Plans to reform rules on cross-border corporate taxation are set to yield more revenue for governments than previously expected, according to new OECD estimates.
In October 2021, as many as 136 countries agreed to the OECD’s two-pillar proposed reform of the global taxation system, which is expected to take effect in 2024. The reform’s goal is to remove loopholes used by multinationals to reduce their tax bill, but this could have far reaching implications for foreign direct investment.
The first pillar of the reform will reallocate government rights aimed at taxing digital corporations based on where they generate their revenue, rather than their physical location. The second pillar aims to impose a global minimum effective corporate tax rate of 15%.
In the update published on January 18, the OECD said it estimates that the corporate minimum tax is now expected to raise up to $220bn per year — equivalent to 9% of global corporate income tax revenues. This is a significant increase from the previous estimate of $150bn. Similarly, the pillar-one reform is now expected to raise around $200bn, in additional annual tax revenue from the largest and most profitable multinationals — up from the $125bn previously predicted.
David Bradbury, the deputy director of the OECD’s centre for tax policy and administration, said that the reforms will bring “stabilisation and greater certainty” to the international taxation system.
“Governments are facing extraordinary expenditure pressures,” he told fDi in an interview. “If implemented, [the reforms] will remove a whole range of distortions from the global economy and will deliver increased revenues [for governments].”
Despite being broadly welcomed, lawmakers in developing countries have raised questions over how the reform will impact their ability to use fiscal incentives to promote investment.
Mr Bradbury said that the global reforms will “put a floor on tax competition” and will be a “game changer” in helping low-income and developing countries with their domestic resource mobilisation.
“Firms are going to be subject to the minimum level of tax regardless of where they invest,” he added, noting that countries will be “limited” under the pillar-two reforms, but still allowed to use tax instruments to attract investment into real economic activities.
Despite the potential for the reforms to raise significant government revenues in developing countries, some policymakers believe they could go further. Colombia’s finance minister José Antonio Ocampo told Reuters on January 17 that the reforms were “too limited” and still had a “bias in favour of (countries that host) the headquarters of multinationals”. Mr Ocampo is planning to supplement the OECD’s global deal with an additional accord with other Latin American countries.