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With no specific carve-outs for tax incentives, Pillar 2 may adversely impact the developing countries, especially in relation to the tax incentives granted by the countries.
Pillar 2 seeks to implement a global minimum level of effective taxation on the income of large multinational enterprises. It suggests that global action is required to stop a harmful race to the bottom on corporate taxes.1 However, the current design of Pillar 2 does not include any specific carve-outs for tax incentives. Overtime, countries across the globe (especially developing countries), have been granting tax incentives for various reasons (like promoting foreign direct investment, promoting research & development, promoting specific sectors of the economy, etc.).2 Therefore, with no specific carve-outs for tax incentives, Pillar 2 may adversely impact the developing countries, especially in relation to the tax incentives granted by these countries.3 Possibly, the imposition of minimum taxes may make these tax incentives ineffective in certain situations.
Considering the background provided above, this article discusses the Pillar 2 proposal and its impact on developing countries. After that, it provides some background on tax incentives, some of the prevalent forms of tax incentives used by countries, and the purpose of granting such incentives coupled with some country-specific examples. It then presents an evaluation of the impact of the Pillar 2 proposal on tax incentives. Furthermore, it goes on to discuss the subsidies and the policy rationale for granting the subsidies. This paper concludes with assessing the feasibility of replacing tax incentives with subsidies (with Pillar 2 making certain incentives ineffective).
Section I: Pillar 2 proposal of the OECD
We are at the cusp of the fourth industrial revolution.4 Unlike the earlier phase of the revolution, where the use of the internet advanced from a focus on static information to an emphasis on software as a service, and the internet being the basic enabler of business and business innovation, the fourth industrial revolution has essentially remolded digital and technological spheres. Exhibit 1 represents different phases of the industrial revolution. Exhibit 2 represents the expected impact of Industries 4.0 technologies. This technological upheaval has altered the way we live, work, and relate to one another, while reshaping business activities in unprecedented ways. Exhibit 3 represents an example of the Industry 4.0...