Jurisdiction Not to Tax, Tax Sparing Clauses, and the OECD Minimum Taxation (GloBE) Proposal

The OECD Programme of Work on the tax challenges arising from the digitalization of the economy comprises a so-called GloBE (Global Base Erosion) or Pillar Two proposal, consisting of a series of measures aimed at establishing a floor to tax competition by achieving minimum taxation of the income obtained by in-scope multinational enterprises. If such a measure is implemented, developing countries would be severely deprived of the possibility to grant tax incentives to attract FDI and potentially foster economic growth. This contribution emphasizes the importance of the thorough review of their tax policy preferences that developing countries should undertake amidst the rapid adoption of GloBE, which the OECD is pushing to achieve. To illustrate this concern, an examination of implementation issues shows that a deficient enactment of the income inclusion rule proposed in GloBE could paradoxically trigger the applicability of tax sparing clauses aimed at protecting the effectiveness of tax incentives, even when both sets of rules pursue opposing goals.

Global tax reform is on track, but hurdles remain

Significance More than 130 countries have agreed rules to allow the minimum taxation of excess corporate profits and a formula for allocating revenue shares by country. However, several EU states have yet to agree to the former, while the latter faces resistance in the United States, where a two-thirds congressional majority is needed. Impacts Countries that attract multinationals with low effective tax rates will shift to indirect pro-business policies. Multinationals will reduce their presence in tax havens but not necessarily in low-tax jurisdictions. Digital services taxes will be removed if the revenue-sharing formula applies from 2023, but other measures may be introduced on big tech.