In October 2021, the G20 Leaders Declaration welcomed the historic Two-Pillar international tax package, agreed by more than 135 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. Pillar Two of this package involves a global minimum effective corporate tax rate of 15% for large MNEs, which seeks to respond to continued concerns regarding profit shifting, harmful tax competition, and a damaging ‘race-to-the-bottom’ on corporate tax rates. This report, which has been prepared at the request of the Indonesian G20 Presidency, considers the impact of Pillar Two on the use and design of tax incentives, with a particular focus on developing countries.
Pillar Two places multilaterally agreed limits on tax competition and will ease the pressures on jurisdictions to offer tax incentives. Where a multinational enterprise’s (MNE’s) effective tax rate (ETR) in a jurisdiction falls below 15%, the MNE would potentially be subject to top-up taxes under the Global Anti-Base Erosion (GloBE) Rules, a core component of Pillar Two. In the past, jurisdictions have sought to attract investment through tax incentives, many of which have been found to be wasteful and ineffective, particularly in developing countries. Pillar Two will reduce the incentives for MNE’s to engage in profit shifting and will support jurisdictions in achieving a better balance between using tax policy to attract investment and mobilising domestic revenues.
Jurisdictions will continue to be able to use the tax system to attract investment under the GloBE Rules, but the rules will discourage the use of damaging tax incentive policies. Corporate Income Tax (CIT) incentives are widely used across jurisdictions in pursuit of a variety of goals. However, if poorly designed they can be of limited effectiveness, while resulting in substantial revenue losses. The GloBE Rules will impact the use of different tax incentives in different ways, with some incentives only being affected to a limited extent if at all. Where tax incentives are successful in attracting tangible investment and jobs, the rules will have a more limited impact. However, where tax incentives allow MNEs to generate substantial low-taxed profits in a jurisdiction without providing substantial tangible investment or jobs, the GloBE Rules will help protect the corporate tax base.
The revenues generated by Pillar Two can be used by jurisdictions to support economic development or to improve their overall investment environments. For example, through spending in areas such as physical infrastructure or labour force skills development. Such non-tax factors are valued by investors and will become increasingly important in a post-Pillar Two environment, where jurisdictions seek to improve their competitiveness by relying on policies beyond tax.
Jurisdictions should begin preparing for the arrival of Pillar Two now, including through a thorough assessment of the tax incentives currently in place. The introduction of Pillar Two presents a unique opportunity to engage in tax incentive reform, especially for developing and emerging economies. Failing to act or moving too slowly will result in foregone tax revenues, as other jurisdictions move to impose top- up taxes. In some jurisdictions, tax incentive reform may be challenging to implement, due to the complex governance of tax incentives. In considering any reform options, jurisdictions should also consider stabilisation clauses in contracts and obligations, which may result from certain investment agreements.
Source :
OECD (2022), Tax Incentives and the Global Minimum Corporate Tax: Reconsidering Tax Incentives after the GloBE Rules,
OECD Publishing, Paris, https://doi.org/10.1787/25d30b96-en.
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