Impact of a global minimum tax on FDI

The introduction of a 15% global minimum tax on the foreign profits of the largest multinational companies proposed in the context of the G20/OCDE Base Erosion and Profit Shifting (BEPS) project has important implications for international investments and investment policies.

With this, according to a report by the United Nations Conference on Trade and Development (UNCTAD), BEPS Pillar II is expected to discourage multinational companies from transferring profits to countries with low taxes and reduce tax competition between countries.

Other objectives are to stabilize international tax rules and reduce tax uncertainty, create a more level playing field for companies and avoid the proliferation of unilateral measures that would lead to a deterioration of the investment climate.

In addition, UNCTAD believes that increased tax revenues will support domestic resource mobilization for the Sustainable Development Goals.

Statutory corporate income tax (CIT) rates have fallen over the last three decades in a race to the bottom to attract international investment.

They now hover around 25% in both developed and developing countries.

Also, according to UNCTAD, the effective tax rates (ETR) on the declared profits of foreign affiliates tend to be lower, less than 20% on average, mainly due to the tax incentives offered by countries. hosts.

Global minimum tax

Multinational companies often pay significantly less tax on their foreign income because they can shift some of their profits to low-tax jurisdictions.

As a result, the real tax rates faced by multinational companies on their foreign income are around 15%, significantly lower than the general rate.

This is captured by a new metric introduced in an UNCATD report, the FDI Level ETR, which reflects the average taxes paid by multinationals on all of their FDI income, including transferred earnings.

Pillar II will increase the corporate income tax faced by multinational companies on their foreign earnings.

First, multinational companies will reduce profit shifting, since they will have less to gain from it and will pay the tax rates of the host country.

Second, foreign affiliates that pay an ETR below the minimum on reported earnings in host countries will be subject to additional tax.