No handouts to offset global tax, says OECD

Crossroads: Women work at a garment export factory in Hung Yen province. Vietnam wants to introduce a top-up tax but fears that without some sort of compensation, the higher levy could make it less attractive to large multinationals. — Reuters

HANOI: The Organisation for Economic Cooperation and Development (OECD) told Vietnam last week that handouts to big firms to offset higher levies under a global overhaul of tax rules would be problematic, a person familiar with the discussions says.

Vietnam was planning subsidies worth hundreds of millions of dollars to partly compensate multinationals with big investments in the country, including Samsung Electronics and Intel, for the higher taxes they will face next year, Reuters reported last week.

Under the new rules shepherded by the OECD, companies paying less than 15% in a low-tax jurisdiction will, from January, face a top-up levy either in that jurisdiction or in their home country.

Vietnam’s plan is the first reported attempt worldwide to find a partial workaround to the new global rules, but other countries are considering similar moves, a person familiar with the talks said, noting the OECD warned of the risks these arrangements may pose, potentially “compromising the ultimate purpose” of the reform.

The rules were devised to tackle tax planning practices that have allowed multinationals to pay very little or no tax at all.

Usually, this is done by basing their headquarters in tax havens, such as Caribbean islands or small European states, where they often have no production activities.

Vietnam is a major manufacturing hub, heavily reliant on foreign investment, which it has been able to attract over the decades, partly thanks to tax sweeteners but also because of low labour costs, proximity to China, free trade deals and a stable government.

Hanoi wants to introduce a top-up tax but fears that without some sort of compensation, the higher levy could make it less attractive to large multinationals, which have been asking for compensation in private talks. In 2019, Samsung paid as little as 5.1% in tax in one province.

In meetings in Hanoi last week, OECD officials told Vietnamese government officials that if subsidies to multinationals were found to be direct compensation for the higher levy, “the domestic top-up tax would be disqualified,” the person said, declining to be named because the information was not public.

The person said the OECD made it clear that large companies would therefore have to pay the top-up levy in their home country, for instance, South Korea in the case of Samsung.

OECD senior tax official John Peterson declined to comment about the outcome of the meeting, citing confidentiality rules.

However, he said if one country compensates a multinational with “targeted benefits, for example in the form of grants or tax credits”, it would no longer be able to raise revenues from a top-up tax.

In that case, the company “will simply be subject to additional top-up tax, equal to the same amount, in another jurisdiction”.

Vietnam’s government did not reply to Reuters requests for comment.

Asked about the planned measures at a press conference on Monday, Nguyen Thanh Lam, the deputy information minister, said: “It’s a broad and complicated matter. Many government agencies are involved and studying it.”

Vietnam’s planned subsidies would be in the form of after-tax cash handouts or refundable tax credits, according to initial plans subject to changes, Reuters has reported. — Reuters

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