## EXECUTIVE SUMMARY

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### Overview of the Inclusive Framework (IF) Agreement
- 138 jurisdictions joined the 2021 IF agreement; coverage and timing:
  - 138 of 142 IF members have agreed on the reform (Kenya, Nigeria, Pakistan, and Sri Lanka abstained).
  - Implementation of Pillar 1 is in principle mandatory for all committed countries, with planned effect in 2024 (delayed from 2023).
- Pillar 1 (P1) key design features:
  - Allocates 25 percent of MNE profits exceeding a 10 percent return on revenue to market jurisdictions ("Amount A").
  - Applies in addition to the existing international tax system; includes group-jurisdictional rules to relieve double taxation.
  - Covers slightly over 100 very large MNEs with turnover of at least €20 billion (to be lowered to €10 billion following a review after 7 years).
  - Excludes the natural resource and financial sectors.
  - Requires countries to remove and not introduce new unilateral DSTs and similar measures.
  - Includes simplification of the arm’s length principle applied to marketing and distribution ("Amount B").
- Pillar 2 (P2) key design features:
  - Applies to MNEs with global turnover exceeding €750 million.
  - Ensures a 15 percent minimum effective tax on excess profits in each country where an MNE operates.
  - Defines excess profits as profits exceeding a substance-based income exclusion equal to a return of 10 percent of payroll and 8 percent of tangible assets (foreseen to fall to 5 percent on both over 10 years).
  - Implements the minimum tax through three interrelated rules:
    - Income Inclusion Rule (IIR).
    - Undertaxed Profits Rule (UTPR).
    - Subject to Tax Rule (STTR) with a minimum rate of 9 percent for certain related-party payments.
  - Rule priority: STTR → QDMTT → IIR → UTPR.
- Nature of P2 adoption:
  - P2 reflects a "common approach"—not mandatory domestically, but agreeing countries must accept adoption and application by others; most parts can be implemented through domestic law without treaty changes.

### Impact and Key Findings — aggregate effects
- Global corporate income tax revenue:
  - Estimated to rise by about 6 percent (0.15 percent of GDP).
  - Including estimated second-round effects from reduced tax competition, this might rise to around 0.4 percent of GDP in the longer term.
- P1 aggregate effects:
  - Reallocates about 2 percent of total profits of MNEs, raising global CIT revenue by $12 billion.
  - Estimated global tax base for the new taxing right is around $150 billion.
  - Due to the high threshold, P1 applies to just over 100 MNEs (based on 2019 data).
  - Investment hubs lose approximately 2–3 percent of their current CIT revenues.
  - Revenues rise by around 0.7, 0.4 and 0.9 percent of CIT revenues in LICs, emerging market, and advanced economies, respectively.
- P2 (GloBE) aggregate effects:
  - Would raise global CIT revenues by 5.7 percent (before behavioral responses).
  - 18.5 percent of global MNE profit is taxed below 15 percent ($1.47 trillion in 2019).
  - Average current tax rate on these profits is 5 percent, implying an average top-up tax of 10 percent on profits exceeding the substance-based exclusion.
- STTR revenue potential (developing countries):
  - Among treaties currently in force for developing countries, share with WHT below 9 percent: about 19 percent for interest and 20 percent for royalties.
  - For technical service fees, close to 80 percent of treaties have a WHT below 9 percent, in most cases (78 percent) zero.
  - The minimum would apply in 101 treaties for 32 developing countries, concluded with 13 countries (6.9 percent of the total number of treaties).
  - Among 101 treaties with detailed service-import information, 20 treaties for 7 developing countries give rise to positive STTR.
  - STTR revenue per treaty ranges from near zero to 0.14 percent of current CIT revenue; in aggregate STTR would bring additional CIT revenue of up to 0.14 percent for a respective source country.
  - Restricting STTR to royalties alone would generate additional revenue in only one treaty, adding 0.003 percent of CIT revenue for that source country.
  - Caveats: lack of detailed bilateral interest/capital gains data understates total STTR effects; recipient-country rate responses could reduce source-country gains.

### Effects on profit shifting, tax competition, and distributional impacts
- Profit shifting and global revenues:
  - 36 jurisdictions either do not tax corporate profits or have statutory rates below 15 percent.
  - Imposition of a 15 percent minimum ETR is estimated to reduce profit relocated for tax purposes by 36 percent (assumes semi-elasticity of -1.2 and 2019 global CIT data).
  - Global tax revenue loss from tax avoidance declines by 27 percent, equivalent to an increase in global CIT revenue of 1 percent.
  - Long-term investment elasticity used: -0.08 for MNE groups (with profitability above 10 percent) in related calculations.
- Distributional impacts:
  - LICs stand to gain around 1 percent of current MNE-linked CIT revenue from changed profit shifting behavior.
  - Low-tax jurisdictions could lose around 2.8 percent, on average.
  - Compensation channel: low-tax jurisdictions’ revenue loss from changed profit shifting could be offset by extra revenue from the minimum tax itself if profits continue to be shifted there.
- Tax competition dynamic effects:
  - Reduced tax competition could boost global CIT revenues by an extra 8.1 percent.
  - Empirical inference: a 1 percentage point increase in world average CIT induces, on average, a 0.6 percentage point increase in a country’s own rate.
  - Under simulations, average CIT rate rises from 22.2 to 24.3 percent due to the global minimum tax.

### Firm investment and marginal effective tax rates (METRs)
- Predicted investment effects:
  - OECD (2020) projects average global METR increases by about 1.85 percentage points.
  - Global MNE investment rate would fall by 0.12 percentage points.
  - Total business investment rate would fall by 0.05 percentage points.
  - UNCTAD (2022) estimates potential downward effect on global FDI is about 2 percent.
- GloBE rule interactions with investment:
  - GloBE carve-out (substance-based exclusion) can encourage real investment in some countries because exclusion rises with payroll and real assets; METR can be negative if pre-existing profits exceed carve-out.
  - GloBE can also raise METR in other circumstances.
  - Keen et al. (forthcoming): high-tax jurisdictions may gain MNE investment at expense of low-tax jurisdictions under GloBE.

### Implementation challenges, sequencing, and country responses
- Outstanding P1/P2 details and legal issues:
  - Amount B of P1 remains to be finalized; work postponed to mid-2023 with a public consultation released late 2022.
  - STTR awaits guidance on scope of covered payments and interaction with recipient-country tax payable and existing WHTs.
  - QDMTT design details remain to be clarified (qualification features, sequencing with residence-based CFC taxes).
  - Rules needed to eliminate double taxation arising from P1; clarifying WHT impacts is key for LICs.
- Implementation feasibility:
  - P1 requires shaping into a multilateral convention and ratification by a critical mass; does not lend itself to unilateral adoption by first movers.
  - P2 risks limited; can be pioneered by a smaller number of countries and expanded later; many P2 parts can be implemented via domestic law.
  - Status of adoption actions cited (selected examples):
    - Several countries published draft P2 legislation (Netherlands, Switzerland, United Kingdom).
    - On December 12, 2022, EU members agreed on a Directive requiring implementation in national law by end-2023.
    - Korea introduced P2 minimum tax rules in domestic law, becoming effective in 2024.
    - The United Kingdom committed to including P2 in its spring 2023 Finance Bill.
- Administrative and compliance costs:
  - P1 adds rules to determine destination of sales and crediting to avoid double taxation; requires trust and cooperation among tax authorities.
  - P2 builds on accounting-based starting points with adjustments, creating gray areas requiring legal interpretation; different interrelated top-up taxes could apply.
  - Application depends on other countries’ choices, requiring cooperation and information exchange.

### Special concerns and capacity constraints for LICs; IMF support
- Administrative capacity constraints:
  - TADAT evaluations show many LICs lack features for registration, filing, payment; digitalization and management of MNE risks imperfect.
  - Many LIC revenue administrations lack dedicated international tax units or experience collecting revenues from outbound investment (IIR/UTPR).
  - Limited access to and capacity to use exchanged data (e.g., CbC reports); as of OECD (2021b) only three LICs had access to CbC reports; this increased to five one year later (OECD 2022a).
  - Short timelines and limited engagement in early policy decisions complicate preparation.
- Suggested mitigations and IMF role:
  - Recommend adopting at least the QDMTT; QDMTT adoption is recommended for all countries.
  - Possible mitigations: longer implementation timelines (feasible under P2) and transitional simpler solutions (alternative minimum taxes, domestic safe harbors).
  - IMF Capacity Development supports domestic policy reviews (general corporate tax structure, investment incentives, anti-avoidance rules), diagnostic assessments (FITAS), and capacity building for implementation and international cooperation.

### Policy guidance and country-level priorities
- Strategic choices for countries:
  - Whether and how to adopt Pillar 2 rules, including QDMTT.
  - For non-IF members, consider adopting QDMTT or similar measures given extraterritorial effects.
  - Investment hubs should consider QDMTT to secure remaining capital import revenue but may face structural shifts if inflows decline.
  - Developing countries should reassess tax treaties to identify scope for benefiting from the STTR and protect source taxing rights.
- Key domestic policy reviews recommended:
  - Review general corporate tax structure and CIT rates.
  - Reassess and redesign tax incentives, focusing on cost-based incentives linked to substance.
  - Strengthen anti-avoidance rules and consider tailored, simplified measures for LICs (AMTs, safe harbors, deductibility limits, taxing offshore indirect transfers, careful treaty strategy).
- Box 3 (QDMTT rationale) — selected points:
  - QDMTT shares GloBE base and prevents application of other GloBE taxes by ensuring domestic taxes push ETR above 15 percent where needed.
  - QDMTT is recommended for all countries; may dominate other domestic tax increases.
  - Stabilization clauses may preclude adding new taxes; renegotiation advised as QDMTT does not raise MNE’s global tax liability.

### Reform directions and future international tax architecture
- Assessment framework (IMF 2019 criteria): robustness to cross-border spillovers, ease of implementation (practical and legal), suitability for LICs.
- Reform approaches considered:
  - Border-adjusted profit taxes (destination-based): robust if global adoption, not currently under consideration.
  - Formula apportionment (FA): allocates consolidated profits by payroll, assets, sales; could address arm’s length difficulties.
  - Residual profit allocation (RPA): allocates profits exceeding routine profit (P1 is a form of RPA but allocates only 25 percent and retains complexity).
  - Minimum taxes (P2): reduces profit shifting and tax competition but includes substance-based exclusion increasing complexity.
- Possible evolutions and enhancements:
  - P1: reduce turnover threshold, increase share of residual profit allocated, reconsider exclusions (e.g., regulated financial services).
  - P2: remove substance-based income exclusion, lift exemption for international shipping, raise minimum rate above 15 percent.
  - Move toward distinguishing normal returns and excess profits; introduce ACE or consider destination-based cash-flow tax (DBCFT).
  - Excess profit taxes (EPTs) considered for recovery or windfall responses; a 10 percent EPT on consolidated MNE accounts allocated by sales could raise global revenue by 16 percent of current CIT revenues (example estimate).
- Agenda for developing countries ("third pillar"):
  - Strengthen anti-abuse provisions, revise treaty policy to protect source taxing rights (UN Tax Committee and UN Model outcomes relevant).
  - Consider coordinated or unilateral actions to strengthen source taxation, including WHTs on services (UN Model Article 12A and Article 12B for ADS).

### Treaty policy, WHTs, and STTR design options (Box 5 highlights)
- Treaty renegotiation trends:
  - Out of >1,500 treaties between source countries and advanced economies/investment hubs, 30 percent renegotiated and 3 percent terminated between 1980 and 2021.
  - Predicted discontinuations: 19 percent of treaties with investment hubs and ~10 percent with advanced economies in next 10 years.
- WHT and STTR statistics:
  - About 19 percent of treaties apply WHT < 9 percent to interest; ~20 percent for royalties.
  - For technical service fees, close to 80 percent of treaties have WHT < 9 percent, 78 percent equal zero.
  - 63 percent of treaties allow WHT on capital gains from immovable property; 33 percent on capital gains from other shares.
- STTR design alternatives:
  - Using an effective resident-country rate (proxied by one half of the nominal rate) expands potential STTR coverage substantially (416 of 1,474 treaties eligible), increasing revenue potential but sensitive to resident-country rate responses.
- Policy recommendations for treaties:
  - Improve international guidance on scope of withholding taxation for services.
  - Use multilateral templates (akin to MLI) to facilitate coordinated treaty changes.
  - Simplify approaches for LICs (fixed margins under Amount B, safe harbors) and prioritize allocation factors that attribute a greater share of profits to developing countries if FA gains prominence.

### Strengthening tax administration and domestic revenue options for LICs
- FITAS diagnostic toolkit:
  - Framework for International Tax Administrative Strengthening (FITAS) provides diagnostic ratings and strategy guidance to address gaps in international tax administration.
- DSTs and policy trade-offs:
  - "31 countries, including 17 low-income and emerging market economies, have adopted unilateral measures to tax digital services, including DSTs."
  - Revenue collections for DSTs modest: 0.01 to 0.02 percent of GDP.
  - Design variants include WHTs on purchases (UN Article 12B), gross revenue taxes, digital PE concepts; trade-offs between collection costs and avoidance opportunities.
- Domestic revenue mobilization beyond international reforms:
  - International reform global revenue estimated at 0.15 percent of GDP (rising to ~0.4 percent with second-round effects); dwarfed by LIC needs.
  - To meet SDG needs in five key areas, LIC expenditure needs estimated at nearly 16 percent of GDP.
  - Potential revenue increases in LICs: Tax Capacity gap estimated at 8 percent of GDP; comparing with EMEs suggests potential of ~5 percent of GDP.
- Domestic policy options to raise revenue:
  - VAT reform (reduce exemptions/remove reduced rates): EMEs average 2 percentage points of GDP higher VAT revenue than LICs.
  - Specific excises: alcohol, tobacco, unhealthy foods, passenger vehicles, fuel, carbon.
  - Extractives: royalty plus resource rent tax.
  - Personal income tax: strengthen progressive PIT and rationalize tax expenditures.
  - Recurrent property taxes: use digital technologies; property taxes generally raise <0.1 percent in LICs, ~0.5 percent in EMEs.
- Administrative measures:
  - Governance, autonomy, integrity, digital transformation, comprehensive compliance strategies, and improved customs procedures.

*International Monetary Fund.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview of the Inclusive Framework (IF) Agreement
- An ambitious reform agreed at the Inclusive Framework on Base Erosion and Profit Shifting in 2021, with 138 jurisdictions joining.
- The agreement complements prior BEPS efforts by:
  - reallocating taxing rights to market economies (Pillar 1, "P1"); and
  - establishing a global minimum corporate tax to curb tax competition (Pillar 2, "P2").
- Coverage and timing:
  - 138 of 142 IF members have agreed on the reform (Kenya, Nigeria, Pakistan, and Sri Lanka abstained).
  - Implementation of Pillar 1 is in principle mandatory for all committed countries, with planned effect in 2024 (delayed from 2023).
- Key design features of Pillar 1:
  - Allocates 25 percent of MNE profits exceeding a 10 percent return on revenue to market jurisdictions ("Amount A").
  - Applies in addition to—rather than instead of—the existing international tax system; includes group-jurisdictional rules to relieve double taxation.
  - Covers slightly over 100 very large MNEs with turnover of at least €20 billion (to be lowered to €10 billion following a review after 7 years).
  - Excludes the natural resource and financial sectors.
  - Requires countries to remove and not introduce new unilateral digital services taxes (DSTs) and similar measures.
  - Includes simplification of the arm’s length principle applied to marketing and distribution ("Amount B").
- Key design features of Pillar 2:
  - Applies to MNEs with global turnover exceeding €750 million.
  - Aims to ensure a 15 percent minimum effective tax on excess profits in each country in which an MNE operates.
  - Defines excess profits as profits exceeding a substance-based income exclusion equal to a return of 10 percent of payroll and 8 percent of tangible assets (foreseen to fall to 5 percent on both over 10 years).
  - Implements the minimum tax through three interrelated rules:
    - Income Inclusion Rule (IIR): subjects foreign-earned MNE profits to a top-up tax in the residence country if taxed below 15 percent in any jurisdiction; source jurisdictions can pre-empt the IIR by implementing a Qualified Domestic Minimum Top-up Tax (QDMTT) consistent with the IIR.
    - Undertaxed Profits Rule (UTPR): allows source countries to apply a top-up tax (for example, by denying deductions) if no IIR or QDMTT applies.
    - Subject to Tax Rule (STTR): a treaty-based rule allowing source jurisdictions to impose limited source taxation (for example, withholding taxes (WHTs)) on certain related-party payments subject to tax below a minimum rate of 9 percent.
  - Rule priority in case of overlap: STTR has priority, followed by QDMTT, the IIR, and the UTPR.
- Nature of Pillar 2 adoption:
  - P2 reflects a "common approach"—not mandatory to implement these rules domestically, but agreeing countries must accept adoption and application by others; most parts can be implemented through domestic law without requiring treaty changes.

### Impact and Key Findings
- Overall assessment:
  - The agreement makes the international tax system more robust to tax spillovers, better equipped to address digitalization, and modestly raises global tax revenues.
- Aggregate revenue and economic effects:
  - Global corporate income tax revenue is estimated to rise by about 6 percent (0.15 percent of GDP).
  - This revenue gain comes at the cost of some investment decline.
  - The revenue effect could be larger in the long run as pressures from tax competition and profit shifting abate.
- Distributional and country-specific effects:
  - 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 relative to their large revenue needs for development.
- Scope and limitations of quantitative analysis:
  - The paper provides fresh analysis using simulations to assess impacts on tax revenues, investment, profit shifting, and tax competition.
  - Such quantitative analysis is largely lacking in the literature due to the fundamental nature of the reform and absence of historic precedents.

### Implementation Challenges and Country Responses
- Implementation requires an active approach by all countries and domestic policy rethinking.
- Strategic decisions countries must make include:
  - Whether and how to adopt the rules agreed in Pillar 2 (including consideration of a QDMTT).
  - For countries not members of the IF, how to react to adoption by others.
- Policy guidance and recommended domestic reviews:
  - The paper provides guidance, including recommending adopting at least the Qualified Domestic Minimum Top-up Tax (QDMTT).
  - Countries are advised to review:
    - General corporate tax structure,
    - Investment tax incentives,
    - Anti-avoidance rules.
- Role of IMF support:
  - IMF Capacity Development helps countries navigate domestic policy responses by assessing implications and building capacity for implementation.
- Special implementation notes:
  - Most parts of Pillar 2 can be implemented through domestic law reform and will not require tax treaty changes.
  - The STTR is treaty-based and allows limited source taxation at a 9 percent minimum rate on certain related-party payments.

### Forward-Looking Considerations and Reform Directions
- The international tax framework will likely continue to evolve beyond the IF agreement in response to emerging challenges and pressures from fiscal spillovers.
- Possible directions and tools for further reform:
  - Reforms toward allocations more robust to tax spillovers, such as destination-based taxation, could start by widening the coverage of Pillar 1.
  - The agreement may pave the way for higher taxation of excess profits.
  - To serve the interests of developing countries more forcefully:
    - Simplification of profit allocation rules could be achieved by expansion of formula apportionment and the use of safe harbor rules.
    - A greater role of withholding taxes, for example on outgoing service payments, can shape the future developing country agenda.
- Emphasis on addressing LIC concerns:
  - There remains room for further improvement regarding reform aspects still under discussion, especially to address the concerns of low-income countries (LICs).
- The paper contributes to the global debate by:
  - Assessing the IF reforms against IMF (2019) criteria for robustness, fairness, and enforceability.
  - Offering simulation-based impact analysis where possible.
  - Discussing targeted domestic responses for LICs and how reforms contribute to revenue mobilization in support of development objectives.

*Prepared by Ruud de Mooij (FAD), Alexander Klemm (FAD), Shafik Hebous (FAD), Christophe Waerzeggers (LEG), Cory Hillier (LEG), Sebastian Beer (FAD), Li Liu (FAD), Jan Loeprick (FAD), Sebastien Leduc (FAD), Pierre Kerjean (FAD), and Tamas Kulcsar (FAD).*

### 7.      Several details remain open and will have to be agreed before implementation. Some

### 18.      Cross-border tax avoidance will decrease as a result of smaller differences in statutory

### 18.      Cross-border tax avoidance will decrease as a result of smaller differences in statutory

### Effects on profit shifting and global revenues
- At present, 36 jurisdictions either do not tax corporate profits at all or apply a statutory tax rate below 15 percent.
- Imposition of a 15 percent minimum ETR is estimated to reduce the amount of profit relocated for tax purposes by 36 percent.  
  - Calculation assumptions: semi-elasticity of reported profit with respect to the tax rate differentials of -1.2 and uses global data on CIT revenues and tax rates of 2019.
- The global tax revenue loss from tax avoidance declines by 27 percent, which is equivalent to an increase in global CIT revenue of 1 percent.
- Presumed long-term tax elasticity of investment applied in related calculations: -0.08 for MNE groups (with profitability above 10 percent).

### Distributional impacts across country groups
- Simulations suggest:
  - LICs stand to gain around 1 percent of current MNE-linked CIT revenue from changed profit shifting behavior.
  - Low-tax jurisdictions could lose around 2.8 percent, on average.
- Notes on interpretation:
  - Profit shifting depends on other country-specific factors beyond the statutory CIT rate (for instance: the number and size of MNEs within a country, the presence of anti-avoidance rules, specific provisions in double tax treaties, or cultural and language ties with low-tax jurisdictions).
  - Empirical evidence suggests profit shifting is highly nonlinear in the tax rate differential.
  - If no (rather than just less) profit were shifted into low-tax jurisdictions in response to P2, revenue effects would be more dispersed and low-tax jurisdictions would lose more.
- Compensation channel:
  - Low-tax jurisdictions’ revenue loss from changed profit shifting behavior could be compensated by extra revenue from the minimum tax itself, at least as long as some profits continue to be shifted into these countries.
- Group definitions used in staff estimates:
  - Low-tax jurisdictions include 19 jurisdictions with statutory tax rates below 15 percent.
  - Remaining countries grouped into 34 advanced economies and 116 low and middle-income countries.

### Tax competition and dynamic effects on CIT rates
- Additional positive revenue impact from P2 could come from reduced competition over corporate tax rates, which could boost global CIT revenues by an extra 8.1 percent.
- Empirical inference from past tax competition experience: a 1 percentage point increase in the world average CIT rate will, on average, induce a country to raise its own rate by 0.6 percentage points.
- Under the simulations:
  - 18.5 percent of MNE profit will face a higher CIT burden due to the global minimum tax.
  - The average CIT rate would rise from 22.2 to 24.3 percent due to the global minimum tax.
  - The associated boost in global CIT revenues would be 8.1 percent, exceeding the direct effect on revenue.

### Implementation challenges (P1 and P2)
- P1 implementation challenges:
  - Agreement required on several relevant details, followed by shaping into a multilateral convention requiring ratification by a critical mass of jurisdictions.
  - In absence of a ratified agreement, P1 does not lend itself to unilateral adoption by first movers or differing implementation across countries.
  - Non-adoption of P1 could reopen debate about unilateral DSTs and attendant risks of trade disputes.
  - For some countries, the two-pillar reform was acceptable as a package; political viability of P2 alone is uncertain.
- P2 implementation features and risks:
  - P2’s risks are more limited; it could be pioneered by a smaller number of countries and expanded subsequently.
  - Partial or non-fully aligned domestic measures that are reasonably similar (e.g., non-qualifying outbound minimum taxes) would still help set a floor on global tax rates and limit profit shifting and tax competition.
  - Status of adoption and legislative actions cited:
    - Several countries have published draft legislation for P2 adoption (Netherlands, Switzerland, United Kingdom).
    - On December 12, 2022, EU members agreed on a Directive requiring implementation in national law by end-2023.
    - In December 2022, Korea introduced P2 minimum tax rules in domestic law, becoming effective in 2024.
    - The United Kingdom committed to including P2 in its spring 2023 Finance Bill.
    - Several jurisdictions issued public consultations (including Australia, Canada, Malaysia, and New Zealand).

### Administrative and compliance costs; special concerns for developing countries
- Implementation complexity:
  - P1 adds a new taxing right on top of the existing system; new complexities include rules to determine the destination of sales, provide credits to avoid double taxation, and administrative guidance requiring trust and cooperation among tax authorities.
  - P2 requires accounting-based starting points with several adjustments to define covered taxes and income for minimum tax calculation, creating gray areas requiring legal interpretation; different and interrelated top-up taxes could apply.
  - A country’s application of rules depends on what other countries do, requiring cooperation and information exchange.
- Administrative capacity constraints in many LICs:
  - TADAT evaluations illustrate many LICs lack key features of effective revenue administration for registration, filing, and payment.
  - Digitalization and management of key risks posed by MNEs remain imperfect; legislative provisions on tax administration and procedures are often weak.
  - Many LIC revenue administrations have not established a dedicated international tax unit or work program, complicating implementation of new global rules.
  - Enforcement of taxes on MNEs has been extremely hard for these countries prior to reforms; evidence suggests major complications with transfer pricing and relatively large revenue losses from profit shifting.
- Specific implementation challenges for LICs:
  - Many tax administrations lack capacity to reform while managing day-to-day work with limited human, technological, and financial resources; multiple reform initiatives compete for resources.
  - Reforms compete with other priorities in supporting the development agenda of LICs; initial investments (e.g., common reporting standards and country-by-country reporting) may yield future benefits through data sharing, but many LICs lack access to exchanged data or capacity to use it.
  - Limited experience in collecting revenues from outbound investment hinders administration of instruments such as the IIR and UTPR.
  - Limited experience in coordinating with foreign tax administrations and participating in cross-border dispute resolution puts LICs at a potential disadvantage.
  - The timeline for implementation is challenging: many tax administrations had little engagement in early policy decisions, lack understanding of evolving uncertainties, and face short timelines that leave little room for consultation and preparation.
  - Possible mitigations: a longer implementation timeline (feasible under P2) and transitional simpler solutions such as alternative minimum taxes or domestic safe harbors.
- Other factors that can modify profit shifting effects of the agreement include:
  - (i) the exclusions under P2, especially the turnover threshold; (ii) the substance-based income exclusion; (iii) tax incentives, which affect effective tax rates under the GloBE rules but can also create their own effects on profit shifting; and (iv) the effects of P1 on profit shifting.

### Other international cooperation initiatives: BEPS and UN efforts
- BEPS (G20/OECD) outcomes and limitations:
  - The 2015 BEPS project concluded with 15 actions to combat profit shifting, comprising minimum standards and common approaches.
  - Initial signs suggest BEPS minimum standards thus far have had some, but likely modest, implications.
  - Selected BEPS outcomes:
    - Action 5 (harmful tax practices) requires preferential tax treatments to be linked to substantial activities (“nexus requirement”); as of July 2022, 319 preferential tax regimes have been reviewed and many amended, but this has not prevented spread of preferential IP regimes nor further decline in statutory CIT rates.
    - Paradox: the nexus requirement could make tax competition worse by inducing governments to reduce their general rate to attract real investment.
    - Actions 6 and 14 introduce provisions to prevent tax treaty abuse and improve cross-border dispute resolution via the Multilateral Instrument (MLI) or bilateral negotiation; many countries have signed the MLI, yet 45 current IF members did not (including the United States).
    - Action 13 (CbC reporting) requires large MNEs to report key information on a country-by-country basis; evidence of impacts:
      - Joshi (2020) finds CbC reporting raises the consolidated ETR of an MNE group by 1-2 percentage points.
      - Hugger (2020) finds an increase in companies reporting turnover just below the threshold.
      - De Simone and Olbert (2021) estimate CbC reporting reduced the number of affiliates operating in low-tax jurisdictions by 0.6 to 3.1, on average, with closures accompanied by reallocating real activities to low-tax jurisdictions.
    - A key deficiency: most developing countries do not have access to CbC reports given confidentiality safeguards; OECD (2021b) finds only three LICs had access to CbC information; this had increased to five one year later (OECD 2022a).
    - Effective use of incoming information in tax compliance management by developing countries requires adequate IT and data analytics capacity.
  - Two key deficiencies of BEPS that the IF agreement aims to address:
    - Work on reallocating taxing rights to address digitalization (Action 1) concluded in 2015 with “the need for continued work in this area,” leading to P1 of the IF agreement.
    - Tighter anti-avoidance measures under BEPS can make real investment more responsive to corporate tax rate differentials and thereby risk intensifying tax competition; P2 aims to address profit shifting further and put an effective limit on tax competition.
- UN cooperation and treaty model developments:
  - The UN model treaty has been developed to update WHTs to remain a mechanism to collect and enforce source taxation rights, important for LICs.
  - Potential base-eroding cross-border payments include interest, royalties, and fees for services (technical, management, consultancy), where asymmetric tax treatment can arise if the payer deducts cost while payee is untaxed or taxed at a low rate.
  - Cross-border WHTs on gross payments of service fees can preserve source-country taxing rights by shifting tax collection to the payer; this is particularly relevant given high and rising trade in services.
  - The UN Treaty Model (Article 12A, included in the 2017 UN Model) now permits source taxation of fees for technical, management, or consultancy services subject to a rate limit; Article 12A is broader than the STTR, which permits source countries under their tax treaties to impose taxes on defined payments only and operates as a top-up tax.
  - Implications: benefits to LICs from the STTR depend on behavioral impacts and existing WHT rates under applicable tax treaties; WHT rates above 9 percent can still apply and LICs should focus on other WHT-related treaty Articles, including 12A, in developing their treaty policy framework.

*Source: International Monetary Fund.*

### 29.      In a similar spirit, the 2021 UN Model adopted Article 12B, dealing with income from

### ppea2023001 - 29.      In a similar spirit, the 2021 UN Model adopted Article 12B, dealing with income from

### Article 12B and automated digital services (ADS)
- The 2021 UN Model adopted Article 12B, dealing with income from automated digital services (ADS).
- Where agreed between treaty partners, Article 12B allows gross basis taxation (for instance, through WHT) on cross-border payments with respect to services such as on-line advertising, intermediation, social media, digital content provision, cloud computing, sale of data of users of a digital interface etc.
- Article 12B was adopted with developing countries’ interests in mind by seeking to preserve their taxing rights in a simpler way than P1.
- Advantages and limitations:
  - Advantage: simpler preservation of source taxing rights for ADS compared to broader principled reforms.
  - Disadvantage: ring-fenced approach confined to ADS rather than economy-wide measures with stronger destination-basing.
- If the two-pillar agreement implementation fails, Article 12B could bring within the scope of tax treaties unilateral measures directed at ADS (such as DSTs) that currently may fall outside tax treaties, thereby addressing double taxation risks and other distortions.
- Implementation caveats:
  - A treaty might not exist or materialize, or treaty changes may be elusive given asymmetry in digital trade.
  - Article 12B also provides for an optional net basis taxation mechanism for MNEs.

### Regional cooperation initiatives
- Regional cooperation can complement the global reform process and support implementation of the IF reforms.
- Example: The EU directive on P2 ensures even application throughout the EU and is simpler and preferable to a country-specific approach.
- Benefits of regional coordination:
  - Regions often have smaller differences in economic structure, administrative capacity, and culture, potentially easing agreement on tax coordination.
  - Tax spillovers (from investment relocation, profit shifting, and tax competition) can be larger on a regional scale, raising gains from coordination.
  - Regional agreements should cover all relevant regional players because returns to tax competition rise for abstaining countries.
- Scope for regional initiatives beyond IF agreement:
  - Address regional profit shifting and tax competition pressures, for example by agreeing on a regional minimum statutory tax rate.
- Historical examples and outcomes:
  - WAEMU and CEMAC harmonized (parts of) the tax base and agreed on a minimum CIT rate of 25 percent, but tax competition continued through special tax regimes not covered.
  - EU attempts to harmonize corporate tax base and rate made limited progress, focused on administrative matters, elimination of double taxation, anti-tax avoidance measures, and implementation of P2.
  - East African Community prepared a multilateral tax treaty to harmonize cross-border taxes; it awaits ratification and has made modest progress on domestic tax harmonization.

### Country-level reform priorities — overview
- Countries that joined the IF agreement must decide on optional provisions, prepare for treaty changes, put agreed policies into domestic law, and prepare for implementation.
- All countries, including non-joiners, need to consider modifying domestic policy frameworks in response to others’ policy changes.
- IMF CD supports countries in navigating optimal policy responses and building implementation capacity.

### A. Opting in or opting out (P2 and related instruments)
- P2 adoption is optional; P1 is effectively mandatory for those signing the implementing convention.
- Strategic considerations for P2 adoption:
  - Only if a critical mass of IF agreement countries adopts the GloBE rules will P2 have meaningful global impact.
  - Adoption of the IIR by countries with significant MNE headquarters ensures near worldwide coverage of the minimum tax.
  - Widespread adoption of the UTPR as a back-up rule would also ensure near-universal coverage.
  - Capital importers have strong incentive to adopt the QDMTT once major capital exporters adopt the GloBE rules because QDMTT ensures top-up tax is collected locally and adds no compliance costs for affected MNEs.
  - Countries concerned about higher taxes on foreign investment may wait on QDMTT adoption until GloBE adoption is widespread, but should begin preparatory work immediately.
  - Non-signatory countries are affected by P2; residence-country IIR and source-country UTPR can apply to MNEs in non-signatory countries. Non-IF members should consider adopting the QDMTT or similar provision, despite some uncertainty whether such a tax would be recognized as qualified.
  - Investment hubs with significant financial inflows but little real activity might lose tax base due to reduced profit shifting; adopting QDMTT can secure remaining capital import revenue, but may require deep structural reforms if inflows decline.
  - Developing countries should reconsider tax treaties to identify scope for benefiting from the STTR, including provisions allowing taxation of cross-border services and capital gains.

- Box 3 — Why Countries Should Adopt the Qualified Domestic Minimum Top-Up Tax (QDMTT):
  - QDMTT shares the same base as other GloBE taxes: applies only to firms exceeding the size threshold and is levied on profits after deducting the substance-based income inclusion.
  - QDMTT does not levy taxes on profits not subject to GloBE taxes elsewhere.
  - QDMTT directly prevents application of other GloBE taxes by ensuring domestic taxes push ETR above 15 percent where needed; ETR is calculated without applying the substance-based income exclusion.
  - The ETR ratio can be lower than 15 percent—even though taxes as a share of excess profits exceed 15 percent—so QDMTT avoids this mismatch and dominates other tax increases.
  - QDMTT adoption is recommended for all countries; other tax increases and reforms (e.g., reviewing tax incentives) may be desirable in addition.
  - Potential difficulty: stabilization clauses in tax agreements with MNEs may preclude adding new taxes; governments should renegotiate exceptions for QDMTT because it does not raise the MNE’s global tax liability.

### B. Corporate tax rates
- Countries may consider raising CIT rates given reduced competitive pressures from the higher minimum tax on in-scope profits.
- Empirical literature suggests corporate tax rates are strategic complements: if other countries raise tax, a country is inclined to do the same.
- For low-tax jurisdictions, the minimum tax can be welfare improving if they have a sufficiently large domestic tax base.
- Jurisdictions with CIT rates below the minimum might combine QDMTT introduction with a lower CIT rate on out-of-scope profits to compete for investment and profits.

### C. Tax incentives
- P2 will reduce the effectiveness of many tax incentives in attracting FDI by potentially imposing additional tax on FDI, rendering part of revenue forgone ineffective in attracting investment.
- Impact specifics depend on covered tax and in-scope income definitions:
  - P2 applies only if the measured ETR is below 15 percent and accounting profit exceeds the substance-based income exclusion.
  - Not all incentives are treated equally in ETR computation:
    - Accelerated depreciation or immediate expensing have limited impact on computed ETRs due to deferred tax adjustments.
    - Refundable tax credits are treated as income (denominator) and thus reduce the ETR less than non-refundable tax credits that reduce covered taxes (numerator).
- Income exclusion rules strengthen the relative benefit of cost-based tax incentives tied to substance-based requirements (additional employment, capital spending).
- Governments should revisit and potentially update investment promotion frameworks immediately:
  - Reassess legal barriers like stabilization clauses or expansive BIT scopes that may hinder leveraging P2 reforms.
  - Undertake comprehensive evaluations of investment promotion and redesign incentives to maximize effectiveness, focusing on cost-based incentives.
  - Introducing a QDMTT reduces risk of redundant tax expenditures and prevents taxes being topped up elsewhere.

- Box 4 — Assessing the Impact of Pillar 2 on Tax Incentives (steps and data needs):
  1. Determine the number of in-scope MNEs:
     - Only multinational groups with annual revenues of more than €750 million are currently affected.
     - Public CBCR reports are a useful starting point but often incomplete; complement with administrative data or commercial databases like ORBIS and public filings.
     - Remove excluded entities (e.g., state-owned enterprises, transport sector).
  2. Calculate the ETR on profits following the GloBE model rules:
     - Aggregate covered taxes and book profits for all subsidiaries in a country within the same group.
     - Covered taxes start from taxes charged on business income (most prominently CIT and rent taxes); taxes on gross income (such as royalties or DSTs) are not included.
     - Make adjustments for timing differences, refundable vs non-refundable tax credits, and deferred tax treatments.
     - ETR = ratio of covered taxes to accounting profits.
  3. Determine additional tax from P2:
     - Where ETR is below 15 percent, minimum tax applies to the difference between 15 percent and the effective rate.
     - Base for the tax is the excess profit: book profit minus the substance-based exclusion, equal to the amount by which book profit exceeds 8 percent of tangible assets and 10 percent of payroll (each declining to 5 percent over 10 years).
     - Information on wages is often less complete than for assets in public databases and CbCR data.

### D. Tailored base protection in LICs
- LICs are advised to continue using tailored anti-tax avoidance rules because they are relatively more vulnerable to profit shifting and face capacity constraints.
- Tailored, simplified, rules-based measures are recommended to balance administrability and mitigation of distortions.
- Five tailored approaches of special relevance for LICs:
  1. Alternative minimum taxes (AMTs):
     - Over 50 countries globally have AMTs based on turnover or assets; effective in supporting revenue.
     - To be recognized as covered taxes under P2, AMTs would need to operate as substitutes for CIT (gross taxes alone do not qualify).
     - Complexities can arise if domestic AMTs depart from P2 framework.
  2. Safe harbors:
     - Simplify arm’s length principle application by prescribing expected returns for specific transactions or entities (rebuttable safe harbors).
     - Common for commodities and low value-adding services; may be appropriate for manufacturing, sales and distribution, and various service providers.
     - In developing economies with limited public transfer pricing data, safe harbors can leverage administrative data.
     - Simplified approaches risk over- and under-taxation; careful calibration is needed to safeguard reasonable portion of profits in LICs and minimize planning opportunities.
  3. Limitations to deductibility of interest and possibly other payments:
     - LICs have sovereign right to implement domestic limits to deductions, operating like targeted domestic minimum taxes.
     - Can apply to interest and other base eroding payments (cross-border services fees) that may be hard to tax via WHT or directly due to treaty constraints.
     - Such measures could deny deductions or tax local resident taxpayers, taking into account any foreign tax actually payable.
     - LICs should be cautious about agreeing to constrain their source country taxing rights or allowing another country’s outbound measure to apply in priority.
  4. Offshore indirect transfers of assets:
     - LICs should tax offshore indirect transfers and location-specific rents more broadly and secure taxing rights over them, supported by applicable tax treaties.
     - Offshore indirect transfers seem intended to be excluded from P2 global minimum tax, potentially undermining source country rights.
     - Possible mitigation: tax gains triggered by offshore ownership sales through a deemed disposal mechanism for the local asset-owning entity.
  5. Double tax treaties:
     - LICs should ensure potential benefits outweigh costs before entering treaty negotiations and periodically reassess existing treaties.
     - Exercise caution and have sufficient capacity before entering into tax treaties to avoid substantial revenue losses with little FDI gain.
     - Attention to treaty terms: avoid tight restrictions on WHTs for royalties, interest, cross-border services; prioritize minimum WHT rates for dividends, interest, royalties, technical service fees; adopt the UN Model PE definition (including services PE); retain right to tax indirect transfers; adopt appropriate anti-abuse provisions.

### E. International tax administration
- (Section begins but content beyond heading not included in supplied excerpt.)

*International Monetary Fund — INTERNATIONAL CORPORATE TAX REFORM (excerpt).*

### 40.      LICs tax administrations should continue to reinforce their capacities to address

### ppea2023001 - 40.      LICs tax administrations should continue to reinforce their capacities to address

### Strengthening tax administration capacity (FITAS)
- The IMF developed an analytical toolkit called the Framework for International Tax Administrative Strengthening (FITAS).
- FITAS:
  - Uses a questionnaire approach to provide a diagnostic assessment of an administration’s progression toward good practice in managing specific international tax risks.
  - Produces ratings in each category that offer insight into design and implementation gaps.
  - Supports development of a subsequent strategy to address gaps based on key success factors.
- Subsequent capacity development can support implementation.

### Digital Service Taxes (DSTs) — scope, design, and effects
- Adoption and scope:
  - "31 countries, including 17 low-income and emerging market economies, have adopted unilateral measures to tax digital services, including DSTs."
  - As of December 2022 four other countries have prepared draft legislation and six have announced an intention to do so.
- Revenue magnitude and expectations:
  - Revenue collections and expectations for DSTs are modest, ranging from 0.01 to 0.02 percent of GDP (IMF 2021).
- Design variants and trade-offs:
  - Approaches range from narrowly applying WHTs on select purchases from non-residents (UN’s Article 12B) to targeting all revenue from specified digital services to residents.
  - WHTs reduce collection costs but can facilitate avoidance by rechanneling payments through countries without such tax.
  - Some DSTs focus on online advertising and marketing only (example: Austria); others cover digitally-delivered content (example: Türkiye).
  - The African Tax Administration Forum (ATAF) proposes a hybrid model using "the higher amount between direct payments and the apportioned global revenue as the base."
  - Some countries adopt a digital permanent establishment (digital PE) concept with global and/or local sales thresholds to establish taxable presence.
  - Taxation of the digital PE faces challenges due to hard to value intangibles; may be implemented on a gross revenue basis (example: Nigeria).
- Economic and distributional effects:
  - Statutory incidence is on service providers, but many highly digitalized MNEs report pass-through of costs, potentially increasing prices and lowering demand.
  - Distortions arise from taxation of gross revenue and from wedges between activities inside and outside DST scope; production decisions of highly digitalized businesses with low or no variable costs may not be influenced at the margin.
  - In a survey of 219 highly digitalized MNEs, 28 percent of respondents indicated they absorb DST costs; the rest indicated pass-through to consumers, suppliers, or both.

### Revenue mobilization: limits of international tax reforms and domestic options
- Contribution of international tax reforms:
  - Global revenue from the 2-pillar reform is estimated at 0.15 percent of GDP.
  - Including estimated second-round effects from reduced tax competition, this might rise to around 0.4 percent of GDP in the longer term.
  - If a proportional share flows to LICs, it would be welcome but is dwarfed by overall revenue challenges.
- Revenue needs and potential in LICs:
  - To meet the SDG in five key areas, expenditure needs in LICs are estimated at nearly 16 percent of GDP.
  - Estimates suggest a potential revenue increase in LICs of 8 percent of GDP (Tax Capacity gap).
  - Comparing current revenue ratios with emerging market economies suggests a revenue potential of around 5 percent of GDP.
- Tax policy options with revenue and distributional considerations:
  - VAT reform: reduce exemptions and remove reduced rates; average revenue in emerging market economies is 2 percentage points of GDP higher than in LICs.
    - Where equity concerns arise, social expenditure financed from VAT reform (social transfers, health care, education) can offset impacts on the poor.
  - Specific excises: better design, improved enforcement, and higher tax rates on alcohol, tobacco, unhealthy foods, passenger vehicles, fuel, and carbon emissions.
  - Extractives: enhance fiscal regimes (royalty combined with a dedicated resource rent tax) to secure rents.
  - Personal income tax: strengthen progressive PIT and rationalize tax expenditures; challenging where informality is high.
  - Recurrent real property taxes: use new digital technologies for registration, expand bases, increase rates; property taxes generally raise less than 0.1 percent in LICs and average about 0.5 percent of GDP in emerging markets.
- Administrative measures to raise revenue:
  - Management and governance arrangements to ensure autonomy, accountability and transparency, rules-based decision-making, high integrity, agile management models, sound organizational design, and result-based management.
  - Solid foundation of core tax and customs functions: registration, filing, payment, and correct reporting, with improved internal assurance, external oversight, integrity assurance, and transparency.
  - Comprehensive compliance strategies: address tax evasion by high-wealth individuals, professionals, self-employed, and VAT compliance gaps; implement data-driven, risk-based compliance management supported by digitalization.
  - Digital transformation of revenue administration: beyond e-registration/filing/payments to using data for risk-based compliance, mitigating arrears, and lowering administrative and compliance costs.
  - Streamline and secure customs clearance and international transit procedures; implement customs valuation in line with WTO standards.

### A look into the future — reform directions
- Principle robustness and tendencies:
  - Among allocation principles, the source principle is least robust, followed by the residence principle; the destination principle is likely the most stable.
- Source-based taxation:
  - Vulnerable to spillovers; arms-length principle is complex and sometimes arbitrary.
  - Alternatives include formula apportionment or fixed margin regimes (included in P1).
  - International coordination (BEPS action items, P2 global minimum tax) is needed to mitigate spillovers.
  - Strengthening source taxation is important for developing countries as capital importers.
- Residence-based taxation:
  - Vulnerable to spillovers; worldwide regimes have been replaced by territorial systems.
  - International coordination via CFC rules and outbound minimum taxes (IIR) helps sustain residence principle.
  - Considering residence from shareholders’ perspective could depoliticize headquarters location but requires advances in information exchange, IT, and mark-to-market accounting.
- Destination-based taxation:
  - Least susceptible to spillovers; consumers are least mobile.
  - Movement toward destination-based taxes expected (shift from CIT to VAT, DSTs).
  - Implementation options include formula apportionment and border adjustments (DBCFT).
  - A DBCFT would create large revenue redistribution and asymmetric spillovers if introduced by a few countries.
- Possible evolutions of the IF pillars:
  - Dual system risk: IF agreement creates a dual international tax system (new regime for in-scope MNEs, old for others) that may induce firm responses to opt for preferred systems.
  - P1 enhancements:
    - Reduce the very high turnover threshold for in-scope firms further than the currently foreseen halving 7 years after implementation.
    - Raise the 25 percent of residual profit that is real located, or reduce the 10 percent return on sales used to calculate routine profit.
    - Reconsider exclusion of regulated financial services; taxing rights for extractive industries remain in resource location countries.
  - P2 enhancements:
    - Remove the substance-based income exclusion to prevent incentives to shift real investment and staff into lower tax countries.
    - Lift exemption for international shipping to address low tax rates in the sector (example: common presumptive “tonnage” tax regimes leading to effective tax rates of just 7 percent for largest operators).
    - Raise the minimum tax rate above 15 percent to support robustness of source and residence-based taxes.
- Corporate tax design alternatives:
  - Move toward distinguishing normal returns to capital and excess profits (“economic rent”).
  - Introduce an allowance for corporate equity (ACE) compatible with formula apportionment (P1) and recognized under minimum taxes (P2); ACE would remove corporate debt bias.
  - A more radical option is a destination-based cash-flow tax (DBCFT) that exempts normal return via expensing of investment.
- Excess profit taxation:
  - Excess profit taxes (EPTs) are receiving interest for pandemic recovery and addressing energy price surges.
  - Concerns about outbound profit shifting could be alleviated by international coordination.
  - An example estimate: a 10 percent EPT on globally consolidated accounts of multinationals (on top of current CIT), with the EPT base allocated using sales, could raise global revenue by 16 percent of current CIT revenues.

### Agenda for developing countries (a potential "third pillar")
- Objectives and rationale:
  - A new reform program targeting lower income, capital importing economies could build on and go beyond BEPS and the two-pillar reform.
  - Could reflect outcomes and discussions in the UN Tax Committee and the UN Resolution on international tax cooperation.
- Unilateral and coordinated actions:
  - Countries can move unilaterally to strengthen anti-abuse provisions and revise treaty policy to better protect and expand source taxing rights (in line with IMF and PCT advice).
  - Concerns about competitiveness and deviation from established practices suggest advantage in publishing design recommendations in the IF or coordinating broader reform initiatives to foster changes to imbalanced tax treaties.

*INTERNATIONAL CORPORATE TAX REFORM — INTERNATIONAL MONETARY FUND (excerpt from ppea2023001)*

### Box 5. Treaties Ripe for Revision?

### Box 5. Treaties Ripe for Revision?

### Overview and recent trends
- Out of more than 1,500 treaties concluded between source countries (defined to include LICs as well as middle-income countries) and advanced economies or investment hubs (defined as countries where inward FDI stocks exceed 150 percent of GDP), 30 percent have been renegotiated and 3 percent were terminated between 1980 and 2021.
- The trend of treaty termination or renegotiation has accelerated in recent years, especially through MLI ratifications.
- The MLI is not included among the renegotiations covered by the pre-MLI survival analysis; treaty renegotiations and terminations are often motivated by concerns about clauses unaffected by the MLI.

### Empirical drivers of treaty revision
- A survival analysis focusing on pre-MLI discontinuations indicates that both country-specific variables and treaty specifics determine the average lifetime of a bilateral treaty:
  - Where source countries’ treaty partners are characterized by low statutory CIT rates and large inward FDI stocks, the average number of years a treaty remains effective is reduced.
  - Greater restrictions to withholding taxation on interest payments and weaker PE definitions make treaties more prone to revision.
  - The absence of two newer additions to model treaties—provisions safeguarding the right to tax capital gains on indirect transfers of assets and anti-abuse clauses—are associated with a greater likelihood of renegotiation or termination.

### Predicted treaty discontinuations (next 10 years)
- Using past patterns to predict survival:
  - 19 percent of treaties with investment hubs will be renegotiated or terminated in the next 10 years.
  - The probability of treaty discontinuation with an advanced economy in the next 10 years is roughly 10 percent.

### Implications for source taxation and treaty policy
- Improving international guidance on the scope of withholding taxation, in particular with respect to services, could become central to a reform pillar serving developing countries.
  - Most developing economies are service importers; taxation of services is of critical importance for source countries beyond digitalization and consumer-facing activities.
  - Article 12A of the UN Treaty Model retains the right to levy final WHT on cross-border service payments; this provision is absent from the OECD Model Treaty.
  - Only around 20 percent of source country treaties cover service fee provisions.
- Using the MLI template to initiate another multilateral initiative could facilitate treaty changes to retain meaningful rates on interest, royalties, income from services and capital gains, and to target particularly unbalanced treaties.

### Withholding tax (WHT) distribution and STTR scope (key statistics)
- Focusing on WHT in source countries alone:
  - About 19 percent of the treaties apply a WHT rate less than 9 percent to interest.
  - About 20 percent of the treaties tax royalties less than 9 percent.
  - For technical service fees, close to 80 percent of all treaties have WHT less than 9 percent, and WHT equals zero in 78 percent of all treaties.
  - In capital gains:
    - 63 percent of treaties allow for WHT on capital gains from immovable property.
    - 33 percent allow for WHT on capital gains from other shares.
- Accounting for the nominal corporate tax rate in the recipient country reduces the number of treaties impacted by the STTR:
  - For interest and royalties, the STTR top-up is positive for 26 and 27 treaties, respectively.
  - For technical service fees, 101 treaties have room for additional STTR.
  - Overall, the minimum would apply in 101 treaties for 32 developing countries, concluded with 13 developed countries (6.9 percent of the total number of treaties) to outbound payment of interest, royalties, and technical service.

### STTR revenue potential and covered payments
- Covered payment defined broadly to include royalties and charges for financing and insurance services, professional services and technical services.
- Relative to total taxable profit for CIT, the size of covered payment:
  - Is typically small—less than 0.05 percent in close to 60 percent of countries.
  - Has a median of 0.02 percent and a mean of 0.7 percent.
- Among the 101 treaties identified as in scope with detailed service-import information:
  - 20 treaties for 7 developing countries (China, Egypt, Indonesia, Mexico, Morocco, Philippines, and South Africa) give rise to positive STTR.
  - STTR revenue per treaty ranges from almost zero to 0.14 percent of current CIT revenue for individual treaties.
  - In aggregate, the STTR would bring additional CIT revenue of between 0.002 and 0.14 percent for the respective source country.
  - Restricting the STTR to royalties would generate additional revenue in only one treaty, adding 0.003 percent of CIT revenue for the respective source country.
- Alternative STTR design using an effective resident-country rate (proxied by one half of the nominal rate):
  - Close to one third (416 out of 1,474) of treaties would become eligible for the STTR, involving 81 developing countries and 37 treaty partners.
  - The revenue potential expands to 50 treaties for 16 developing countries with information available on covered payments.
  - The additional STTR revenue would add between 0.0003 and 0.8 percent of current CIT revenue for the respective source country, assuming no change in effective CIT rates in recipient countries.
  - If resident countries increase their tax rate in response to the STTR, the strong revenue effects under this alternative design would likely be reduced.

### Policy options and recommendations
- Expand international guidance and coordination to make international tax rules commensurate with lower capacity administrations.
  - Consider simplified methods (e.g., fixed margins under Amount B) for some distribution and marketing activities as acceptable alternatives to case-by-case benchmarking.
  - Explore broader application of simplified approaches across sectors and activities, weighing associated efficiency costs.
- Consider simplification measures that require guidance rather than new standards:
  - Mechanical deduction limitations for potentially base-eroding payments (for example, mechanical limits for central purchasing fees, commissions, royalties).
  - Treating related party interest as equity for tax purposes could more dramatically contain profit shifting from related-party financing.
- Improve international guidance on the scope of withholding taxation for services to strengthen source-country taxation.
  - Use multilateral templates (akin to the MLI) to facilitate coordinated treaty changes that preserve meaningful withholding rates on interest, royalties, income from services and capital gains.
- Expand the STTR design to enhance benefits for LICs:
  - Broaden the set of covered cross-border payments to include capital gains and a wide range of service payments, given lower WHTs on technical service fees.
  - Consider determining the STTR top-up on an effective (rather than nominal/statutory) tax rate in the resident country—e.g., proxied by one half of the nominal rate—to capture preferential regimes and BEPS effects.
- Make simplicity a primary objective for reforms that serve LIC interests:
  - If safe harbors are recognized under the arm’s length principle, their design should ensure a reasonable portion of profits accrues to LICs.
  - If formula apportionment gains prominence, choose allocation factors that attribute a greater share of profits to developing countries.

*Source: Box 5, ppea2023001 (International Corporate Tax Reform, International Monetary Fund).*

### 10. Parameter 푢푢 generally lies between 0 and 1, since depreciation for tax purpose is not

### 10. Parameter 푢푢 generally lies between 0 and 1, since depreciation for tax purpose is not

### Role of 푢푢 and baseline assumptions
- 푢푢 generally lies between 0 and 1; if tax depreciation were immediate then 푢푢=1.
- Multiplying 푢푢 by the tax rate 푢푢 gives the value of tax depreciation allowances in terms of tax savings.
- Replacement investment in each period 푡푡 is assumed to maintain the capital stock at its initial level: 퐼퐼
푡푡 = 훿훿
푡푡 퐾퐾
푡푡−1 so that 퐾퐾
푡푡 = 퐾퐾
0 = 퐾퐾.
- 푃푃 and 푄푄 increase annually at the general rate of inflation, 휋휋. Prices normalized so that 푃푃
0 = 푄푄
0 = 1; investment and output expressed in real terms.

### Net present value and investment condition (equations)
- NPV expression (equation (3)):
  - NPV = 퐹퐹(퐾퐾)(1−푢푢) − (푟푟+훿훿)(1−푢푢푢푢)퐾퐾 / 푟푟
  - Rewritten: NPV = [퐹퐹(퐾퐾) − (푟푟+훿훿)퐾퐾] − 푢푢[퐹퐹(퐾퐾) − 푢푢(푟푟+훿훿)퐾퐾] / 푟푟
- Interpretation:
  - First bracket: economic profit (in excess of normal profit).
  - Second bracket term (with 푢푢): net tax liability applying 푢푢 to taxable profit.
- Profit-maximizing investment where marginal NPV = 0 (equation (4)):
  - 휕휕휕휕푃푃 휕휕 / 휕휕퐾퐾 = 퐹퐹
퐾퐾(1−푢푢) − (푟푟+훿훿)(1−푢푢푢푢) = 0
  - Equivalent (equation (5)): 퐹퐹
퐾퐾 = (푟푟+훿훿)(1−푢푢푢푢) / (1−푢푢)

### Hurdle rate and METR (equations and implications)
- Hurdle rate 푅푅푅푅 defined (equation (6)):
  - 푅푅푅푅 = 퐹퐹
퐾퐾 − 훿훿 = (푟푟+훿훿)(1−푢푢푢푢)/(1−푢푢) − 훿훿
- In absence of tax, hurdle rate equals normal rate 푟푟.
- With immediate expensing (푢푢 = 1), taxation is neutral for investment.
- If 푢푢 < 1, hurdle rate exceeds normal rate 푟푟, implying taxation reduces optimal investment.
- METR definition (equation (7)):
  - METR = (푅푅푅푅 − 푟푟) / 푅푅푅푅
- Closed form METR (equation (8)):
  - METR = 푢푢(1−푢푢)(푟푟+훿훿) / [푟푟(1−푢푢푢푢) + 푢푢훿훿(1−푢푢)]
- Implication:
  - METR > 0 as long as 푢푢 < 1 and 푢푢 > 0. CIT raises the hurdle rate and reduces the number of profitable investments.

### AETR (equation and interpretation)
- AETR definition (equation (9)):
  - AETR = 푢푢[퐹퐹(퐾퐾) − 푢푢(푟푟+훿훿)퐾퐾] / 푝푝
  - Rewritten: AETR = (푝푝 − 푟푟)푢푢 + (1−푢푢)(푟푟+훿훿)푢푢 / 푝푝
  - Where 푝푝 = 퐹퐹(퐾퐾)/퐾퐾 − 훿훿 (average pre-tax rate of return net of depreciation).
- Interpretation:
  - First term: CIT on economic profit per unit of investment.
  - Second term: CIT, net of tax depreciation allowances, on the normal required return per unit.
  - For high-profit projects, AETR approaches the statutory tax rate; for low-profit projects, the second term dominates and resembles METR.

### ETRs under the GloBE (minimum tax) — extensions and conditions
- Assumptions:
  - Per-country GloBE income equals domestic tax base (absent tax incentives).
  - GloBE rate 푚푚 > statutory CIT rate 푢푢.
  - Carve-out defined as fixed percentage of capital stock: 푐푐퐾퐾.
- NPV under minimum tax (equation (10)):
  - 휕휕푃푃휕휕 = [퐹퐹(퐾퐾) − (푟푟+훿훿)퐾퐾] − 푚푚[퐹퐹(퐾퐾) − 푢푢(푟푟+훿훿)퐾퐾] + (푚푚 − 푢푢)푐푐퐾퐾 all divided by 푟푟
- Condition for minimum tax to apply to a positive tax base (equation (11)):
  - 푐푐 < [푝푝 − 푟푟]푢푢 + [푝푝 + 훿훿](1−푢푢)
- Profit-maximizing condition under GloBE (equation (12)):
  - 퐹퐹
퐾퐾
퐺퐺 = (푟푟+훿훿)(1−푚푚푢푢) − 푐푐(푚푚−푢푢) / (1−푚푚)
  - Special case: when 푚푚 = 푢푢, reduces to standard case.
- METR under minimum tax (equation (13)):
  - 푀푀푀푀푀푀 푅푅
퐺퐺 = (푟푟+훿훿)(1−푢푢)푚푚 − 푐푐(푚푚−푢푢) / [푟푟(1−푚푚푢푢) + 훿훿(1−푢푢)푚푚 − 푐푐(푚푚−푢푢)]
- Condition when minimum tax increases cost of capital/METR relative to standard case (equation (14)):
  - 푐푐 < (푟푟+훿훿)(1−푢푢)/(1−푢푢)
  - Notes: right-hand side decreases in 푢푢 and increases in 푢푢; RHS always less than 퐹퐹
퐾퐾.
  - A carve-out equal to 퐹퐹
퐾퐾 (ACE-like deduction at right normal return) would suffice to prevent METR increase under the minimum tax.
- Implications:
  - GloBE more likely to raise METR in jurisdictions with less generous tax depreciation or low statutory/average tax rates.
  - With a generous carve-out that does not satisfy (14), GloBE can reduce cost of capital and METR, while increasing the AETR.
- AETR under minimum tax (equation (15)):
  - 푢푢푀푀푀푀 푅푅
퐺퐺 = 푚푚[퐹퐹(퐾퐾) − 푢푢(푟푟+훿훿)퐾퐾] − (푚푚−푢푢)푐푐퐾퐾 / [퐹퐹(퐾퐾) − 훿훿퐾퐾]
  - Rewritten: 푢푢푀푀푀푀 푅푅
퐺퐺 = (푝푝 − 푟푟)푚푚 + (1−푢푢)(푟푟+훿훿)푚푚 − (푚푚−푢푢)푐푐 all divided by 푝푝
- Interpretation:
  - First two terms: unambiguous increase in AETR because 푚푚 > 푢푢.
  - Third term: reduces AETR by top-up on carve-out share taxed at standard rate.
  - Overall AETR increases (AETR_G > AETR) when minimum tax applies to a positive tax base per equation (11).
  - Projects subject to top-up tax under GloBE face higher AETR, but not necessarily higher METR if carve-out covers marginal investment with lower rate of return.

*INTERNATIONAL MONETARY FUND*

### References

### References

### Key topics covered in the referenced literature
- Digital services taxation and the digitalisation of the economy (e.g., “Suggested Approach to Drafting Digital Services Tax Legislation,” ATAF, 2020; “Tax Challenges Arising from the Digitalisation of the Economy – Economic Impact Assessment: Inclusive Framework on BEPS,” OECD, 2020).
- Two-pillar solution and Pillar Two / Global Anti-Base Erosion (GloBE) Model Rules (e.g., ATAF, 2021 CBT/TN/07/21; OECD, 2021a; OECD, 2022a; OECD, 2022b).
- International corporate tax avoidance, BEPS, transfer pricing, and profit shifting (e.g., Beer, de Mooij, and Liu, 2020; Crivelli, de Mooij, and Keen, 2016; Devereux et al., 2021).
- Tax policy, revenue mobilization, and fiscal responses to COVID-19 and other crises (e.g., IMF Staff Discussion Notes No. 2021/003; IMF Special Series Note on COVID-19; IMF Fiscal Monitor April 2022).
- Minimum corporate taxation and tax competition (e.g., Aslam and Coelho, IMF Working Paper No. 2021/161; Hebous and Keen, IMF Working Paper October, 2021).
- Taxation of extractive industries, shipping, and resource-rich developing countries (e.g., Daniel et al., 2019; Albertin et al., African and Fiscal Affairs Departments, Departmental Paper 21/22; Merk, 2020).
- Country-by-country reporting, disclosure, and data issues for transfer pricing analyses (e.g., De Simone and Olbert, 2021; Hugger, ifo Working Paper No. 304; Platform for the Collaboration on Tax toolkits, 2017–2022).
- Tax treaty negotiation, source-based taxation, and treaty effects (e.g., Platform for the Collaboration on Tax, 2021 Toolkit on Tax Treaty Negotiations; Schatan, 2021; Schoueri and Tomazela, 2021).
- Regional studies and fiscal policy for development and SDGs (e.g., Gaspar et al., Staff Discussion Notes No. 2019/003; Verdier et al., Departmental Paper 22/013).

### Representative institutional contributors and collaborative outputs
- International Monetary Fund (IMF): multiple policy papers and staff notes (e.g., IMF, 2009; IMF, 2014; IMF, 2015; IMF, 2016; IMF, 2017; IMF, 2019; IMF, 2022a; IMF, 2022b; IMF Staff, 2021).
- Organisation for Economic Co-operation and Development (OECD): Inclusive Framework outputs on BEPS and Pillar Two (e.g., OECD, 2020; OECD, 2021a; OECD, 2021b; OECD, 2022a; OECD, 2022b; OECD, 2022c; OECD, 2022d).
- Platform for the Collaboration on Tax (PCT) joint toolkits and progress reports with IMF, OECD, UN, and World Bank Group (e.g., PCT, 2017; PCT, 2020; PCT, 2021; PCT, 2022).
- Regional and specialized organizations: African Tax Administration Forum (ATAF) (2020, 2021), World Bank Group (O’Sullivan and Cebreiro Gomez, 2022), UNCTAD (2022), World Economic Forum (WEF, 2021).

### Notable working papers, departmental papers, and policy outputs (selected identifiers preserved)
- IMF Working Paper No. 2021/161 — Aslam and Coelho, “A Firm Lower Bound: Characteristics and Impact of Corporate Minimum Taxation.”
- IMF Working Paper No. 2022/193 — Beer, Leduc, and Loeprick, “Keeping it simple – Efficiency Costs of Fixed Margin Regimes in Transfer Pricing.”
- IMF Working Paper No. 2022/187 — Hebous, Prihardini, and Vernon, “Excess Profit Taxes: Historical Perspective and Contemporary Relevance.”
- IMF Staff Discussion Notes No. 2021/003 — Benedek et al., “A Post-Pandemic Assessment of the Sustainable Development Goals.”
- Departmental Paper 21/22 — Albertin et al., “Tax Avoidance in Sub-Saharan Africa’s Mining Sector.”
- Departmental Paper 21/12 — Crivelli et al., “Taxing Multinationals in Europe.”
- Departmental Paper 21/17 — Dabla-Norris et al., “Digitalization and Taxation in Asia.”
- Departmental Paper 22/013 — Verdier et al., “Revenue Mobilization for a Resilient and Inclusive Recovery in the Middle East and Central Asia.”

### Cross-cutting toolkits, manuals, and technical notes
- ATAF, 2020, “Suggested Approach to Drafting Digital Services Tax Legislation.”
- Brondolo et al., Technical Notes and Manuals No. 2022/001, “Compliance Risk Management: Developing Compliance Improvement Plans.”
- Platform for the Collaboration on Tax toolkits: 2017 toolkit on comparables data for transfer pricing; 2020 toolkit on offshore indirect transfers; 2021 toolkit on tax treaty negotiations; PCT Progress Report 2022.
- OECD and related reports on tax incentives and the global minimum corporate tax (e.g., OECD, 2022d).

*Source: ppea2023001 - References*

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_Source: https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023001.pdf_