Global minimum tax will make developing nations less attractive: UN report

The proposed introduction of a global minimum corporate tax of 15 per cent on the foreign profits of the largest multinational enterprises (MNEs) has major implications for international investment and investment policy, according to the UNCTAD World Investment Report on Thursday.

For developing countries, such a tax will reduce the effectiveness of low tax rates and fiscal incentives to attract investment, says the report.

The report, "International tax reforms and sustainable investment", provides a guide for policymakers to navigate the complex new tax rules and to adjust their investment strategies.

The proposed reforms, planned for 2023 or 2024, aim to discourage multinationals from shifting profits to low-tax countries.

According to the report, key implications are:

1. Increased tax revenues from multinationals for most countries
2. Higher taxes on foreign profits of multinationals
3. Potential downward pressure on new investment by multinationals
4. Reduced effectiveness of low tax rates and fiscal incentives to attract investment

"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.

"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," she added.

According to the UN report, the tax rates on the foreign profits of multinationals will increase. Foreign affiliates that pay tax rates below the minimum on profits reported in host countries will be subject to a top-up. Also, multinationals will reduce profit shifting and pay host-country rates on a larger profit base.

The estimated rise in the effective tax rates faced by multinationals is conservatively estimated at 2 percentage points, the report said. 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.