Global tax rates and the developing world: Is a global minimum tax good for emerging economies?

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  Quantumrun Foresight
• December 6, 2022

A global minimum tax rate solves numerous chronic tax avoidance challenges, but it may also impose harmful consequences on developing nations. However, if implemented correctly, the worldwide tax may help to equalize income distribution across countries.

Global tax rates and the developing world context

In October 2021, G-20 leaders finalized a new global tax agreement that limits the tax avoidance of multinational enterprises (MNEs) or multinational corporations (MNCs). The deal, negotiated by the OECD (Organization for Economic Co-operation and Development) and accepted by 137 countries and territories (collectively known as the Inclusive Framework or IF), represents decades of effort to amend international tax policies. The "IF deal" creates new taxing rights regardless of the MNC's physical location and a global minimum corporate income tax of 15 percent on the world's largest firms. This strategy has two primary goals. The first is to create renewed taxes for large MNCs (e.g., Facebook, Google), and the second is to establish a base rate and approach for a global minimum corporate tax.

However, while G-20 has considered this tax plan a landmark, some developing countries are not as convinced, and some emerging economies worry that developed countries will receive extra taxes from MNCs. In addition, low- and middle-income countries (LMICs) might have to scrap future digital service taxes for a better formula-based method to reduce their revenues. According to the Brookings think-tank, the existing formula would provide G-7 nations—which include only 10 percent of the world's population—with 60 percent of the anticipated $150 billion USD in tax revenue. In other words, LMIC nations are asked to sign a legally enforceable agreement to gain an uncertain and possibly lower revenue outcome.

Disruptive impact

Some experts believe the global tax could have the beneficial side-effect of encouraging the "reshoring" of profits to other countries. This trend would occur if offshore investment centers, like the Cayman Islands, Bermuda, or the British Virgin Islands, no longer had reduced or zero income taxes for MNCs. In response to the proposed global tax, several countries have already anticipated a change in their headline corporate tax rate. This development might make them less appealing to MNCs, resulting in offshore investments re-allocating. Another potential benefit of the global tax is that MNCs will be forced to pay taxes where they profit from operations. After years of providing tax exemptions to investors, corporations, or regions, developing countries now have few large companies with high effective tax rates. 

However, to benefit from the future implications of the new global tax, developing countries may need to examine their tax and investment policies to determine which incentives will be most affected and modify them. Tax credits are frequently included in legislation, rules, contracts, or other legal documents, which stability clauses may safeguard. These provisions often render tax incentives challenging to change, especially for projects that have already begun. 

Implications of a global minimum tax rate on the developing world

Wider implications of a global minimum corporate tax rate on the developing world may include: 

• Low- and middle-income countries acting slowly to implement this tax formally. Instead, governments may aggressively modify their tax plans to generate the most revenue.
• Some MNCs might retract from emerging economies, resulting in decreased employment and investment opportunities in the developing world.
• Multinational corporations lobbying against the global tax policy, although some may work with their respective governments to negotiate exemptions or subsidies.
• Tax firms experiencing increased demand to help MNCs navigate evolving global tax provisions.
• Roadblocks in implementing the tax as political parties and jurisdictions enter deadlock over specific clauses. For example, in the US, as of 2021, the Republican Party opposes the global tax, whereas the Democratic Party supports it.

Questions to comment on

• If you work for the tax industry, do you think this global minimum tax is a good idea?
• What are the other potential roadblocks to this tax plan?