The global minimum tax is arguably the most important topic in the much talked-about international tax reform, with implications for both developed and developing countries. While taxing the digital economy has taken the limelight in the headlines, the global minimum tax has the potential to have a significant impact, especially on developing nations.
In this column, I have explored the key considerations for developing countries in light of the global minimum tax and discussed how they can navigate this new tax landscape.
Understanding the Global Minimum Tax
The global minimum tax was agreed upon by 137 countries and jurisdictions as part of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The aim of the global minimum tax is to ensure that multinational enterprises (MNEs) pay a minimum tax rate of 15% in each country where they operate, thus preventing profit shifting and tax avoidance.
The OECD’s initiative consists of two pillars. Pillar one focuses on addressing tax challenges arising from digitalization of the economy.
Pillar two, known as the Global Anti-Base Erosion (GloBE) rules, establishes the base rate approach for the global minimum tax. It sets a minimum tax rate of 15% for MNEs with a turnover above a certain threshold. The intention is to prevent MNEs from shifting profits to low-tax jurisdictions and engaging in harmful tax competition.
Also Read: Gold Buying: 3 best options to invest in gold & how to do it
Potential Impact on Developing Countries
While the global minimum tax has been heralded as a major step towards fairer taxation, developing countries have expressed their concerns about its potential impact.
One of the main concerns for developing countries is the potential loss of tax incentives. These countries fear that the elimination of tax incentives could discourage foreign direct investment (FDI) and hinder their economic development. Tax incentives have played a crucial role in attracting investments, and developing nations worry that the removal of these incentives could make them less competitive in the global market.
Additionally, developing countries are concerned about the potential loss of tax revenues to developed countries. Under the global minimum tax rules, if a developing country’s tax incentives result in an effective tax rate below 15%, the home country of the MNE may collect the minimum tax instead. This could lead to a shift of tax revenues from developing countries to developed nations, further exacerbating existing inequalities.
Navigating the Global Minimum Tax Landscape
Given the potential challenges posed by the global minimum tax, developing countries need to carefully navigate this new tax landscape. Here are some key considerations for developing nations:
1. Reviewing and Modifying Tax Incentives
Developing countries should conduct a comprehensive review of their existing tax incentives to assess their compatibility with the global minimum tax regime. This review should aim to identify and modify any tax incentives that may be affected by the minimum tax rate of 15%.
2. Strengthening Tax Administration and Enforcement
To ensure compliance with the global minimum tax rules, developing countries need to strengthen their tax administration and enforcement mechanisms. This includes investing in technology and capacity-building to enhance their ability to monitor and collect taxes effectively. Developing nations should also consider collaborating with international organizations and other countries to share best practices and enhance their tax administration capabilities.
3. Advocating for Equity and Inclusivity
Developing countries should actively participate in international tax discussions to advocate for their interests and ensure that the global minimum tax regime is fair and inclusive. They should seek to address concerns related to the distribution of taxing rights, the impact on tax revenues, and the potential disadvantages faced by developing countries. By actively engaging in the global tax reform debate, developing nations can influence the design and implementation of the global minimum tax.
4. Exploring Regional Cooperation
Developing countries can also consider exploring regional cooperation to address the challenges posed by the global minimum tax. By collaborating with neighboring countries, developing nations can develop regional strategies to attract investment, harmonize tax policies, and collectively negotiate with MNEs. Regional cooperation can help mitigate the potential disadvantages faced by individual developing countries and present a unified front in international tax discussions.
5. Diversifying the Economy
Developing countries should focus on diversifying their economies to reduce their reliance on specific sectors or industries that may be more susceptible to the impact of the global minimum tax. By promoting economic diversification, developing nations can create resilient economies that are less vulnerable to changes in the global tax landscape.
6. Evaluating the Impact on FDI
Developing countries should closely monitor the impact of the global minimum tax on FDI. While there are concerns that the elimination of tax incentives may deter foreign investors, it is important to assess the overall impact of the global minimum tax on FDI flows. Developing nations should track investment trends, evaluate the effectiveness of alternative investment strategies, and adjust their policies accordingly.
7. Promoting Transparency and Accountability
Developing countries should prioritize transparency and accountability in their tax systems to build trust and attract investments. By implementing robust anti-corruption measures, promoting transparency, and enforcing strong corporate governance standards, developing nations can create an enabling environment for investors.
In conclusion, the global minimum tax represents a significant shift in international tax policy, particularly for developing nations. By carefully navigating this new tax landscape, developing countries can protect their interests and foster sustainable economic growth. The key lies in proactive policymaking, regional cooperation, and advocating for fair and inclusive policies on the global stage.
(By Akash Kalra, Transfer Pricing and International Economics Consulting Expert. Views are personal)