A tax overhaul passed by the U.S. Congress by the end of last year may affect Vietnam’s economy as American investors are likely to send their investment back home, where the income tax rate has been significantly slashed, Vietnamese economic experts have warned.

The sweeping tax reforms, signed into law by U.S. President Donald Trump on December 22, include reductions in the corporate income tax rate from 35 percent to 21 percent, and a minimum of 10.5 percent taxes on foreign profits U.S. companies send home.

The tax overhaul ought to encourage corporations to relocate or build new operations in the U.S. instead of sending them overseas, where the corporate tax rate is often lower.

The U.S. government also hopes that U.S. companies will repatriate their foreign cash pile, with the attractive 10.5 percent tax levied for this kind of profit.

Countries where U.S. companies are doing business, including Vietnam, see those benefits as challenges for their respective economies, members of the economic advisory panel to Vietnamese Prime Minister Nguyen Xuan Phuc said in a recent report.

“U.S. companies will transfer their profits generated from operations in Vietnam back home, rather than keeping the money here for reinvestment,” Vu Viet Ngoan, head of the panel, told Tuoi Tre (Youth) newspaper.

“Vietnam’s economy will be impacted if many U.S. corporations would follow this trend.”

Employees are seen at a shoe making plant in Vietnam. Photo: Tuoi Tre

But the bigger concern comes from neighboring economies, not the U.S. tax bill itself, Ngan noted.

Many countries, including China, have begun to offer new tax incentives to keep U.S. investors in their economies, “a trend Vietnam should keep a close watch on,” the pundit said.

According to the advisory panel, China has “taken a timely action” by offering tax exemption for U.S. companies if they retain investment in the country, and at the same time enacting new measures for those who want to repatriate their investment.

“Vietnam should keep watching the development of this trend in China to be able to respond timely, even when there are still not many U.S. investors here,” Ngan said.

Serious attention needed

Upon receiving the report from the advisory panel, Tran Dinh Chieu, member of the Finance and Budget Committee under the lawmaking National Assembly, said Vietnam should pay due attention to those warnings.

“The problem should be taken into serious consideration even when Vietnam’s corporate income tax remains lower than the U.S. at 20 percent, and as low as ten percent for foreign businesses eligible for preferential treatment,” Chieu said.

Employees are seen at an electronics factory in Vietnam. Photo: Tuoi Tre

Chieu advised that Vietnam review its own tax policy and try to reduce ‘unofficial fees’ and petty corruption to retain foreign investors.

‘Black expenses’ make up as much as ten percent of total business costs of foreign companies in Vietnam, according to a survey by the Vietnam Chamber of Commerce and Industry.

An expert in the industry and trade sector also suggested that Vietnam should increase its attractiveness to foreign investors, particularly those in the electronics industry, at a time when many mobile phone companies have signaled their plans of relocating back to the U.S.