An initiative by the OECD to tackle base erosion and profit shifting (BEPS) by multinational corporations (MNCs) has prompted countries around the world to amend the preferential tax regimes offered by their special economic zones (SEZs), particularly those elements that could be labelled as harmful tax competition. 

Within the same context of the BEPS initiative, the OECD-G20 also came up with the Global Anti-Base Erosion (Globe) framework, calling for the introduction of a global minimum tax for MNCs — a proposal that can also affect SEZs. The proposal is currently being discussed by the 139 countries participating in the BEPS initiative. More recently, Joe Biden’s administration in the US has submitted its own proposal for a minimum tax. 


Unlike the BEPS project that addresses harmful tax competition, the Globe and the US proposals address all types of tax competition. Both would mandate all countries to effectively levy a minimum tax rate, with proposals varying from 12.5% to 28%. 

One of the concerns is to what extent the minimum tax will result in less investment in developing countries, since companies carrying out investment in these countries may not have a return on investment that allows the payment of this tax. This is the case of investments carried out in an SEZ that benefits from a reduced tax rate in comparison to the country’s domestic tax rate. 

The use of SEZs has been promoted by countries not only to support the development of exports, foreign direct investment (FDI) and local employment, but also to promote investment and competitiveness in specific (or underdeveloped) geographical areas. Since there are no exceptions to the application of the minimum tax rate, it could be reasonably expected that all business carried out overseas will have to comply. 

But what will investors do if the reduced rate in the SEZ is below the minimum tax rate — for example if the SEZ was 5% and minimum tax rate was 25%? Would they leave the country, or pay the difference to the country where the investor is headquartered? And if so, would the revenue foregone by the developing country then be transferred to the developed country? 

At the time of writing, these proposals are still being discussed; however, it is clear that there is a need for more clarity on how these proposals will be shaped. It is unknown how to mitigate the impact of a minimum tax on FDI, and how countries, including those that have modified their SEZ regimes in the past, can benefit from these changes. Whether this could mean the end of SEZs everywhere also remains to be seen. 

Irma Mosquera is associate professor of tax law at Leiden University, the Netherlands, and lead researcher at GlobTaxGov, an ERC-funded project that investigates global tax governance.

This article first appeared in the June/July print edition of fDi Intelligence. View a digital edition of the magazine here.