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The OECD Global Minimum Tax: Is It Suitable For Developing Countries?

The authors are Saumya Joshi and Parvathi Badrinath, fourth-year students at Jindal Global Law School, Sonipat.

The Race to the Bottom

Corporate Income Tax (“CIT”) is a direct tax that consists of the taxes levied on the net profits of a company. In India, a resident company is taxed on its worldwide income, whereas a non-resident company is taxed only on income that is received, accrued or arises, or deemed to accrue or arise in India. The Income Tax Act of 1961 sets the CIT rate, which usually varies between 20 and 40 percent.

Just like India, other countries worldwide collect CIT at varying rates based on their respective economic backgrounds and policies. Over the last few decades, worldwide CIT rates have been declining. Even after excluding jurisdictions with nil and extremely low tax rates (tax havens), the overall average statutory CIT rate declined from 30.2 percent in 2000 to 21.3 percent in 2022. This decline can be attributed to a phenomenon called the ‘Race to the Bottom’. The Race to the Bottom is a term used to describe the competition between countries to undercut each other by offering lower CIT rates to attract more foreign investment. This competition, along with BEPS activities, has led to a lower collection of corporate tax. BEPS stands for Base Erosion and Profit Shifting and refers to “tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.” As of 2023, it is estimated that BEPS practices cost countries up to USD 240 billion in lost revenue annually.

To tackle BEPS and increase corporate tax collection, over 140 countries adopted the OECD Inclusive Framework on BEPS in 2013 and BEPS 2.0 in 2021. The BEPS 2.0 Framework consists of Pillar One which reallocates taxing rights, and Pillar Two which sets the Global Minimum Tax (“GMT”) rate at 15 percent. The GMT intends to minimise the Race to the Bottom and BEPS practices. This article will explain four reasons why the current GMT rate set by Pillar Two of the OECD Inclusive Framework on BEPS is unsuitable for developing countries and lower-middle-income countries (“LMICs”).


Pillar Two of the OECD Inclusive Framework on BEPS

Pillar Two of OECD BEPS 2.0 ensures that the corporate income of multinational enterprises (“MNEs”) is taxed at an appropriate and uniform rate called the Global Minimum Tax Rate. The GMT rate applies to all MNEs with annual revenues above the prescribed threshold, which is currently set at 750 million Euros. The GMT intends to put a floor on the destructive Race to the Bottom. The current GMT rate was fixed by the G20 at the OECD Agreement in October 2021 at 15 percent. It is projected that the current rate will generate around USD 150 billion in additional global tax revenues annually.

The application of Pillar Two is based on three rules: The income inclusion rule (“IIR”), the undertaxed payments rule (“UTPR”) and the subject-to-tax rules (“STTR”), of which the first two are of importance here. The IIR applies when a company operates in a jurisdiction that has a tax rate lesser than the GMT. In this case, the country where the company’s ultimate parent entity is located is allowed to collect a ‘top-up’ tax so that the subsidiary pays a total tax of 15 percent. In contrast, the UTPR applies when the ultimate parent entity is itself located in a jurisdiction that does not apply the GMT. In such a case, the top-up tax can be collected by another country where a constituent entity of the parent is located.

Although it is purported that the GMT will increase CIT revenues and this is possible, it may not be the case for developing countries at the current rate of 15 percent.


The Current GMT Rate is Not Suitable for Developing Countries and LMICs

The current GMT rate of 15 percent set by Pillar Two of BEPS 2.0 is not desirable from the point of view of developing countries and LMICs for four reasons:

1.     Downward Global Convergence:

Developing LMICs like India have a higher CIT rate than most countries and they rely more heavily on the CIT as a source of revenue. The threshold under the Framework will drastically reduce the revenue of such countries due to the low rate. The new GMT rate of 15 percent is far below the global average of 24 percent. These countries fear that this will create a new global ceiling for countries which will cause a substantial downward convergence with countries racing downwards to converge at 15 percent to remain competitive. The unintended consequence will be a resultant loss in the corporate tax base of many developing countries and LMICs whose governments heavily depend upon this source of revenue. Such a revenue loss would contribute to the damage of long-term goals that are especially important to these countries in their pursuit of social welfare.

2.     Detrimental Top-Up Tax:

The majority of companies covered under the GMT are headquartered in developed countries. The priority given to the IIR over the UTPR means that developed countries are given the first choice to collect top-up tax. The G7 countries are projected to receive 60% of the estimated $150 billion generated by the GMT, even though they are home to only 10% of the world’s population. Since developed countries are getting the most benefit from this top-up tax, some LMICs feel that this priority should be flipped, and the top-up tax should be allowed to be collected by source countries instead.

3.     Reduction in FDI investments:

a.     Many LMICs offer tax incentives to companies to attract Foreign Direct Investment (“FDI”). The application of the IIR will remove any impact of these exemptions, as companies would no longer have a financial incentive to invest in the economies of LMICs. In response to this, it has been argued that limiting tax competition for FDI will allow countries to compete on non-tax grounds, which is supposed to be a ‘better and fairer’ form of competition. However, this argument is based on the assumption that limiting tax competition will affect all countries similarly. This assumption is false, since developed countries already offer investors benefits like a developed infrastructure, stable financial markets, an educated workforce, etc. and LMICs will not be able to offer these benefits to the same extent as developed countries. Hence, they compete on tax grounds to attract FDI and therefore, limiting tax competition is detrimental to FDI investments in LMICs.

b.     Further, a GMT fails to account for the non-tax benefits that LMICs reap from their tax incentives. This can be demonstrated by taking the example of Rwanda. In Rwanda, certain companies get tax benefits like a 0% effective tax rate or a corporate tax holiday for 5 to 7 years. Companies claiming these exemptions have to employ and train a certain percentage of Rwandan employees. These incentives are given to sectors most in need of development. Rwanda is receiving a lot of non-tax benefits from the tax incentives like education and training of the workforce, employment for Rwandans, development in crucial sectors, etc. Imposing a GMT may remove these non-tax benefits by discouraging FDI in LMICs.

4.     Costly international arbitration:

LMICs like Kenya have raised concerns about the new mandatory binding dispute resolution mechanism under the Framework which puts sovereign tax disputes in the hands of ad hoc international arbitrators. International arbitration procedures which are typically costly and lengthy may not be viable for LMICs who possess scarce resources and must weigh these against a potentially losing battle against large MNEs or their home nations which are often developed countries. Certain low-income countries can indeed opt out of mandatory arbitration if they have a low level of prior bilateral tax disputes. However, this will unfairly disadvantage LMICs that actively seek to defend their trade interests internationally through bilateral disputes.



The Race to the Bottom phenomenon in tandem with BEPS activities has led to the lowering of CIT collection worldwide. To mitigate this issue, Pillar Two of the OECD BEPS 2.0 framework introduced in 2021 stipulates a GMT rate of 15 percent for companies with a turnover exceeding Euro 750 million in annual revenues. Although it is expected that the GMT will increase CIT revenues, the current rate of 15 percent may not be beneficial for developing and lower-middle-income countries like India. Most developing countries have a higher CIT rate than the current GMT rate which inspires fears of downward global convergence. The policy also seems to favour developed countries, especially the provisions related to income inclusion which may discourage FDI. Further, mandatory binding arbitration under this framework will be costly and tedious for developing countries. Hence, the GMT rate should be increased so that there is an actual increase in the collection of CIT in developing countries, so that they can fully realise the benefits of a global minimum tax.

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