Attracting foreign direct investment in the context of global minimum tax

DNHN - Despite economic and political fluctuations that significantly "shook" the stability of this capital flow, global FDI growth remained robust. Vietnam is not immune to the effects of several new investment trends.

Inflows of global foreign direct investment (FDI) in 2021 are $1,580 billion, up 64 percent from the 2020s exceptionally low level. With a booming mergers and acquisitions (M&A) market and the rapid growth of international project financing as a result of lax financial conditions and large infrastructure stimulus packages, the recovery exhibits significant momentum.

By 2022, the global environment for international business and cross-border investment has undergone a significant transformation. In addition to the lingering effects of the Covid-19 pandemic, the conflict in Ukraine is causing food, fuel, and financial crises in many nations around the world. Uncertainty among investors may exert significant downward pressure on global FDI.

Big changes

By 2021, multinationals from advanced economies will have more than doubled their overseas investments to $1.3 trillion, representing 75% of global FDI inflows. This increase is largely attributable to record reinvestment earnings and M&A activity levels. In 2021, the high volatility of the focal countries will persist.

The total offshore investment by European multinationals has rebounded to $550 billion from an unusually low level in 2020. US multinationals' overseas investments increased by 72 percent to $403 billion. To the tune of US$225 billion, foreign direct investment (FDI) from other developed nations increased by 52%, primarily due to Japanese and Korean multinationals.

To $438 billion, the value of FDI activities by multinational corporations from developing economies increased by 18%. Even during the COVID-19 pandemic, developing Asia remains a significant source of investment. While total outbound investment from developing Asia increased in 2021, companies with regional headquarters made fewer acquisitions.

In recent years, the investment trend in areas related to sustainable development goals (SDG) has increased significantly. In 2021, international investment in developing countries will increase by 70%. The total value of green sector announcements and international project financing transactions in the SDG sectors has surpassed pre-Covid-19 levels by approximately 20%. However, the majority of growth has shifted to renewables.

As a result of the Covid-19 pandemic, the sales of digital multinationals have grown five times faster than those of the traditional top 100 over the past five years. big. These groups' investment trends are opposed.

Traditional top 100 firms are more active in new investment, while digital multinationals are more active in mergers and acquisitions. To access foreign markets, digital multinationals invest relatively little in physical assets.

The international production of both digital multinationals and large traditional multinationals has steadily increased, albeit at varying rates. In contrast, small and medium-sized enterprises' foreign direct investment is decreasing.

Although digital multinational corporations do not invest significantly in direct projects, they significantly contribute to the digital economy through the establishment of professional service offices, research and development centers, and Internet infrastructure...

In 2021, capital inflows into developing Asian economies will reach an all-time high of $619 billion, representing 40% of global capital inflows and making Asia the largest recipient region. Except for South Asia, the region as a whole share similar growth trends for 2021. However, capital flow concentration remains high. China, Hong Kong (China), Singapore, India, the United Arab Emirates, and Indonesia account for more than 80% of foreign direct investment (FDI) in the region.

FDI flows continue to fluctuate amidst Organization for Economic Co-operation and Development (OECD) discussions regarding the imposition of a 15% minimum tax on goods by relevant jurisdictions. with the foreign profits of large multinational corporations – those with a turnover of more than 750 million euros.

This pillar's primary objective is to prevent multinational corporations from relocating profits to countries with low tax rates and to reduce international tax competition. When tax is one of the most important factors in FDI investment decisions, introducing a minimum tax rate on corporate profits will significantly affect international investment and investment policy.

The initial application of the global minimum tax will be limited to multinational corporations with consolidated revenues exceeding 750 million euros. This threshold accounts for more than two-thirds of newly implemented investment projects over the past five years and is even greater in developing regions.

Moreover, even though initially a large number of companies will remain outside the scope of FDI, the reality is that the largest multinational corporations are increasingly engaging in FDI (outward investment by small businesses). and moderate decline), coupled with the gradual reduction of the anticipated threshold, will result in almost all FDI being subject to the minimum over time.

Developing economies can benefit from less competition from low-tax locations. Nonetheless, as competition shifts from tax leverage to alternative investment determinants, many may continue to be at a disadvantage because they cannot afford the substantial up-front financial commitments necessary to provide infrastructure or subsidies.

Vietnam in a different light

Vietnam is frequently mentioned for its potential advantages of abundant labor and low costs. In contrast to neighboring economies, the quality of labor is not necessarily a strength in the short term. According to a Manpower Group report, the average salary of Vietnamese workers is currently 275 USD, which is equivalent to more than 6.5 million VND/month (modest in comparison to the global average of 2,143 USD/month). The Philippines has a higher average salary (US$283 per month), but Vietnam has a much higher proportion of skilled workers: 18.3% compared to 11.1%.

In contrast, Vietnam's current population makes it a potential consumer market. According to McKinsey, Vietnam's consumer class could expand by 36 million people over the next decade, defined as consumers who consume at least 11 USD per day at purchasing power parity (PPP).

Less than 10% of Vietnam's population was in the consumer class in the year 2000, but that number has increased to 40% today. By 2030, this percentage could approach 75%. New consumption is on the rise not only because of first-time consumers but also because the income of the general consumer class tends to skyrocket. The top two tiers of the consumer class, including those who spend at least $30 per day, are expanding at the quickest rate and could account for 20% of Vietnam's population by 2030.

Urbanization is a significant contributor to rising incomes. Vietnam's urban population is projected to increase by 10 million over the next decade, from 37% of the total population in 2020 to 44% in 2030. However, rising land rental costs and tax policy can diminish Vietnam's attractiveness.

FDI firms enter Vietnam due to the country's comparative advantages over other nations. There are direct economic and commercial benefits such as tax deductions, low labor costs, and large markets, as well as strategic benefits such as cultural proximity, diplomatic partner exchange, and increased cooperation. Therefore, Vietnam must maintain a mix of strategic and commercial benefits to compensate for the benefits that FDI enterprises would lose if taxes were raised.

Vietnam can assist multinational corporations in reducing input costs through indirect forms of assistance, such as assistance with the cost of purchasing machinery, R&D expenses, and investments in better infrastructure. This is why it is crucial to establish a robust network of subcontractors (OME - original manufacturing equipment) in Vietnam, thereby creating a complete and interconnected value chain.

In what ways can Vietnam directly support capital, science, and policies to help upgrade technology, reduce product costs for OEM businesses, and connect businesses to production networks?

Phan Dinh Manh