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INTERNATIONAL CORPORATE TAX REFORM

February 2023

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International Monetary Fund

Washington, D.C.

© 2023 International Monetary Fund

Title page

INTERNATIONAL CORPORATE TAX REFORM

January 12, 2023

EXECUTIVE SUMMARY

To relieve the pressure on the outdated international corporate tax system, an ambitious reform was agreed at the Inclusive Framework (IF) on Base Erosion and Profit Shifting in 2021, with now 138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.

Approved By

Vitor Gaspar (FAD) and Rhoda Weeks-Brown(LEG)

Contents

• Glossary

• INTRODUCTION

• THE INCLUSIVE FRAMEWORK AGREEMENT

• A. Details of the Agreement

• B. Qualitative Assessment

• C. Impact of the Agreement

• D. Implementation Challenges

• OTHER INTERNATIONAL COOPERATION INITIATIVES

• A. BEPS and Beyond

• B. Cooperation Through the United Nations

• C. Regional Cooperation Initiatives

• COUNTRY-LEVEL REFORM PRIORITIES

• A. Opting In or Opting Out

• B. Corporate Tax Rates

• C. Tax Incentives

• D. Tailored Base Protection in LICs

• E. International Tax Administration

• F. Digital Service Taxes

• G. Revenue Mobilization Agenda

• A LOOK INTO THE FUTURE

• A. Reform Directions

• B. An Agenda for Developing Countries

• References

• BOXES

• 1. IMF Engagement on International Corporate Tax Matters

• 2. Summary Evaluation of the IF Agreement and More Fundamental Reforms

• 3. Why Countries Should Adopt the Qualified Domestic Minimum Top-up Tax

• 4. Assessing the Impact of Pillar 2 on Tax Incentives

• 5. Treaties Ripe for Revision?

• FIGURES

• 1. Revenue Impact of Pillars 1 and 2

• 2. The Impact of Pillar 2 on Profit Shifting Gains and Losses

• 3. CIT Rates over Time

• 4. Selected Intellectual Property Box Tax Rates, Year of Introduction, and Statutory CIT Rates

• 5. Revenue Needs or Potential of Developing Countries Compared to Revenue Estimates from International Tax Reforms

• 6. Simplification Potential Across Sectors

• 7. Taxation of Imported Services

• APPENDICES

• I. Data and Methodology of Impact Assessment

• II. BEPS and ATAD

• III. Risky Treaties

Glossary