Khóa luận tốt nghiệp: Legal issues in the implementation of global minimum tax on FDI enterprises

AbbreviationsCee country-by- countryCE constituent entity CFC controlled foreign corporation CIT corporate income tax DTT domestic top-up tax ETR effective tax rate FDI foreign direct in

CHU BICH NGOC

452038

GRADUATION’S THESIS

CHU BICH NGOC

452038

LEGAL ISSUES IN THE IMPLEMENTATION OF

GLOBAL MINIMUM TAX ON FDI ENTERPRISES

NHUNG VAN DE PHÁP LÝ DOI VOI DOANH NGHIỆP FDI TRƯỚC YÊU

Major: Financial and Banking Law

GRADUATION’S THESIS

SupervisorAssoc Prof., Ph.D Pham Thi Giang Thu

Hanoi, 2024

remarks and information provided in the thesis is validand reliable.

Signature of Stwervisor Stgnatare of Author

AbbreviationsCee country-by- country

CE constituent entity

CFC controlled foreign corporation

CIT corporate income tax

DTT domestic top-up tax

ETR effective tax rate

FDI foreign direct investment

GIoBE global anti-base erosion

GMT global minimum tax

MNE multinational enterprise

MPI Ministry of Planning and Investment

MoF Ministry of Finance

OECD Organization for Economic Co-operation

and DevelopmentQDMTT qualified domestic minimum top-up tax R&D research and development

VAT value-added tax

Table of Contents bes

CHAPTER 1 FUNDAMENTAL ISSUES OF CORPORATE INCOME TAX AND

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1.24 Assessment of impact on BEPS methods and Tax competition

2.1 Group of main FDI outflows 2§

2.1.1 Rationale for the implementation of GMT 283:12: Legal frameworle for the GMTS c.eeseenroiiisisaansaaassaosae 29

3.13 Complementary measures

22 Group of main FDI inflows

2.3.1 Rationale for the implementation of GMT - 38

2:3:2 E8001fiamaiWorifor [gi MT so s-sansssassisstiauasissdaaasgasaooao OP2.3.3 Complementary measures AlCHAPTER 3 PRACTICAL RE VIEW OF VIETNAM REGULATIONS ON

IMPLEMENTATION OF GLOBAL MINIMUM TAX AND PROPOSALS 443.1 Vietnam reguhtions on CIT on FDI enterprises for the implementation ofGMT 44

3.1.1 Achievements of cunrent regulations on CIT on FDI enterprises 443.1.2 Opporhurties and Challenges for the implementation of GMT 493.2 Proposals on the implementation of GMT for FDI enterprises in Vietnam

54

3.2.1 Incorporation of the GMT into internal laws 34

3.2.2 Compensation for FDI enterprises affected by the GMT 563.2.3 Complementary FDI attraction siralegies 60

The GMT (also known as the Pillar 2 solution) has become a “hot” topic discussed

by the business community and Governments ever since the term is first coined by the

OECD in 2019, and further explored within its Inclusive Framework members to stop

the “race to the bottom”? in corporate taxation.

Set to be implemented at the start of 2024, the GMT has led to great changes ininvestment strategies of large corporations as well as the investment attraction policies

of many countries A minimum effective rate of 15% basically means MNEs are to paythe same required amount of tax liabilities even when located in tax havens Developing

countries once made use of tax incentives to increase competitive advantages can no longer achieve the same purpose and therefore need to resort to other measures to retain

of the 21 national economic sectors, 18 industries have received external fundings BySeptember 20, 2023, there are 38,379 valid FDI projects in the whole country of Vietnam

Ì “The OFCD/G20 Èxhune Framework on BEPS which groups 137 contries and jiwisdictions on an equcl

Sooting for multilateral ne gotiation of international tan rules, agreed chaing its 8-9 October meeting that the pillar approach they have been developing since 2019 provides a solid foioxdation for a fimnae agreement.” See more : OECD (2020), Jiternational commuanty renews commitment to address tan challenges from digitaiication of the economy, têtps:(Wrivw.oecd orgtax/intemational-conmamity-renews-commaitment-to-nuiltilateral-efforts-to- address-tax-challenge s-from- digitalisation-of-the-

two-economy hina/#:~ text=3 1% 2FD 1% 2F2020% 20% 2D% 20 The Inc hasive % 20Framevrork% 200n% 20BEPS% 20re ea

sed, Accessed 19/02/2024.

` “Race to the bottom” is 2 socio-economx phrase to describe either goverment deregulation of the business envionment or reduction in corporate tax rates, m order to attract or retam economx activity n ther prisdictions See Chapter 1.14.

* Decision No 29/2021/QD- TTg dated October 6, 2021, on Special hwestment Incentives, Article 5G).

with a total registered capital of 455 06 billion The FDI sector has on that account been

recognized as an integral part of the economy, attracting FDI a key part of Vietnam’sexternal economic affairs

However, in the face of the inevitable trends of GMT, some of Vietnam’s presenttax measures are not meant to last The GMT cancels out corporate effort to slash theCIT bills and grants extensive tax incentives by the governments old-fashioned To relyonly on available investment policies such as The 2020 Law on Investment withouttailoring native solutions will not be much help in adapting appropriately to the newchallenge

If there is appropriate mechanism for the GMT, Vietnam shall be assured to not

lose out on domestic taxing rights and the amount of CIT duely collected to other countries Experience from international tex mechanisms, along with the inherent

advantages of Vietnam such as political and economic stability, good inflation control,and a market of 100 million people shall act as great opportunities to improve on thecurrent investment environment and gain an edge on appealing foreign fundings

This paper examines the function of GMT, its effect on global corporate operationand administration, with a focus on the immediate situation in Vietnam On such groundsthe author humbly proposes a number of recommendations to the Vietnam Government

in adjusting their FDI attraction strategies to align with the emergence of GMT

2 Literature review

On the rules and functions of GMT, there are various documents introduced bythe OECD aswell as independent research by researchers or institutes of lays as well aseconomics, including:

- OECD documents and guides, in particular “Jax Challenges Arising from the

Digitalisation of the Economy —Global Anti-Base Erosion Model Rules (PillarTwo) Examples” in 2022

* MPI (2023), FDI attraction situation in Viemem (oxi Viemcm’s overseas investment in the first mine months of

2023, ứtps:/ñvrww mpi gov v1Ưer/Pages/2023-9-20/EDI-attraction-s taation- m- Vietraim- svd- c8n1uj aspx#-~ text= There % 20iyere % 20 102% 20cotntries% 20nd year%2Don% 2Dyear) Accessed 20/02/2024.

Vietraim-s-transfer pricing, but changes the employment, investment and import tives, and that for a sufficiently large cost share of labor and/or capital, theSBIE is equivalent to a production subsidy.

incen-“International tax competition and Coordination with a Global minimuon tax”

by Michael P Devereux in 2023, which investigates the incentives forcountries to implement and maintain the global minimum tax introduced bythe G20/OECD’s Inclusive Framework 2021 agreement: Pillar 2 It argues thatthe agreement has sufficient elements to create incentives for large

headquarters countries to implem ent it C onditional on them doing so, there is

an incentive for host countries to follow suit The agreement would put a

significant floor on tax competition However, there are caveats to thisargument in terms of complexity and the incentive to maintain someprovisions that are likely to raise little revenue

On the implementation of GMT in Vietnam, accessments of impact are mainlyproduced by economics journal and data collected by the MoF A number of researchershave composed proposal articles on the implementation of GMT in Vietnam Primarysources for this study includes:

“Global minimum tex — Global experiences on application, Evaluations ofimpact and Policy proposals” on MoF 2023 conference on Global minimiantax Handbook In particular, “Floidamental rules and stipulations of Pillar 2

of BEPS and its impact” by Le Xuan Truong.

“Global minimum tax: Opportunities and challenges for Vietnam”, Journal of Finance no, 802 in 2023 In particular, “Jmpact of the global minimum tax on

FDI enterprises in Viemam”TM by Nguyen Van Phung

“Global minimum tax implementation: Vietnam’s policy recommendations”

on Pancasila and Law Review by Le Thi Thao in 2021 The article discussesand analyzes the various challenges that countries are facing when imposing

investm ent, (iv) recommend solutions for the Vietnamese government in making and effective enforcement in the coming time.

law-3 Scope

Object under study: The implementation of the GMTPeriod under study: 2023— present

Space under study: jurisdictions around the world including:

- European jurisdictions: The United Kingdom, Germany, France, Switzerland,

- American jurisdictions: The United States of America, Canada;

- Asian jurisdictions: China, Japan, Korea, Phillipines, Singapore, Thailand, Vietnam.

4 Methodology

A systematic search was conducted across multiple academic databases using

relevant keywords such as “GMT”, “CIT”, “tex competition” and “tax cooperation”.Peer-reviewed articles published within the last five years were included in the review.The study uses normative juridicial, qualitative research methods on the basis ofsecondary literature inform ation

With an aim of achieving the objectives and tasks of the thesis, evaluations in thispaper are based on its dialectical method and materialistic view of Marxism —Leninism.There is also a combination of research methods: analytical, synthetic, and themethodology of Comparative Laws, (i) Analytical and synthetic methods are used in

Chapter 1 to clarify the general issues of CIT and GMT, (ii) Analytical and synthetic methods are also used in Chapter 2 to analyze the manifestations of the rules of GMT in

legal systems worldwide, (iif) In Chapter 3; the author uses methods of interpretation,analytical and synthetic methods and Comparative methods to analyze themanifestations (introduced and or prospectively introduced) of GMT in the legal system

of Vietnam and highlight a number of possible application from the similar economically) countries to Vietnam on the main issue of the thesis As a result, the author

(socio-5 Purpose

The study determines why GMT (despite some integral provisions remains underconstruction) is an inevitable trend that create both challenges and opportunities fordeveloping countries originally dependent on FDI to boost home economic growth Thestudy seek to prove why it is highly recommended for Vietnam to take actionimmediately to counter the effect of GMT andkeep competitive advantages At the sametime, the findings of the study further explain why tax incentives are not preferable forlongterm development, and eventually Vietnam will need to employ a new course ofaction envisioning a more sustainable economy

In order to achieve the abovementioned purpose, the study seek to achieve the

following objectives:

- Provide a comprehensive and historical overview of GMT,

- Demonstrate how FDI in Vietnam is to be directly and notably affected by theimplementation of GMT around the world,

- Provide insights and appropriate solutions gained from real-time

countermeasures taken by other countries in similar circumstances andVietnam’s actual conditions

Chapter 1.2 provide overall picture of GMT: its definition, its backgrounds, thefunctionalities, etc as a corrective for the overinfluence of above measures.

Chap ter 2 Legal framework for the implementation of Global Minimum Taxaround the world

This Chapter adresses in detail how countries around the world have incorporatedthe GMT into their domestic laws The GMT is a set of complementing rules to eachother but can be applied independently On the process for global tax integration, eachcountry endorses their own roadmap and personal pace so as not to cause serious

disturbances to the financial conditions of locally-located enterprises This Chapter is comparative in nature considering its presentation of Western and Eastem laws, other

reginonal communities and ASEAN

Chap ter 3 Practical review of Vietnam regulations on Corporate Income Tax

on FDI Enterprises for the implementation of the Global Minimum tax andProposals

This Chapter evaluate Vietnam's current legal framework for attrating FDI, itsstrengths and shortcomings ahead of the GMT movement Certain legislations is inquiredinto, such as the 2020 Law onInvestment, Decree 31/2021/ND-CP dated March 26, 2021

on elaboration of some Articles of the Law on Investment, Decision 33/2023/QD-TTgdated December 29, 2023 on providing dossiers, order and procedures for assessment ofquality and value of machinery, equipment and technological lines of investment

projects, Decision 29/2021/QD-TTg dated October 6, 2021 on special investment incentives available for R&D and large investment projects, etc In light of Vietnam’s

distinct socio-economic features and global experiences in the implementation of GMT

shall proposals be made on promptly responding to the current situations

1.1 Corporate income tax

1.11 Definition

While the concept of tax does not carry a universally accepted definition andtherefore is not possible to exhaustively define, it is possible to provide some commonidentifiers with respect to tax It should be noted that most jurisdictions do not define taxand that tax should be considered as something different than a levy (which may equally

be imposed by a government)’.

As taxes can be considered a direct violation of the right to property and otherconstitutional rights, the procedure for governments to introduce a tax is usually subject

to some form of special process In this regard, it should be noted that levies are usually

not considered taxes and are therefore not subject to discussion here However, it isimportant that in the design of any system, taxes are not disguised as levies

For a government charge to be considered a tex, there are some common traitsobservable in all taxes: (2) a tax isa compulsory charge (i.e not a voluntary contribution);(ai) a tax is imposed by legislation (government); (iii) a tax is to be used for a publicpurpose; and (iv) a tax is usually not tied to a specific service to be provided to theindividual paying the tax (i.e the tax may support services to the collective and not theindividual)

While these elements are observable, there is no uniformity in application amongstates Also, states may well add to the requirements of this list before the charge may beclassified as a tax in the particular jurisdiction Critically, the legitimacy of the tax isfound in its creation by legislation

Income means literally incoming or what comes in consideredin relation to money

or money’s worth But such a broad literal meaning of that term does not satisfy even thenormal requirements for day-today expression It is usual to speak more specifically of

Ý Pistone , Pasquale, et a1 (2019), Flowlamentals of Taxation: An Dutroduction to Tax Policy, Tax Lose, and Tax

Administration, Publisher IBFD , Amsterdam.

of income usually refer to it as the profit, gain, or economic advantage accruing fromdesignated sources’, but such synonymous terms are inadequate to evince the truemeaning of thereof.

Public finance economists use their own definition of income as a standard bywhich to gauge the statutory definition of the income tax base A widely accepteddefinition among economists is the so-called Haig- Simons (H-S) definition® According

to this definition, income is the money value of the net increase in an individual's power

to consumer during a period This is equal to the amount actually consumed during a

period plus net additions to wealth Net additions to wealth — savings — must be included

in income because they represent an increase in potential consumption

It is worth mentioning here that Haig-Simon income includes accrued capitalgains: accrued gains are additions to net worth Since the market value of capital assets

is difficult to determine, absent frequent trades in established markets, income taxsystems typically include realized capital gains in the tax base instead of accrued gains.Nonetheless, this solution is properly viewed as a compromise with the practicalproblems of determining accrued gains taxing realized capital gains as opposed toaccrued gains allows investors to defer tax until the capital asset is sold, and the oldadage “atax deferredis atax foregone” clearly appliesin such circumstances Therefore,texing realized capital gains instead of accrued gains or not texing capital gains at allprovides an incentive to invest in capital assets, especially those assets — like land,collectables, etc — that appreciate in value over time but do not generate an annualincome

® Hewett, W VZ (1925), “The Definition of Income”’, The American Economic Review , 15(2),p.239.

Ì The Oxford English Dictionary (2015) defines oxome inter alia as prof andproceeds,vehile the Collms English

Dxtionary (2015) defines it as “the amotoit of monetcay or other returns, either ecaned or wecaned accriang over

a givenpertod of time” or “receipts or revemne”’ Tht Penguin English Dxtionary (2015) has a samilar definition as

the Collins English Dictionary, namely “quoney received from work property, or anestment, regularly or over a

specified time” The Chưmbers Ditionary (2015), on the other hand, defines picome as profit or interest from

anything, as well as reverme It therefore seems as if dictionaries define mcome as representing both gross and net amount (m other wards, after dechacting expenditure).

* Rosen, H S (2002), Public Fbxpxe 7" edition, Publisher New York: Mc Gravr-Hill,p.17.

the tax rates aslow as possible If there are exemptions and special treatm ents that narrowthe tax base, then it is necessary to increase the tax rate on those remaining in the taxbase in order to reise the same revenue Second, an income tax with exemptions andspecial treatments violates the commonly invoked principles of horizontal and verticalequity The principle of horizontal equity requires that those with similar incomes,irrespective of source, should face similar tax burdens If someone receives income from

an exempt source then they pay less tax than someone who receives the same sum

exclusively from wages, rent, or interest?

Corporation indicates legally “an organization formed with state goverrmental approval to act as an artificial person to carry on business (or other activities), which

can sue or be sued, and (imless it is non-profit) can issue shares of stock to raise frods

with which to start a business or increase its capital” CIT is therefore specifically

applicable to the profits earned by companies considered separate legal entities from theindividuals that own them Generally, sole proprietorships and traditional partnershipsare not considered separate legal entities from their owners, whilst limited companiesand corporations are Currently, most countries treat every company as a separate entity

for tax purposes, evenif they are part of a multinational group!)

With all abovementioned issues, the term CIT is defined as “a direct tax that is

levied on the income earned by companies or organizations on an accounting periođ1,

A country’s corporate tax may apply to: () corporations incorporated in the country, (11)

corporations doing business in the country on income from that country, (iii) foreign

corporations who have a permanent establishment in the country, or (iv) corporationsdeemed to be resident for tax purposes in the country

Labrie, FE (1953), “The Meaning of Income in the Law of Income Tax”, Unversity of Toronto Press,

ưtp:/hmrny jstor org/stable/10 31384) ctvcj2kz2 Accessed 20/02/2024.

‘© Hil, G.N (2002), The People’s Law Dictionary, Publisher Fine Conmumications,p 206.

!! ActionAsd International Briefing (2019), Corporate brome Ten, http /actionforglobaljustice actionaid org.

Accessed 20/02/2024.

`? Emoi Law University (2022), Revation Lew Textbook, Publisher People’s Public Security, Hinoi,p 212.

1.1.2 Characteristics

First, the object of corporate taxation is corporate income Taxable income iscalculated on the basis of Revenme minus Reasonable Expenses plus Other Income.Corporate revenue comes from a variety of source, such as the sale of goods, services,and assets, Advertising, Licensing agreements, Fees and service charges, Subscriptions,Rental income; etc Most countries apply a fixed rate of CIT to ensure fairness andefficiency in collection and management

Second, CIT payers are enterprises that satisfy a particular set of conditionsdepending on the law of where they are registered Vietnam’s law stipulates that CITpayers are enterprises that have generatedincome For the Thailand Revenue Code: “CJT

payers only include companies and partnerships with legal status”, Swedish Tax C ode:

“Companies, businesses with over 50 000 Krones in capital and employ labow are

eligible to CIT’ Tex regulations worldwide often use the criteria of resident or resident for determining tax able income Residents must pay tax on all taxable incomegenerated at their home and host country Non-residents only have to pay tax on incomegenerated in the host country”.

non-Third, CIT is a direct tax In addition to making contribution to the nationalbudget, CIT is also aimed at accommodating economic growth, therefore it is closelyintertwined with a state’s socio-economic policies Legal systems utilize tax incentivesand exemptions, or progressive taxation, etc to utilize its mofivation fimction ormonitoring finction, depending on their immediate situation

Forth, CIT is a complex tax with low stability Compared to other taxes, the

administration for CIT is relatively more burdensome and therefore more costly.

Calculation process requires not only the amount of tax able income, but also their source,

duration of residence, income stability, etc to be determined.

Finally, the sources of law onCIT matters include both domestic andinternationallaw Because CIT is a direct tax, itis subject to Double Tax Avoidance Agreements

© Supra note 12

1.1.3 Purpose or The rights of nations to tax

Overall, the corporate tax can be considered as a backstop for personal incometaxation In principle, the income of a corporation could be treated as income of theshareholders for the purposes of tax ation and be reported in personal income tax returns.However, specific roles of CIT are as follows:

First, a levy firms pay for public services provided by governments If theseservices cannot be financed via fees charged to individual users, the CIT may financethem, even if the link between taxes paid by each firm and its benefit from the publicservice is loose Paramount among these services is the system of laws which is thefoundation of modem business and their legal enforcement through the courts The skill

and efficiency of labor which is an essential prerequisite of modern industry is at least partly due to public education The government takes care of a variety of social costs

resulting from business operations, it takes care especially of the unemployed, preservingtheir ability to work for any future demand of business But all businesses, whetherincorporated or not, benefit from these services

Second, an instrument to tax economic rents or excess profits (e.g, monopolyprofits or profits from resource extraction) Here, the reason to tax corporations instead

of individuals is that rent taxes are less distortionary than other taxes For an individualcountry, taxing foreign capital owners on their rents has significant appeal and provides

a major attraction to the CIT Under the current international tax convention, sourcecountries have the primary taxing right to tax MNEs’ income The taxation of rents thataccrue to foreigners is particularly important if rents arise from natural resources

Numerous developing countries have abundant resources that are extracted by

multinational compames that have their residence elsewhere Fiscal regimes aregenerally in place to ensure that a significant portion of these natural resource rents

accrues to the local governments

The right to tax typically involves identifying the dominance of a nation over thetights of a person, since the act of taxation is the act of preserving some resources for

the use of the polity'+ The question of “which nations ought to be seen as justified inclaiming to have jurisdiction over the income that is earned through corporate structuresthat span their territorial borders” has been raising fierce debates for the entire history ofcorporate taxation This question is important because (i) MNEs have an inherentadvantage in choosing where to perform their CIT obligations, and (4) every countrywants to protect their tax base On account of the very purposes of CIT, there are twowidely-recognized ways of determining the rightful taxing jurisdiction: (i) On the basis

of source, nations are entitled to income that is said to arise within their territories (that

is, the territory in which capital is invested or activities are carried out); (ii) On the basis

of residence is that nations are entitled to any income, wherever it is earned, when it is

eamed by anyone they define as a resident!’

1.1.4 BEPS methods and Tax competition

a BEPS methodsTaxes paid by companies are a key source of revenue for governments,particularly in developing countries In Vietnam, CIT accounts on average for 14.4% oftotal tax revenue’, compared to 9% in the OECD (whichis mostly made up of countries

in the global north)” However, the world has become increasingly avare of the massive

scale of corporate tax avoidance and evasion by companies that severely underminesrevenues from corporate tax, shifting the balance of contributions towards those who areeaming less In 2017, Tax Justice Network estimated that global losses to governmentsfrom profit shifting was around 500 billion USD annually, with lower income countries

losing around 200 billion USD}$

“ Christians , A (2022), “Who should tax Mukimationals” Social Plalosopin' cad Policy 39(1),p 208-225.

* Bruns, G W.J_(1923), “Report an double taxation”, League of Nations Sconomic and Fincewial Commission.

'* Minh Anh (2023), Corporate Tax accotatfs for 14.4% total tax revenue https :/Mhodaotaichnhvienum

vivihue-‘turnhap-doanh-nghiep- chiem- 144-tong-thu-ngar-sach- 126504 html Accessed 01/3/2024.

'' DECD (2019), Corporate Tex Remeins a Key Reveme Sorace, Despite Falling Rates Worldwide, Tứtps :/Avnv.cecd orghax/corporate-tax-remaans-a-key-reverme-source-despite-fallng-rates-worldvride htm.

“TIN (017), Rex Avoidexe and Evasion — the Scale of the Problem, hitps:/hnmvtaxjustice contentAmploads/2017/11/Tax-dodgimg-the -sc ale-of-the-problem- TIN- Briefing pdf Accessed 01/3/2024

rethyp-Some other methods used by companies to dodge tex include transfer pricing

manipulation!®, earnings stripping®*, or treaty shopping*! Of all the above, transfer

mispricing is particularly common, and a huge source of revenue losses for developingcountries In fact, the IMF has listed it as the top tool for corporate tax avoidance, and it

has been at the core of many tax-dodging cases reported by the media’? Corporate tax

avoidance scandals around the world have underlined the extent to which MNEs havebeen able to use tools such as those above to slash their tax contributions, sometimes tothe point of paying close to zero taxes”

The abovementioned methods are jointly labeled as “BEPS” by the OECD andfirst introduced in its earlier documents in 2013 regarding tax evasion Base erosion

refers to the practice of reducing the taxable base, while Profit shifting refers to the practice of shifting texable profits from high-tex countries to low-tax countries BEPS

happens because there are gaps and mismatches between different countries’ tax systems

bv Tax competition

!* Transfer pricing refers to the pricing of transactions betiveenre lated companies whilst transfer mispricing oc curs

vehen prices are inflated or deflated in order to avoid tax For instance, transfer mispri ing can be used by a

nmultnational to declare losses m & country where significant economx activity is taking place , even if really is

profitable This may be done by fomning a subsidiary ma low or no tax jurisdiction, which purchases raw materials and resells them to operating subsidiaries of the nmiinational at a high muck-up Sẽ Tlers of the raw materials send the goods directly to the operating subsidiaries , whilst the subsidiary based m the low or no tax jurisdiction will do little but process transactions on its computer This allows for the shifting of mcome by creating artificially high expenses for the operating subsidiaries , and high profits for subsidiaries based im low tax jurisdictions See more Wer, J D (2017), “High-Level Tax Avoxdance: How Apple, Amazon and Starbucks Do Ít”, Re? Media,

Tứtps:/ãnedann coméranttAgh- level tax-avoidan e-how-appk -amazon-and-starbucks-do-2-cb26 Ib0cc£89 Accessed 01/3/2024.

*° Method of tax base erosion where nmkinuationals rechice their tax obligations by paying excessive amounts of

terest to other, usually related, companies This is achieved by a subsidiary or parent company making + loan to

another subsidiary company in the same nmktinational group at + high interest rate Interest repayments will then.

‘be deducted when calculating CIT lability.

*! Treaty shopping arises where + company tut is not resident in either of the tyro jurisdictions party to a bilateral

tax treaty, establishes 2 company in one of the countrizs to take actvantage of the beneficial tax treatment through thất tax treaty.

+ The 2012-2013 Starbucks tax crisis m the United Kingdom fueled a firestorm of criticism whkh played out ma

public form via social media following 4 report released by the UK Parliament’s Publi Accounts Committee about tax evasion of MNEs like Starbucks, Google , Amazon See more: Carter, D et al (2023), “The Anatomy of Tragedy: Starbucks as 4 Politics of Displacement”, Accounting Axiting and Accowowability Jownal, Ahttp //doi.org/10.1108/AAAJ-08-2015-2169 Accessed 18/3/2024.

» ActionAid (2014), Levelling Up: Ensuring a Fairer Share of Corporate Tex for Developing Cotatrte:,p +

The trend of corporate tax rate reductions has been gaining momentum, fueled atleast in part by the governments’ belief that lower rates might help attract foreigninvestments Tax competition is defined as “an independent regulation of tax rates bythe authorities of a given area which aims at a specific allocation of employees,

enterprises and capital”TM* The average CIT rate globally has decreased from over 40%

in 1980s to below 25% in 2015 According to Eurodad, if this trend was to continue, CIT

rates would hit zero by 2052)”.

However, tax competition has not only been happening in terms of statutory rates,but also in terms of rules and regulations lowering taxable income for corporates andgranting other tax privileges In developing countries, the “race to the bottom” has been

largely characterized by the granting of tax incentives to secure FDI, resulting in lower ETRs for MNEs Tax holidays, or corporate tax reductions offered for a limited period

of time, have been identified as the most common form of tax incentives in developingcountries Tax incentives give rise to opportunities for tax avoidance and abuse Commonabuses include existing firms transforming into new entities to qualify for incentives,domestic firms restructuring as foreign investors, over-valuation of assets, or the creation

of fictitious investments Lack of transparency around the granting of tax incentives andwidespread use of discretionary incentives also open up the space for corruption

The widespread use of tax incentives granted under special regimes such asspecial economic zones or economic processing zones’’, has brought the effective tax

rate close to zero inmany sub-Saharan African countries” ActionAid has estimated that,

based on the average tax losses to incentives, sub-Saharan African countries could be

losing US$38.6 billion annually’S At the same time, there is often little evidence of

* WAlson, JD (1999), “Theories of Tax Competition”, Naronal Tên Joinzvd, Vol $2 Issue 2,p 269-304

+S Barodad (2017), Zax Games: the Race to the Bottom — Surope’s Role in Supporting an Uigust Global Tax Ë

hutps Ulewodad orgtax gunes-2017 Accessed 18/3/2034

ActionAid and CBI and Chistian Aid and Oxfam (2018), Zax Suennives in the Global South,

‘https :/Mmnvactionaid org uk/sites/def aultffiles/publications/tax_incentives_m the global southpdf Accessed 18/3/2024.

*” Abbas, $M Ali and Alszomder Klenm, et a1(2012),.4 Partial Race to the Bottom: Corporate Tax Developments

inthe Emerging coud Developing Economies IMF 'WP/12/28 ,p 21-22

** ActionAid (2017), Missed Oppornanity: How Cordd Finds Lost to Tex Incentives in Africa be Used to Fill the

Fdwation Financing Gap? http ://curtisrese arch arg/p-contentApploads /Missed-opportmity.-Finalpaf Accessed

19/03/2024.

benefits from tax incentives in terms of job creation or public revenue generation,partially due to the fact that cost-benefit analyses and evaluations are rarely undertaken.The effectiveness of tax incentives in attracting FDI has also been increasinglyquestioned, including by the IMEF?® and the World Bank®.

Corporate tax competition further frustrates the progressivity of CIT As a result,citizens pay the price of governments’ increasing reliance on indirect, often regressive,taxes such as VAT, and the balance of CIT revenue shifting to smaller domesticcompanies Additionally, by pushing the statutory and effective CIT rate below thehighest personal income tax rate, wealthy individuals are further incentivized to channeltheir income through companies, where they can then engage in tax dodging in order to

avoid paying any taxes altogether

12 Global minimum tax

1.2.1 Definition

GMT is a minimum rate of tax on corporate income internationally agreed uponand accepted by individual jurisdictions of the OECD/G20 Inclusive Framework, in thecontext that the scale of BEPS methods has increased dramatically over the decade,partially due to the “race to the bottom” The GMT sets a floor for corporate tax rateswith various corrective measures so that MNEs’ income will be taxed once in eithersource country or residence country at a substantive tax rate Hence, it is the firstimplementation of the “single tax principle” at the global level.

The GMT is one of the two work streams agreed by members of the OECD/G20Inclusive Framework, a working group of 145 countries and jurisdictions (as of March

°° IMF (2015), Options for Low övơme Coumies’ Effective and Efficient Use of Tax Bwcentives for buestment,

IMF, https /rvny xuf org/extemalinp/g20 pdf /101515 pdf Accessed 19/03/2024.

°° World Bank (2009), Swentives and Imestments: Svidence and Policy Implications, Verld Bk Group,

Iittp //documents worldbank org/curated/er/94 506 1468326374478 pdf /588 160 WP0bx enl0BOX353820B01PUB

LIC1 pdf Accessed 01/3/2024.

'! The singh taxprax pk provides that corporate profits should be subject to a nàn tax and that if the country

wih the primary right to tax such #tconae (source or residence) does not mmpose tax at the minum level, the other country involved should tax # See more: Avi Yonah, R.S (2014), “Who Invented the Single Tax Principle? An

Essay on the History of US Treaty Policy”, NYZ Sch L Rev , Vol $9,p.305.

31, 2024) who concentrated on the Two-Pillar Approach to address the tax challenges

of the digital economy They worked on a global consensus-based solution to reform theinternational corporate tax framework, which culminated in a global agreement among

137 jurisdictions in October 2021 The discussions focused on two broad topics: Pillar

1, the partial re-allocation of taxing rights, and Pillar 2, the minimum level of taxation

of profits of MNEs Since then, the implementation of the GMT has progressed witharound 55 jurisdictions (as of January 2024) already taking steps towardimplementationand with the rules coming into effect in 2024

The GMT is achieved through the GloBE regime Pillar Two is optional formembers of the Inclusive Framework, but all members commit to respecting GloBE

where it is adopted by other members Overall, GloBE aims to ensure that in-scope multinational groups pay an effective minimum tax rate of 15% in each country where

they operate However, GIoBE doesnot achieve this goal by requiring adopting countries

to increase their generally applicable domestic corporate income tax rate to 1 5% Instead,when the income of a group’s entities within a country is subject to a combined effectivetax rate below 15%, GIoBE effectively permits other countries to impose an additionaltax to bring the effective rate to the agreed minimum GIoBE therefore creates a pool ofpotential tax revenues by country, to be collected by participating countries wheneverthe effective tax rate of an in-scope multinational group with an entity or entities in acountry (constituent entity) falls below 15933

The GMT is therefore by itself not a distinct type of tax, but a top-up in order tobring the total amount of taxes paid ơn an MNE’s excess profit in a jurisdiction up to the

minimum rate of 15% Therefore, it requires a set number of adjustments (‘GloBE Adjustments”) to the financial accounting net income or loss for each constituent entity

to determine its GIoBE income or loss Because the income tax base is unique of each

` The latest update on members of the Inchisive Framework is issued on November 15, 2023, with 145 state

members See more: OECD (2023), Members of the OFCD/G20 Bxùune Framework on BEPS, https :/nrvnv.oecd org/tax/beps/inc hisive -framework-on-beps-composition pdf Accessed 01/3/2024.

'` Intemutional Instinute for Sustazuble Development (2023), 4 Gide for Developing Coouries on How to

Understand cod Adapt to the Global Miramian Tôn, https /ivrveve isd org/systennfiles/2023-06 /guide-deve countries-adapt-globalmminum-tax-final_0 pdf Accessed 19/3/2024.

loping-country, the ETR needs to be calculated by a cohesively formulated income base TheETR is the ratio of the MNEs’ taxes paid or accrued on GIoBE income in a countrydivided by the multinational’s GIoBE income from that country In order to arrive at thetax rate actually incurred by the taxpayer, the SBIE amount is not excluded from theETR calculation.

Covered taxes are defined to include the income tax es (or close relatives) recorded

in the Constituent Entity’s financial statements, with certain adjustments Thedetermination of a constituent entity’s ETR is complicated by the fact that GIoBE countstaxes withheld on payments of income (e.g, interest, royalties, and services) as CoveredTaxes of the recipient entity, tax es withheld on distributions as covered taxes of the entitydistributing the earnings, and certain shareholder-level taxes on undistributed earnings

of a subsidiary as if paid by the subsidiary (instead of by the shareholder) As such,

GIoBE computes the ETR of a constituent entity by reference to a combination of itsactual (domestic) corporate income taxes recorded in the financial statements (withcertain adjustments), taxes withheld by others on income payments to it (both taxes andincome would be recorded in its financial statements), and taxes paid on deemeddistributions of its earnings by its direct or indirect shareholders

1.2.2 Characteristics

Pillar 2 proposes a coordinated global 15% minimum tax targeted at the intangibleincome of MNEs under a set of GIoBE rules The tax would be levied on financialincome after a deduction for substantive activities and would apply to MNEs withrevenues exceeding 750 million Euros (equivalent to approximately 810 million Dollars

as of March 31, 2024) in two of the past four years” The proposed tax is similar in some

ways to the current U.S tax on global intangible low-taxed income but also differs in

important aspects, as discussed in the next section Most notably, the GLoBE tax would

** Pillar 2 also auchades tyro treaty-based rules One is a provision called the subject to tex rule (STTR), which is

not part of GLOBE and would be mplemented separately Rt provides for a top-up tax on payments betweenrelated.

parties where the source country has ceded taxng rights through a treaty and the recipient country is 2 low- or tax jurisdiction These payments generally awolve xưerest androyakies The rate is 7.5% to 9% See more: OECD Q02), Addressing the Tax Chellenges Arising from the Digitalization of the Economy, https /Aavnv.cecd_orghaxbeps /brochume-addressing-the-tax-cha llenges-arising-from-the -digitalisation- of-the-

no-economy-july-2021 pdf Accessed 05/02/2024.

apply separately to the operations of constituent entities (e.g., subsidiaries and branches)

in each country, rather than applying on an overall basis to all foreign-source income, as

is the case with global intangible low-tax ed income A constituent entity with operations

in a country that are generating less than 10 million Euros of revenues or less than 1million Euros in losses would be excluded from the 15% minimum tax for those specificoperations

Under the GLoBE rules, an effective tax rate would be calculated for allconstituent entities of a MNE group located in each country Income from interestsaccounted for under the equity method in financial accounting where a share of after-tax income is included in profits, is excluded The equity method applies when there is

a significant, but not controlling, interest in the entity, typically where the ownership

share is between 20% and 50% in corporations and certain partnerships, although it

depends ơn the circumstances and entity structure For example, in a limited partnership,limited partners are not considered controlling if the general partner controls theinvestment, even if a limited partner owns a large share of the investment For purposes

of GLoBE, the income and tax items attributable to these entities would be excludedfrom the calculation International shipping income would also be excluded fromcoverage, as would investm ent funds and tax-exempt organizations, such as charities andpension funds

To target intangible income in each country of operation, the minimum tax wouldapply to income after a deduction for a share of the book value of a constituent entity’stangible assets and for a share of the value of payroll The allowance for these deductions

is often referred to as the substance carve-out and would eventually equal 5% after a yeer phase-in period The deductible share of tangible assets would initially equal 8%

10-and decline by 0.2 percentage points per year for the first five years, 10-and then decline by0.4 percentage points per year over the next five years to reach 5% The deductible share

of payroll would begin at 10% and decline by 0.2 percentage points per year for the firstfive years, and then by 0.8 percentage points per year over the next five years to reach5% According to the OECD, the substance carve-out is intended to allow tax incentives

for routine activities without triggering the top-up tax The OECD also claims that thecarve-out will cover a broad range of industries because it includes a deduction for

payroll as well as tangible assets*’.

a The Top-Up TaxUnder the GLoBE rules, a top-up, or additional, tax would be levied to increase aconstituent entity’s ETR to 15% if the entity’s tax was below the 15% minimum rate inits country of operation The calculation to determine whether a constituent entity's ETRwas below 15% would be made before deducting the substance carve-out The top-uptex would then be applied to income after deducting the substance carve-out Forexample, assume a constituent entity has an effective tax rate of 10% before deducting

the substance carve-out Also assume that the entity has a carve-out equal to 20% of income Then the top-up tax would be 4% (5% times [100% minus 20%]).

The top-up tex would be achieved in one of three ways according to the following

rate on the foreign constituent entity’s income to 15% If the parent entity owns less than 80% of the entity, then such partially owned parent entity would be responsible for the

top-up tax In either case, the tax revenue would accrue to the country in which the parent(or partially owned) is located, and not the low-tax ed entity’s country of operation TheIIR is to be effective in 2024

* OECD (2023), Global Ann-Base nai Model Rides, Frequently Asked Questions, Tứtps:/wrvr otcd orghaxbeps ifags-on-model-globe-ruks pdf ,p 3 Accessed 04/02/2024.

Third, if the ultimate or partially owned parent entity’s home country does notadopt an IIR, then all other countries in which the MNE group has constituent entitiescould increase the effective tax rate on the constituent entities operating within theirborders by invoking the UTPR The UTPR would allow the denial of deductions in anamount to produce an additional tax liability equal to the needed top-up tax in the low-tex jurisdiction such that the 15% minimum tax is achieved Deductions could be deniedfor payments to group companies and third-party entities, and for other items asdetermined by local law, including depreciation and interest An additional tax could also

be applied The right to the top-up tax increase would be allocated to countries imposingthe UTPR based on 50% of their share of total tangible assets in the entities imposing

the UTPR group plus 50% of their share of employeesin the entities imposing the UTPR The UTPR would, therefore, be imposed by countries on constituent entities that are

neither in the source nor headquarters country, and all revenue would accrue to the

countries imposing the tax It would serve as a backstop to ensure that the minimum tax

is imposed If adjustments could not be made to collect the full tơp- up tax, anyuncollected tax would be passed forward to be collected in the future The UTPR isexpected to be effective in 2025 for most countries that have adopted GLoBE, but theimposition of the tax on countries with a statutory corporate tax rate of at least 20%(which includes the United States) is delayed until 2026

bv Treatment of credits, grants, deductions, and losses

Under GLoBE mules, refundable credits (to be received within four years) andgrants would be counted as increases in income (but not taxable) rather than reductions

in taxes This treatment was recently extended to certain transferable credits Thus, for

example, if the tax rate is 20% before credits and there is a refundable credit equal to15% of income, the effective tax rate would be reduced to 17.4% (0.20/1.15) and no tơp-

up tex would apply If, however, the credit was nonrefundable, the tax rate would bereduced to 5%, and a 10% top-up tax would apply to achieve the 15% minimum rate

unless there was an applicable exception’ One exception would pertain to tax creditsthat accrue to operations that are treated under the equity method of accounting Theequity method is used when a company must account for the profits or loss of anotherentity it has a substantial, but not controlling, ownership interest in Under GLoBE mules,the income attributable to these entities is not included in the consolidation of earningsand would therefore be excluded from the effective tax rate calculation for purposes ofthe minimum GLoBE tax Thus, tax credits attributable to such operations would not beaffected by GLoBE

The GLoBE calculation of the tax allows for temporary timing differences in thefinancial and tax accounting treatment of deductions (such as depreciation), so lower

taxes for this reason (e.g, tax depreciation occurs before book depreciation) would not trigger a top-up tax This tex benefit can be recaptured, however, if not resolved in five

years for certain items, although this five-year rule does not apply to cost recovery Anylosses are valued at the minimum rate and carried forward as credits to offset future taxes.1.2.3 Purpose

a Addressing BEPS methods by MNEsFor a given capital allocation across a MNE’s affiliates, the GMT reduces theincentive to shift profits to lơw-tax jurisdictions Evidence implies that the tax effects on

profit allocation are large and grow over time”?, Profit shifting does not have any

productive implication, it just alters the locational tax bases and shifts funds from thepublic sector to the enterprise This is just unproductive rent-seeking activity, and theassociated cost is pure waste According to the economic theory of tax avoidance,

enterprises may be expected to maximize the net gain from avoidance, i.e they shift profits to low-tax jurisdictions until the marginal gain from profit shifting equals the

marginal cost (in terms of transaction cost, consultant fees, etc) The marginal gain fromprofit shifting is the tax rate differential between the two involved jurisdictions A

`* Gravelle, J G and Keightley, MP (2023), The Pillar 2 Global Minimian Tax: Implications for U.S Tax Policy, https -//crsreports congress gov R47174,p 8.

`7 Englisch, J and Becker, J (2019), “international effective minimum tazation the globe proposal”, World Tex Joana, No 4 November 2019 ,p 483-520.

minimum tax reduces the ETR difference and, thus, the marginal gain from shifting As

a consequence, profit shifting is expected to decrease?’

Overall, by reducing the use of BEPS methods, the GMT improves theinternational allocation of capital and makes investments more efficient From a globalefficiency point of view, MNEs should invest where the before-tax return is highest.MNEs, however, maximize after-tax returns instead of before-tax retums If source-based taxes differ, they may be inclined to invest in locations where gross returnis lower,but due to lower taxes, the net return exceeds the net return elsewhere The GMT reducesthese tax differentials and, thus, lowers the distortion-induced efficiency loss

bv Addressing the “race to the bottom” by tax competition

GMT is expected to mitigate tax competition’ in tvo ways First, it allows for

higher tax rates in non-haven countries The reasonis that GMT effectively curbs profit

shifting, as a consequence, the tax base becomes less elastic Atax rate increase thereforehas a lower efficiency cost in terms of tex base loss Second, in a situation where asufficiently large number of non-havens levy minimum taxes, tax havens or low-taxjurisdictions may costlessly increase their tax revenue by increasing the tax rate up tothe minimum rate without Such a tax rate hike does not increase the MNEs’ tax burdensince they pay the minimum tax rate anyway It just shifts revenue from the non-havens

to the (former) havens (the classical “treasury transfer” argument) Since minimum taxesare, so far, missing there is no available evidence for the impact on tax competition.However, minimum tex thresholds for subnational jurisdictions, e.g the Germanbusiness tax rate, have been shown to alleviate tax competition For instance, Von

Schverin and Buttner (2016) show that, in response to a minimum tax introduction,

jurisdictions have increased their tax rates evenif they were not directly affected by theminimum tex (i.e they had tax rates above the minimum threshold before the reform)".

`* Clifford, S (2019), “Taxing nmitinationals beyond borders: Fuancial and locational responses to CFC niles”,

Jotarid of Public Sconomics No 173.

`° Konrad, K A (2009), Nove birding mpuimim taxes may foster tax competition, 102 Economics Letters 2.

3° Schwverm, A and Butter, T (20 16), Consmcaned Tax Compenition — Empirical Effects of the Mimmuan Tax Rate

on the Tax Rate Distribution, Working Paper.

For a minimum tax on the domestic MNEs’ foreign income to be effective, itcould be necessary to introduce a tax on outbound payments by foreign firms to theirrelated parties abroad as a complementary measure Without such a tax on undertaxedoutbound paym ents, there would be a strong incentive to switch tax residence, (1.e movethe headquarters abroad, or corporate inversion) in order to avoid the GMT In theabsence of a global implementation of the IIR, countries may need to take precautions

to reduce this risk An UTPR may act as a deterrent against corporate inversions by,firstly, decreasing the potential tax savings from switching the headquarters’ locationand, secondly, increasing the burden of tax compliance - provided that the firm continues

to do business with related parties in its former headquarters’ jurisdiction

Moreover, an undertaxed payments rule can also be justified in its own right There might be competitive distortions if domestic enterprises subject to regular

domestic tax ation compete with foreign enterprises that have access to tax haven sheltersand preferential regimes Moreover, with respect to specific categories of outboundpayments, such rules can also serve as an anti-base erosion instrument addressing profitshifting risks This could, in particular, be assumed to be the case with interest payments,because intra-group debt financing can still be relied on to a considerable degree toconvert taxable profits into deductible business expenses

To sum up, the GMT enhances growth by improving the international allocation

of capital’! it saves cost by making inefficient avoidance activities less attractive, anditmitigates tax competition and, thus, allows for a more efficient level of public goods

provision*?.

1.2.4 Assessment of impact on BEPS methods and Tax competition

The GMT introduces significant changes to the international tax architecture and

thereby to the taxation of large MNEs Due to the interlocking nature of the rules, it isexpected that around 90% of in- scope MNEs will be subject to the GMT by 2025, based

3! Michael D., et a1 (2020), The OFCD Global Ant- Base Erosion Proposal, Publisher Oxford University Press, Oxford.

© VanderMeukn, W (2024), OFCD Two-Pilar GloBE Rules: Is Thue to Abcoxton Hope for International

Cooperation ơn a Global Mirimia Corporate Income Tax? 38 Emory Int'l Rev 233.

on the jurisdictions that have implemented or announced implementation? Oncomprehensive estimates of global low-taxed profit, GMT Assessment of Impact’ on theBEPS situation and tax competition is established as follows:

First, shifted profit is estimated to fall by half due to strongly reduced profitshifting incentives, although these effects may take time to materialize Reduced profitshifting means that more profit will be located where MNEs have significant economicactivities, which may particularly benefit developing countries given that academicresearch has suggested they are more exposed to profit shifting Investment hubs areestimated to lose approximately 30% of their tax base due to reduced profit-shifting,which translates into revenue gains for other jurisdictions

Second, the GMT will reduce low-tax ed profit worldwide through reduced profit shifting and top-up tax ation The current stock of low-taxed profit stems in part from the

global decline in both statutory and effective CIT rates over recent decades*’ Globallow-taxed profit is estimated to fall by about 80%; from 36% of all profit globally toabout 7% This reduction stems from both the reduction in profit shifting and theapplication of top-up tax es and is present in all income groups (due to either low baselineCIT rates or the presence of tax incentives and other base narrowing provisions), butlergely concentrated in investment hubs Remaining low-taxed profit is largely due to

the presence of the SBIE, where the GMT takes account of the real economic activities

* The 90% figure is based on the mmmuber of MNE groups in CoC reporting data that could be affected by the GMT

“ These data are published by the OECD, which updates and extends previous OECD mupact assessment work n

several directions The analysis relies on data for the years 2017-2020 wih muproved coverage of the global distribution of profit and activities of large MNEs (ie those withrevemmes above EUR 750 million); approximates the calculation of GloBE Income and the GloBE ETR; and mtroduces updated assumptions regarding the amplemertation of the GMT See more: Hugger, F., et al (2024), “The Global Mmimmm Tax and the taxation of

MNE profit”, OFCD Znation Working Papers,No 68 , Publisher OECD , Paris https //doi

org/10.1787a815d6b-en Accessed 09/3/2024.

© Average STRs have declined globally from an average of 28 2% in 2000 to an average of 213% mm 2020, md

21.1% im 2023 for the 141 jurisdictions covered m Corporate Tax Statistics See more: Devereux, M and B Lockwood and M Redoano (2008), “Do countries compete over corporate tax rates?”, Jounal of Public Economics , Vol 92/5-6 ,https://doLorg/10.1016/J JPUBECO 2007.09 005,p.1210-1235.

“ The SBIE implies that not all low-taxed profit will be subject to top-up tax,requiring a three-step adjustment to

compute the taxbase of the GMT it carves out a share of profit equalto a percentage of the assets and payroll n

‘the prisdition from the GMT base Only profit in excess of the SBIE is subject to top-up tax See more: Cluusing,

K (2020), “Profit Shiftmg Before and After the Tax Cut and Jobs Act”, National Tax Jounal, Vol 73/4,

Iittps ://doi org/10.17310/ntj.2020 4.14 ,p.1233-1266.

of MNEs The global amount of MNE profit taxed below the 15% minimum effectiverate is estimated to fall by more than two thirds.

Third, global CIT revenues are estimated to increase as a result of the application

of top-up taxes and reduced profit shifting The GMT is estimated to raise additional CITrevenues of 155-192 billion USD globally each year or between6.5% and 8.1% of globalCIT revenues, with one third of these gains coming from reduced profit shifting.Estimated revenue gains are expected to accrue to all jurisdiction groups, with thedistribution of revenue gains depending on the assumptions on governments’implementation and MNEs’ behavioral reactions The analysis highlights that theimplementation of QDMTTs can be an important tool for jurisdictions to collect top-uptaxes from low-tax ed profit arising in their own jurisdiction

Finally, differences in tex ation between jurisdictions are estimated to fall, which

will likely increase the importance of non-tax factors in influencing investm ent decisionsand improving the allocation of capital globally While average ETRs in almost alljurisdictions face increases from the introduction of the GMT, the GMT increases thetaxation of low-taxed profit at the bottom of the ETR distribution more strongly

Assuming high tax jurisdictions do not raise their tax rates in response!?, tax rate

differentials will narrow as ETRs become less dispersed As a result of the increase inthe taxation of low-taxed profit worldwide, the average tax rate differential across alljurisdictions falls by around 30% The reduction in tax rate differentials between

investm ent hubs and non-hub jurisdictionsis even stronger! This could have potentially

important impacts on the efficiency of the global allocation of investment and economicactivity

Reduced tex rate differentials can have important effects for the impact ofdomestic and international CIT policy making They are associated with lower

© Langenmayr, D and L Lin (2023), “Home or away? Profit shifting with terrtorial taxation”, Joronal of Public

Economics , Vol 217 ,hitps:/Mdoi org/10.1016/j ]pubeco 2022.104776 ,p.104776 Accessed 09/3/2024.

+ The median taxrate differential with mwestment lubs prior to the mtroduction of the GMT was 14.6 percentage pomts (averaged between 2017-2020) After the GMT is accounted for, the median differential falls to 3.6 percentage pomts See more: Hugger, F et al (2024), “The Global Mmimmm Tàx and the taxation of MNEprofit’’,

OECD Tuation Working Papers No 68, Publisher OECD , Paris.

distortions from the CIT system which can lead to a better allocation of capital Taxation

is one of the factors affecting investment decisions, both in relation to its extent andlocation As ETRs become less dispersed, taxation may play a less distortive role ininfluencing investment decisions Capital may be more likely to flow to thosejurisdictions where it is most productive, rather than where its returns are taxed at thelowest rate Other non-tax factors such as the availability of skilled human capital orinfrastructure may gain increasing relevance in influencing investors’ decisions Anallocation of investm ent that is less impacted by tax motives is likely to be more efficient

and could therefore support economic growtht®,

Lower tax rate differentials therefore reduce incentives to compete through the

tax system, effectively placing limits on tex competition The ability to tax mobile MNE profit has been a key concern for many tax policy makers To deal with the increased

mobility of profit, m any jurisdictions introduced anti-avoidance rules that sought to

tơp-up low-tax ed profit or have resorted to providing tax incentives to retain such tax bases(or both) The absence of a multilaterally agreed floor made jurisdictions vulnerable totax competition with other jurisdictions contributing to increased pressures on CITsystems due to international tax spillovers The GMT introduces a multilaterally agreedfloor to the taxation of MNEs Lower tax rate differentials may dampen the effects ofinternational spillovers that can at times hinder domestic tax policy making All in all,the GMT may facilitate a more balanced use of the tax system and a reconsideration ofits role in the overall investment policy mix

Summary of Chapter 1

As a supplementary set of rules for the taxation of corporation worldwide, the

GMT has their characteristics and purposes aligned with the characteristics and purpose

of CIT Many countries will be affected by GMT whether or not they respond withdomestic measures The Pillar Two initiative creates a pool of potential tax revenues onin- scope MNEs’ incomes to be collected by participating countries (that host an entity in

%* Keen, M.,L Lam and H Pallan (2023), buernational Tax Spillovers and Tengible Iwestuent, with Implications

Jor the Global Miramuan Tex, IMF Working Paper No 2023/159.

the MNEs) whenever the effective tax rate of an entity within the MNEs in the countryfalls below 15% Some domestic tax measures intended to attract and keep foreigninvestment may lose their effectiveness as a result Further, some of GloBE’simpact may

be indirect, providing lawmakers with an opportunity to consider policy reforms whether

or not they adopt GIoBE itself It is in the interest of each country to examine thepotential applicability of GIoBE to its taxpayers and the interplay of GIoBE rules withits domestic tax system in order to make informed decisions about whether and in whatmanner to respond This guide seeks to provide information helpful to making suchinformed decisions

For countries that decide to respond legislatively, policy options range from

Qualified to general reforms Once GIoBE is adopted by enough countries, some countries may be able to collect more tax revenues with corresponding domestic reforms.

These reforms may include adopting a DTT, whether as a GloBE-defined QDMTT or a

general domestic minimum tax, or they may consider revisiting existing tax incentives,

or a combination of these Preserving existing incentives and rate structures for taxpayersoutside the scope of GIoBE while claiming the minimum tax onin-scope companies may

be a priority for some countries For other countries, general reforms may mobilize moredomestic revenue and follow the overall international trend toward more comprehensivetaxation of large multinationals The following chapter examines a range of possibleoptions which have in fact been adopted by governments worldwide and explains thegeneral merits and challenges of each

CHAPTER 2 LEGAL ISSUES IN THE IMPLEMENTATION OF GLOBAL

MINIMUM TAX AROUND THE WORLDTheoretically saying the GMT exert the absolute same effect on everyjuridsiction, asin, no matter who taxes you, you are taxed 15% However, countries with

an originally above 15% ETR and countries with originally below 15% shall reactdifferently The GMT is purported to be a “victory” of the former group” because itsuccessfully intruded on the tax ation rights of host countries Policy reaction of countriestherefore shall be divided into two categories: (1) Group of main FDI outflows, whichfeels under threat that their tax revenues are suffering huge losses; and (11) Group of mainFDI inflows, whichis in dire need of keeping FDI investors within their countries While

the first group is tightening its implem entation of GMT, the other group accompanies its

rules with investment support measures

2.1 Group of main FDI outflows

2.1.1 Rationale for the implementation of GMT

As the number of tax havens has increased! and ETR are even lower than

statutory rates given the proliferation of loopholes, countries with large FDI outflows

have been increasingly alarmed of a significant CIT revenue at stake It is estimated that governments miss out on between 200 — 600 billion Dollars in revenues each year (around 10% — 15% of annual global corporate tax revenues) Most economies utilize

some version of a worldwide or territorial tax system In a worldwide system, domesticand foreign corporate income is taxed To prevent double tax ation, resident corporationscan claim a tax credit to offset some or all of the foreign income tax they have paid Inaterritorial system, corporate taxes are only paid on income that is generated within thecountry’s jurisdiction Most advanced economies have adopted territorial systems

The United States used a worldwide system until 2017, when the Tax Cuts andJobs Act moved the country to a hybrid model closer to a territorial system It featured

'° Independent Conmaission for the Reform of Intentional Corporate Taxation (2021),A global tax deal: avictory

for whom?, vhom Accessed 11/3/2024.

heps:/hmmviirictconvirict-everts/2021/10/7Hcrit-g24-evert-a-globaktax-deaka-vitory-for-*! Shaxson (2019), ““The billions attracted by taxhavens do ham to sending andreceiving mations alike”’, Raking Tax Havens Finance œxi Development Vo16 , September 2019,p.7.

several notable changes such as the removal of a tex on repatriated dividends from theforeign subsidiaries of US MNEs, a minimum tex on the intangible profits of UScompanies’ foreign subsidiaries, and a one-time transition tax on past profits of foreignentities belonging to US MNCs” Despite these changes, US MNCs have continuedshifting profits to tax jurisdictions with lower corporate tax rates, in part due to the law’sdesign Globally, the magnitude of tax maneuvering is so large that macroeconomic data

is distorted via “phantom investments”, where large FDI figures does not reflect

economic activity, but rather empty corporate shells fashioned to lower tax bills Toaddress this problem, the OECD and G20 had led the BEPS initiative—a multilateralnegotiation with over 135 countries, including the United States—since 2013 As a

result, a GMT is now one of the to central pillars of the BEPS initiative alongside a separate proposal to tax technology MNEs in part based on where their users are located.

2.1.2 Legal framework for the GMT

a EU Minimion Tax Directive

The EU is regarded as the biggest player in the global taxation system because oftheir influence on global FDI flows and the drafting of the GMT itself Regarding theimplementation of the EU Minimum Tax Directive, as of February 2024, eighteen EUMember States - Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Denmark,Finland, France, Germany, Hungary, Ireland, Italy, Luxembourg, the Netherlands,

*? Significance of this regulations mm taxing system is as follows: (2) Elmautes the tax on repatriated dividends that

‘US-resident nautinational corporations receive from thex fore ign subsidiaries (1) Introduces a new low rate taxon intangible profits of US company subsidiaries located m low-tax foreign countries (iii) Inposes & one-time

transition tax on past profits of foreign affiliates of US companies.

*' In practice, FDI is defined as cross-border fxunrial awestments betiveen fimms belonging to the same nautzutional group, and nmich of # is phantom m nature—imvestments that pass through empty corporate shells

‘These shells, also called special purpose entities, have no real business activities Rather, they carry out hoking

activities, conduct intrafizm fic ng, or mage ntangbk assets—often to minimize nuultinationals’ global tax

bill Such financial and tax engineering bits traditional FDI statistics and makes difficult to understand gerne

economic integration See more: DamGaard, et al (2019), “The rise of phantom imvestments”, Finexe and Development, No September 2019

* The EU is expected to pocket the lion’s shure of the €150 billion mn additional yearly tax come generated from

‘the new mininmm corporate taxrate In a 2021 bill wrote by the Commission to mtrochice the taxrate xứo EU lav:

“There is an extreme political urgency to go forward with the project” Global takks over the accord have been gomg on for years amid growing protests fram European policynukers over hoiy litth tax tech giants such as Googk , Facebook and Amazon pay into mational coffers See more: Poltxo (2021), FU pushes on with global momo tax rate despite US stalemate , lứtps-lNrvrvr politico ewartic 3 eu-pushes-on-with-globalmminum-tax- Tate-despite-us-stalemate/ Accessed 19/3/2024.

Romania, Slovakia, Slovenia, andSweden, had finalized the domestic legislative processrequired for its enactment.

In line with the EU Directive, the IIR applies in all EU jurisdictions that haveenacted related legislation for financial years starting on or after December 31, 2023,except for Slovakia, which has made use of the deferral option The UTPR becomesapplicable one year later (i.¢., for financial years starting on or after December 31, 2024),except where the ultimate parent entity of the group is located in an EU Member Statethat opted for the IIR and UTPR deferral”.

All EU jurisdictions that have completed the transposition process will apply aDMTT for financial years starting on or after December 31, 2023

On December 10, 2023, the European Commission issued a Note recognizing that Estonia, Latvia, Lithuania, Malta, and Slovakia have exercised their option under Article

50 of the Minimum Tax Directive Article 50 of the Minimum Tax Directive permitsMember States with fewer than 12 ultimate parent entities falling under the Directive'sscope to postpone the implementation of IIR and UTPR for a consecutive six-year periodstarting from December 31, 2023 However, it emphasizes that these Member States arestill required to implement all other provisions outlined in the Minimum Tax Directive

to ensure consistent application across jurisdictions and among taxpayers The MinimumTax Directive explicitly mandates that other Member States must apply the UTPR totheir constituent entities belonging to such groups, effective from December 31, 2023

As of January 25, 2024, the EU Commission announced infringement decisionsagainst EU member states that have not enacted domestic law to implement Pillar

Two: Estonia, Greece, Spain, Cyprus, Latvia, Lithuania, Malta, Poland and

Portugal These countries have been given a two-month period to respond and finalizetheir legislation, with potential further action by the Commission if compliance is notmet The EU Commission announced infringement decisions against these Member

5$ “lection for a delayed application of the IIR and UTPR” stipulates as follows: “By way of derogation from

Article 5 to 14, Member States inwhich no more thea twelve wWtimate parent entities of groups within the scope of tas Directive are located may elect not to apply the IIR and the UTPR for six consecutive fiscal years be ginning Srom 31 December 2023 Member States that make such election shall nonfy the Commission by 31 December 2023.” See more: EU Mnvnwen Tax Directiv, Article 50(1).

States, granting them two months to reply to the letters of formal notice and completetheir transposition, or face the issuance of reasoned opinions.

On December 22, 2023, the European Commission updated its webpage’* on the

Minimum Tax Directive, adding various documents, including a frequently askedquestions (FAQ) document The C ommission clarifies on its webpage that this documentreflects the Commission Services perspectives and is non-binding for both theCommission and the Member States The FAQ document primarily reiterates that theGuidance of the Inclusive Framework can serve as a source for interpreting andimplementing the Pillar Two Directive, ensuring consistency among Member States,provided it aligns with the Directive and Union law

Additionally, on the same date, the General Court of the Court of Justice of the

European Union issued a decision in Case T143/23°7 This case involved a taxpayer's

request for the partial annulment of the Minimum Tax Directive, specifically regardingits impact on the Dutch tonnage tax regime The applicant contended that the Directive

might subject their business to top-up tax and hinder their ability to recover investments

made under the tonnage tax scheme However, the General Court dismissed the case,deeming it inadmissible because the applicant couldn't demonstrate that they belonged

to a “limited class of persons” whose pre-existing rights were affected by the adoption

of the Minimum Tax Directive

b Other countries

Inthe Umted Kingdom, the Pillar Two rules were included in Finance Act (no.2)Act 2023 that was enacted on 11 Jul 2023 The UK measures follow the intent of theGIoBE model rules as closely as possible The enacted legislation includes the IIR,referred to as the multinational top up tax or MTT and a QDMTT Draft legislation hasbeen published to include the UTPR, which was announced in the Autumn Statement

2023, and which will come into effect from accounting periods ending on or after

** Exropean Commission (2024), Mirimian corporate taxation, https:/Raxation-custamss ec europa

wtaxation-Ucorporate-taxationininmam-c omporate-taxation_en Accessed 19/3/2024.

3? Action brought on March 14,2023, Merlin and Others v Conmnission, Case T 141/23 (2023/C164/63)

December 31, 2024 The UK tax authorities released draft guidance on the multinationaland domestic top-up taxes on December 21, 2023.

In Canada, the Department of Finance released draft legislation on 4 Aug 2023that would implement the global minimum tax mules into Canadian law The draftincludes an IIR andQDMTT that would apply to fiscal years of qualifying MNE groupsstarting on or after December 31, 2023 The draft legislation does not include a UTPR;this is expected to be added later Canada’s implementation of the Pillar Two rules will

be via legislation separate from the C orporate Income Tax Act

In South Korea, the GMT was introduced in the Law for the Coordination ofInternational Tax Affairs on 31 Dec 2022, making Korea the first country to codify the

GIoBE rules The government released a draft presidential decree on 9 Nov 2023 for public consultation on the rules The presidential decree was enacted in Jan 2024 to add

a new chapter to the Enforcement Decree of the Law for the Coordination ofInternational Tax Affairs, which contains details on the Korean GIoBE rules SouthKorea has introduced both anIIR and supplementary rules for income inclusion(UTPR).There is no QDMTT On 27 Jul 2023, the Ministry of Finance released proposedamendments to the tax law that include a one-year delay in the effective date of theUTPR, which will become effective on 1 Jan 2025 rather than on 1 Jan 2024

3.13 Complementary measures

Despite the establish structure somewhat staunch and highly complex,

governments of mainly FDI outflows country still fear the reform alone cannot stamp

out tax havens or prevent a harmful tax competition between governments States canstill abide by the new minimum rate whilst offering generous tax credits and other

deductions that effectively reduce the tax rate below 15%°S Many states are already

introducing attractive transferable credits, grants, and subsidies to compete for

investment’® Another loophole in the GMT deal allows firms to ex clude certain amounts

** Noked and Noam (2020), “From Tax Competition to Subsidy Competition”, University of Permuyh@ia Joranal

Of Internationa Law , No 44502020.

** Race to provide non-tax subsidies and corresponding consequences: As mentioned above, while an madequate

carve-out might make non-hamuful tax preferentialre gimes ineffective not providing a carve-out at all would only worsen the situation Countries may engage mm providing non-tax subsidies to attract foreign investments This

of profits - equal to 8% of the value of tangible assets and 10% of payroll in the first year

- from the tax base" Alternative options to close the loophole of SBIE taken by countries

include:

First, excluding risk jurisdictions from the GIoBE proposal A list of tisk (or high-tax) jurisdictions, which are in principle compliant with the GIoBE policy,can be monitored and published by the Inclusive Framework /OECD Thus, only thosejurisdictions whose tex policies pose a high risk of tex evasion should be part of theGIoBE rules This approach would ensure automatic carve-out for businesses that arelocated in low-risk jurisdictions and would bring certainty amongst gemuine taxpayers.Nevertheless, framing such a policy would require one-time curation of an unambiguous

low-and precise list of stlow-andards for determining low-risk jurisdictions low-and periodic review

of any changes in tax policies of such jurisdictions Also, the timeline of review and

circumstances that could alter any jurisdiction's status would need to be pre-determined

Probably the need to have a carve-out should get significantly eliminated due to this

approach

Second, applying alow minimum rate: The other alternative could be that whiledetermining the minimum tax rate, consideration is given to the average effective taxrates of the jurisdictions whose tax regimes have not been considered harmful pursuant

to work carried out under BEPS Action 5 The minimum tex rate should be kept lowerthan the average ETR of these jurisdictions This would ensure that no top-up tax applies

to such jurisdictions MNEs located in jurisdictions with harmful preferential regimes ormeager tax rates would be liable to top-up tax (thus automatically carving out low-riskjurisdictions) However, this approach would entail a lot of detailing for the

determination of the minimum tax rate Further, suppose the minimum tax rate is kept

significantly low In that case, it may defeat the purpose which the GloBE proposal

could lead to certam repercussions, ane of them bemg welfare loss There should not be any welfare loss # the govermunent can replace tax benefits with non-tax subsidies with similar effectiveness , with no additional burden.

However, welfare loss may occur when non- hameful tax benefits promoting welfare carmot be replaced with equivalent non-tax subsidies or where the replacement 3s accompanied by a higher outflow from the government's exchequer.

* Trwedi and Noopw (2021), Pillar Two Substaxe-Based Carve-Out - ‘To Be, or Not to Be', Anttps://ssm_.com/abstract=3864705 or http :/idx doi.org/10.2139/ssm 3864705 Accessed 10/3/2024

intends to achieve, as many jurisdictions would get automatically carved out without anysubstance analysis.

2.2 Group of main FDI inflows

2.2.1 Rationale for the implementation of GMT

First GMT opens a door for larger economies to take from small, export-oriented

countries If the source countries do not implement the GMT themself, the so-called resident countries (i.e, where MNEs are headquartered) will have the right to top up the

tax to 15% if the tax haven does not collect the tax due This is a problem for poorer

countries because the resident countries are mainly rich countries

Second, developing countries may find that the GMT could actually lead to taxrevenue being lost to other jurisdictions Developing countries are typically notconsidered tax havens, given that they often have relatively high headline corporateincome tax rates But after decades of giving tax exemptions to specific sectors,investors, or regions, the effective tax rate paid by many large companies can be quitelow Under global minimum tax rules, which set a 15% minimum benchmark,developing countries whose tax incentives lead to an effective tax rate below 15% mayfind themselves in effect giving up tex revenues to the jurisdiction where the MNE isbased

Third, as 100 of the 138 countries listed in the OECD’s Inclusive Framework

agreement are categorized by the World Bank and UNCTAD as developing countries.Characteristics of these countries is that they: (i) Require significant FDI to facilitateinfrastructure and resource development, (ii) Have implemented tax incentives toencourage FDI, and (iii) Have entered investment or trade agreements or private

contracts that limit their ability to change national tax laws or policies" For example,

many developing countries have entered into tax agreements for large investmentprojects, either through special provisions in their domestic law or in investmentcontracts with foreign investors Often these agreements contain tax incentives,

*! Intemational Centre for Tax and Development (2023),.A global mirimian tax: is Pillar Two fear for developing

€œtatriei?, https JAwvavrictd.ac Mlog/global mmimam-tax-pillar-tyro-fax-developg-coumtries/, Accessed 01/3/2024.