Tax incentives and the GloBE rules

10 October 2022

What effect the Pillar Two rules will have on tax competition, and particularly what tax benefits jurisdictions will be able offer with a view to attracting inward investment is much discussed.

So the OECD report published last Thursday - Tax Incentives and the Global Minimum Corporate Tax – is a very interesting read.

The report, to be presented at the meeting of G20 Finance Ministers later this week, considers the impact Pillar Two will have on the use and design of tax incentives, particularly for developing countries.

Its principal recommendation is that all countries start preparing for Pillar Two now, and that work should include a thorough assessment of the tax incentives that are currently in place.

It contains some practical points for countries to consider when conducting their reviews and notes that well-targeted tax incentives, such as those directed at payroll or tangible assets, are less likely to be adversely affected by the Pillar Two rules.

The report also reminds countries that tax benefits can continue to be provided for entities that are not in-scope of the Pillar Two rules, and that will include subsidiaries of MNE groups with less than €750m revenue or domestic groups.

However, the report expresses the hope that the global minimum tax agreement will reduce the pressure on developing countries to offer "damaging" tax incentives, which it sees as those that ‘allow MNEs to generate substantial low-taxed profits in a jurisdiction without providing substantial tangible investment or jobs’.

Of particular note, is the report’s recommendation that "in the more immediate term" jurisdictions should consider introducing qualified domestic minimum top-up taxes. These will act as a revenue protection measure, ensuring that a jurisdiction with a domestic minimum tax is first in-line to receive any Pillar Two top-up tax from entities located in its jurisdiction.  

In making this recommendation, the report adds further weight to the view that Pillar Two implementation by larger, higher-tax economies is likely to accompanied by the widespread adoption of domestic tax regimes globally.

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