On 21 June 2023, the Ministry of Foreign Affairs of Vietnam issued Notification No.12/2023/TB-LPQT announcing Vietnam’s ratification of the Multilateral Convention to implement tax treaty-related measures to prevent base erosion and profit shifting (“MLI”) that Vietnam signed on 9 February 2022. Generally, from Vietnam’s perspective, MLI came into effect on 1 September 2023.

The MLI modifies “Covered Tax Agreements” (“CTA”), which are in force bilateral double taxation agreements (“DTA”) between parties to the MLI and for which both parties have made a notification that they wish to modify the agreement using the MLI. Therefore, to determine the enforcement of the MLI (e.g., a DTA is modified by MLI), the following conditions should be met:

1. The MLI itself is in force: the MLI is in force if there are at least five jurisdictions deposited the instrument of ratification, acceptance, or approval to OECD. Currently, over 80 jurisdictions among the signatories have deposited their ratification instrument.
2. Both contracting jurisdictions are parties to the MLI.
3. Both contracting jurisdictions list the DTA in their MLI position as an agreement to be covered by the MLI.

In addition, the reservations and choice of optional provisions of contracting jurisdictions will also impact the enforcement of the MLI.

Vietnam has listed 75 DTAs (among over 80 existing treaties) with other contracting jurisdictions to be covered under the MLI and reserves the right not to apply the MLI to certain articles contained in Vietnam DTAs. However, as discussed above, Vietnam’s CTAs will solely be modified by MLI if they are matched with the list of Vietnam’s contracting jurisdictions.

Nevertheless, as more countries are joining MLI, the number of matched agreements will increase rapidly. The MLI is developed to fight against base erosion and profit shifting (BEPS), which will apply alongside existing bilateral DTAs. The measures contained in the MLI will prevent treaty abuse, improve dispute resolution, and combat the artificial avoidance of permanent establishments and mismatch arrangements.

In applying MLI, Vietnam will expand its taxing rights on capital gains tax and income tax on cross-border supplies based on MLI’s provisions on anti-treaty shopping, anti-artificial PE, or anti-mismatch arrangements which are more broadly than these provisions under existing bilateral DTAs.

The changes to existing DTAs, as modified by MLI, request multinational companies involved in multinational supply chains with the use of regional holding companies to review and identify the treaty benefits that may be subject to changes and re-organize their business structure/model accordingly.

Disclaimer: This publication is for general update. This should not constitute our professional advice for a particular case, entity, or any person. Should you need further information on the matter or our professional assistance for your specific cases, please contact us.