After the last G7 endorsement of a global minimum corporate tax rate of at least 15%, questions about the possible consequences of such a policy have increased. Would it make sense to achieve its primary goal of preventing multinational corporations from shifting profits to avoid taxes there? Will the decision-making body comprise the nearly 140 countries that make up the OECD / G20 Iinclusive frame, reach the 15% mark at the meeting from June 30th to July 1st? And how would developing countries cope with the new global tax floor?
The International Institute for Sustainable Development has set up a panel of experts to address these issues while bringing together policy makers, academics and activists. The webinar on “The End of Tax Incentives: What Will a Global Minimum Tax Mean for Developing Countries?” took place on June 23, 2021.
Nathalie Bernasconi-Osterwalder, Executive Director, IISD Europe, welcomed attendees and shared additional questions that shaped the discussion, including how a global minimum corporate tax would interact with tax stabilization provisions in treaties and whether this rule would end tax havens.
Moderator Alexandra readhead, Lead, Tax and Extractives, IISD, outlined the two main situations in which tax revenues could be diverted between countries due to a global minimum corporate tax rate to prevent profit shifting. In the first example, where a subsidiary operating in country X pays less than the proposed 15% rate, its parent company would be forced to pay the difference in country Y, where it is located. In the second scenario, where a subsidiary pays for services to its parent company that is subject to a lower tax rate than the minimum tax rate in country Y, this income could be offset in country X, where the subsidiary is located. The rule used in the first example, the income calculation rule, should take precedence over the rule used in the second example, the under tax payment rule. As a result, the reform would tend to generate more direct tax revenue for the countries where multinational companies are located.
She also stated that the threshold proposed by the G7 is too low, saying, “Many of us hope that the meetings that will take place next week between the G20 and the Inclusive Framework will rise above 15%.” they made the proposal “a significant step forward”.
Anthony Munanda, International Taxation Expert, African Tax Administration Forum (ATAF), initially stressed the caveat that much remains to be clarified, but said a global minimum corporate tax would help reduce the “race to the bottom” that has characterized countries . decades of efforts to attract international investment. Well-established workforce or significant technical innovations could become alternative lures for international investment, he said. While he stated that a global minimum corporate tax should generally increase tax revenues in several developing countries, he noted that there were “many moving parts,” including tax regimes in contracts and statutory tax rates that are above the minimum levels in some African countries could still encourage profit shifting.
Ricardo Martner, Commissioner, Independent Commission for International Business Taxation Reform (ICRICT) agreed that “the devil is in the details” given the exemptions some companies enjoy. He also pointed out the discrepancy between statutory tax rates – which are often well above 15% in South America and Latin America – and the effective tax rate, which can be much lower, reflecting the funds actually raised by companies. All of this points to the need for greater transparency, he said, and reaffirmed to policy makers and authorities that World Bank studies have shown no link between tax breaks and increased foreign investment.
Joy W. Ndubai, Lecturer and Research Associate, Institute for Austrian and International Tax Law, stated that investment promotion is part of free trade agreements and that the global community must understand how trade and investment parameters react to a global minimum corporate tax rate. She agreed with Martner on how heavily governments have embraced tax-based incentives as economic drivers, noting that Rwanda only reaffirmed its preferred corporate tax rate of 0% for international companies with headquarters or regional offices in the country this year. She pointed out that Rwanda’s legislation also includes Value Added Tax (VAT) and some Income Tax Exemptions, noting that some countries and multinational corporations (MNEs) are shifting their focus from corporate income tax to other taxes. She reiterated the need for greater transparency and simplification of investment rules, not only to increase investment but also to reduce the risk of disputes between investors and countries seeking arbitration.
Thomas Lassourd, Senior Policy Advisor, Tax and Extractives, IISD, said there will likely be no immediate direct benefit to developing countries, but they could benefit indirectly due to less tax competition with other countries. He suggested that developing countries could introduce a minimum domestic tax equivalent to the global tax rate to avoid topping up tax revenues in countries where multinational corporations are headquartered. He added that many countries have treaties and preferential agreements, often containing stabilization provisions to prevent governments from changing the rules, and stressed that the inclusive framework should weigh up to allow countries to revise these agreements, to reflect a new global minimum corporate tax rate. He also highlighted a point raised by several other panellists: there is a clear need to partially harmonize the way a company’s tax base is calculated in countries while respecting sovereignty and the regional context.
A full recording of the webinar is available on IISD YouTube page.