15% global minimum tax means higher tax revenues for host country, but a decline in cross-border investments
On the flip side is the potential downward pressure on the volume of investments that the increased tax burden will exert, according to the United Nations Conference on Trade and Development (UNCTAD). This organisation estimates that cross-border investment in productive assets could decline by 2%.
In October 2021, 136 countries agreed that Multinational Enterprises (MNEs) will be subject to a minimum 15% global tax rate from 2023.
UNCTAD has also released its ‘World Investment Report – 2022’. India’s rank jumped one notch to 7th position among top recipients of foreign direct investments (FDI) during 2021, despite lower FDI inflows. Inflows to India declined to $45 billion in 2021 from $64 billion in the previous year. However, outward FDI from India rose 43 per cent to $15.5 billion in 2021.
Under the proposed Pillar Two or global minimum tax solution, spearheaded by the Organisation for Economic Cooperation and Development (Oecd), MNEs that pay tax rates below the minimum on profits reported in host countries will be subject to a top-up. Also, this will result in MNEs reducing profit shifting and will pay host-country rates on a larger profit base, stated UNCTAD.
The estimated rise in the effective tax rates faced by multinationals is conservatively estimated at 2 percentage points. This corresponds to an increase in tax revenues paid by multinationals to host countries of about 15% – closer to 20% for large firms that are directly affected by the reforms, it added.
Both developed economies and developing economies are expected to benefit substantially from increased revenue collection. Offshore financial centres stand to lose a substantial part of revenues collected from foreign affiliates. For smaller developing countries – which generally have lower rates – the application of the top-up tax could make a major difference in revenue collection.
“While the tax reforms are going to increase revenue collection for developing countries, from an investment attraction perspective they entail both opportunities and challenges,” said UNCTAD secretary-general Rebeca Grynspan.
Another likely outcome of Pillar 2 is the reduced effectiveness of low-tax rates and fiscal incentives to attract investments. There is an urgent need for investment promotion agencies and special economic zones to review investment attraction strategies.
Grynspan added: “Developing countries face constraints in their responses to the reforms, because of a lack of technical capacity to deal with the complexity of the tax changes, and because of investment treaty commitments that could hinder effective fiscal policy action. The international community has the obligation to help.”