but careful analysis is needed to determine eligibility and documentation requirements.

Third, strengthening documentation practices. Establishing a rigorous documentation process that aligns with new standards is necessary to manage increased scrutiny. Reliable data management and traceable records will be essential for meeting the QDMTT’s detailed reporting obligations.

Fourth, reassessing the effectiveness of existing tax incentives. Scenario analysis should be conducted to understand how the QDMTT might affect current investments. Businesses should also explore alternative investment support schemes available within their sectors to compensate for reduced benefits from preferential tax policies.

Finally, monitoring regulatory updates and seeking guidance will help businesses stay informed about any changes to QDMTT regulations. This is especially critical as the MoF finalizes the guiding decree and administrative details. Staying updated ensures that businesses remain prepared for new requirements as they emerge.

All in all, the road to QDMTT compliance requires foresight, careful planning, and the ability to adapt to evolving regulations. Hence, MNEs should thoroughly evaluate their tax position, prepare for heightened documentation requirements, and remain proactive in managing this new compliance to achieve long-term growth and investment success in Vietnam.