Illustrative image (Photo: VNA)In his latest analysis, he said FDI had been one of Vietnam’s mostimportant economic growth drivers over the last decade. The country hadsignificantly outperformed its regional peers in attracting FDI since theUS-China trade war emerged, but there were two potential risks to its futureFDI inflows.
Firstly, Vietnam could be losing its competitiveness as an FDIdestination versus India, Malaysia and/or Indonesia, and secondly, a new globalcorporate minimum tax scheme would reduce Vietnam’s relative attractiveness asan FDI destination by limiting the tax incentives offered to prospectiveinvestors.
According to Kokalari, FDI companies that invest in Vietnamtypically enjoy tax breaks that may include a zero % tax rate during theinitial years of their operations, followed by a gradual increase up to a full20% corporate income tax rate over a period as long as 10 years.
In 2021, over 100 countries (including Vietnam) agreed to an OECDproposal for a global corporate minimum tax (GMT) that would impose a 15%minimum corporate tax rate on income for companies with consolidated incomesabove circa 850 million USD starting from 2023. The implementation of thisagreement was subsequently delayed to 2024, and it is not clear yet whether theUS, China, and India will participate in the scheme.
Vietnam has been preparing for the implementation of the new GMTsystem next year, and it has been reported that around 70 companies in thecountry could see their tax rates rise if it is imposed. Some of Vietnam’sregional emerging market peers are reportedly investigating alternative schemesin which some of the additional tax revenues would be channelled into a“business support fund” that would effectively offset companies’ higher taxburdens by subsidising some of those firms’ production costs (for example, withsubsidized electricity prices, spending on the construction of a new factory,worker housing, etc.).
More importantly, low tax rates are far from the most importantfactor in a company’s decision about where to establish a new factory,according to surveys from the World Bank and others. Considerations such aspolitical stability, ease-of-doing-business, workforce (quality and wages), andphysical infrastructure are all more important factors.
“The new GMT is unlikely to impede Vietnam’s FDI inflows given thefact that tax incentives are not the primary attraction for setting up afactory in Vietnam, and it seems likely that workarounds to the GMT are likelyto be put in place, if-and-when the scheme is actually implemented,” he said.
Regarding concern about Vietnam’s continued competitive advantageamid growing interest in India from firms such as search Apple and others,he said: “We are not overly concerned that India will affect FDI that wouldhave otherwise poured into Vietnam for any number of reasons.”
“Tim Cook’s visit to India in April spawned a plethora of articleson the intentions of search Apple and othersto build new factories in the country. But it is important to note that most ofthe products produced in those factories will be sold into the Indian market.In short, new investments to India are not being motivated by the “China 1”investment strategy that drove FDI inflows into Vietnam over the last decade,particularly at an accelerated pace since the start of the US-China trade war,”he said.
Some observers have also noted that planned FDI into Malaysia andIndonesia surged during the last two years, while Vietnam’s registered FDI wasessentially flat. However, investments into Malaysia and Indonesia were largelychannelled into the production of goods Vietnam does not make, includingelectric vehicle batteries.
Kokalari said Vietnam had attracted far more than its “fair” shareof FDI since the US-China trade war emerged in 2018, so some of its regionalcompetitors for FDI inflows are now experiencing some “catch up” investmentsafter having lagged Vietnam in recent years.
“We fully believe that Vietnam will continue to be a primedestination for FDI, particularly from multinationals looking to produce forexport and seeking an alternative and/or additional manufacturing base toChina, for the foreseeable future,” he said./.
VNA
