International Corporate Tax Reform published by IMF (2/2023)
To relieve the pressure on the outdated international corporate tax system, an ambitious reform was agreed at the Inclusive Framework (IF) on Base Erosion and Profit Shifting in 2021, with now 138 jurisdictions joining. It complements previous efforts to mitigate profit shifting by addressing the challenges of the digitalization of the economy through a new allocation of taxing rights to market economies (Pillar 1) and tax competition through a global minimum corporate tax (Pillar 2).
This paper concludes that the agreement makes the international tax system more robust to tax spillovers, better equipped to address digitalization, and modestly raises global tax revenues. Global corporate income tax revenue is estimated to rise by about 6 percent (0.15 percent of GDP)—at the cost of some investment decline. This revenue effect could be larger in the long run as pressures from tax competition and profit shifting abate. Country-specific effects are hard to gauge but will likely be negative in some investment hubs. Developing countries will likely gain, but effects are modest in relation to their large revenue needs for development.
Implementation of the agreement requires an active approach by all countries and calls for rethinking domestic policy. Countries will need to make strategic decisions in response to the agreement, such as determining whether and how to adopt the rules agreed in Pillar 2 and (also for countries not members of the IF) how to react to the adoption by others. This paper provides some guidance, including for adopting at least the qualified domestic minimum top-up tax. Countries are also advised to review their general corporate tax structure, investment tax incentives, and anti-avoidance rules. IMF Capacity Development helps countries navigate these domestic policy responses by assessing their implications and by building capacity for implementation.
The international tax framework will likely continue to evolve beyond the IF agreement by responding to emerging challenges and pressures from fiscal spillovers. Reforms toward an allocation that is more robust to tax spillovers, such as destination-based taxation, could, for example, start by widening the coverage of Pillar 1. The recent agreement may also pave the way for higher taxation of excess profits. To serve the interests of developing countries more forcefully, simplification of profit allocation rules can be achieved by an expansion of formula apportionment and the use of safe harbor rules. Also, a greater role of withholding taxes, for example on outgoing service payments, can shape the future developing country agenda.