On 13 April 2021 the IMF and World Bank held a tax conference entitled Minimum and Digital Taxation: Consensus or Divide? Discussion of the minimum tax centred on the G20 and OECD Pillar Two proposals currently under discussion.
There are two aspects to a minimum tax:
- Outbound – where the residence country taxes foreign earnings if the foreign tax is below the minimum tax threshold; and
- Inbound – where the source country imposes a minimum tax on the resident taxpayer to combat base eroding payments that are made e.g. to related parties in low tax jurisdictions.
A combination of these rules is needed. The advantage of the global minimum tax is that it would prevent profit shifting and act as a backstop to the current rules. It could however also be a blunt instrument so the design of the minimum tax and the threshold tax rate are important. Compliance costs should be kept as low as possible.
Order of application of rules
The Income Inclusion Rule (IIR) is an outbound rule, similar to the US global intangible low-taxed income (GILTI) but computed on a country-by-country basis rather than on an aggregate basis. The Under-taxed Payments Rule (UTPR) is a type of inbound rule similar to the US base erosion anti-abuse tax (BEAT), denying local tax deductions if cross-border payments are made to low-tax jurisdictions.
The proposed order in which the rules such as IIR and UTPR will be applied is important for developing countries. Currently the priority in the order of application of rules is proposed to be given to the IIR, not to the UTPR, which is not satisfactory for developing countries.
Global minimum tax rate
The minimum tax rate under Pillar Two is currently expected to be set at around 9% to 12%. However by comparison the US GILTI rate is planned to increase from 10.5% to 21%. A relatively low threshold rate could give an incentive to low-tax intermediate jurisdictions to adjust their tax rates to the level of the minimum tax, and this would be of concern to developing countries.
There has been an international race to the bottom on corporate tax rates, not helping developing countries which depend relatively more on corporate taxes for their revenue. Research has found that reducing corporate tax rates does not increase inbound investment.
Rather than competing on tax rates countries could focus on stimulating investment through a favourable investment environment and improved science and technology infrastructure.
Capacity building
Capacity building is important for developing countries. They need to develop their capacity in relation to the mechanics of the Pillar One and Two reforms, so they can then develop effective local tax rules that are harmonised with the global rules.
Tax Incentives
Pillar Two only taxes excess income, so tax incentives could retain their effect if they are well designed. The Pillar Two proposals should make developing countries review their incentive regimes, looking at how to structure them and how to put time limits on the incentives.
Global Revenue Estimates
The reallocation of revenue from low tax jurisdictions is estimated at around USD 32 billion if a 10% minimum tax rate is used. As the minimum tax rate rises, the rate of increase in tax revenue increases. China and the US are currently estimated to be the largest recipients of extra tax revenue from the global minimum tax.- –
