Vietnam eyes multi-million-dollar handouts to Samsung in bid to offset global tax

Samsung and other foreign companies are pushing Vietnam to introduce a multi-million-dollar reform that would compensate them for higher levies they face from next year under a global overhaul of tax rules, a source involved in the talks said.

The discussions precede the introduction from January of a minimum tax rate of 15 percent for large multinationals under a landmark global reform led by the Organisation for Economic Cooperation and Development (OECD).

Vietnam has committed to comply with the OECD rule, effectively raising the tax rate to 15 percent for many of the multinationals operating in the country and who are currently taxed at a much lower rate thanks to various sweeteners.

The global rule requires companies paying less in a low-tax jurisdiction to face a top-up levy in their home country.

A top-up levy means foreign companies could pull out precious foreign exchange from Vietnam to comply with the rule, and Hanoi’s decision to implement the higher 15 percent tax rate and plans for compensation are aimed at preventing this from happening.

The Southeast Asian nation, which heavily relies on foreign investment to pump prime its economy, fears the cross-border rule could make it less attractive to large multinationals.

“If this is not fully resolved, Vietnam’s competitiveness will fade,” said Hong Sun, chairman of Korea Chamber of Business in Vietnam, noting that South Korean investors were particularly sensitive to those changes.

In a meeting with government officials in April, Korean tech giants Samsung Electronics and LG Electronics, US chipmaker Intel and Germany’s Bosch were among half a dozen large investors who pushed for compensations, the source who attended the meeting said.

Under pressure, the government is preparing a draft resolution that could be approved by the Parliament in October offering partial compensations to big firms, the source said, declining to be named because the discussions were internal.

None of the companies replied to requests for comments.

The firms have invested tens of billions of dollars in the country and are major employers. Samsung, for example, is the biggest single foreign investor in Vietnam, employs 160,000 people and produces half of its smartphones in the country, accounting for nearly one fifth of the nation’s total exports.

Samsung’s tax rate varies by district and ranged between 5.1 percent and 6.2 percent in 2019 in the two northern provinces where it produces smartphones, according to government data cited by local media.

Under the proposed compensation resolution, still subject to changes, companies with large investments in Vietnam would be allowed to receive after-tax cash handouts or refundable tax credits to support their manufacturing or research outlays.

The total cost of the planned measure is estimated at several hundreds of millions of dollars a year, the source said, noting that the bill for Vietnam would amount to at least $200 million annually.

However, the costs should roughly match the extra revenues that Vietnam is expected to raise from the higher taxes it will be imposing on big multinationals under the new global rules, the source said.

Smaller companies that are not within the scope of the new global rules may also receive handouts, the source said. This is expected to reduce potential frictions with OECD rules.

Vietnam’s ministry for planning and investment and the OECD did not reply to requests for comment.