Deciphering the GloBE in a Low-Tax Jurisdiction

IMF Working Papers, March 22, 2024

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Pillar Two rules of the Inclusive Framework agreement on a minimum corporate tax (known as ‘Global Anti-Base Erosion Rules’, for short GloBE) have important implications for the design of the corporate income tax.
It is not possible to design a system that always guarantees generating exactly the bare minimum tax intended by the rules.
Designing a system that guarantees the bare minimum tax should not be the policy objective.
If no profit tax already exists, countries need to consider whether to adopt one, and if yes, in what form.
There is a case for introducing a general profit tax beyond the GloBE rules, together with a qualifying GloBE domestic minimum top-up tax as a backstop.
Familiar alternatives of efficient economic rent tax designs are no longer equivalent under the GloBE.
In practice, given the specifics of the rules, an efficient rent tax on in-scope multinationals cannot be combined with a statutory tax rate below a certain cutoff, because the minimum tax becomes always binding.
Under the GloBE, immediate expensing particularly maintains the time-value of fully deducting the cost of investment, without impacting the GloBE effective tax rate.

Low-tax jurisdictions must reassess corporate tax design choices in light of GloBE rules:
- Consider whether to introduce a general profit tax if none exists.
- Consider adopting a qualifying GloBE domestic minimum top-up tax as a backstop.
Efficient economic rent tax designs and their expected outcomes are altered by the interaction with GloBE:
- An efficient rent tax applied to in-scope multinationals cannot be combined with a statutory tax rate below a certain cutoff without triggering the minimum tax consistently.
Policy objectives should prioritize broader tax-design goals over attempting to engineer a system that exactly matches the GloBE bare minimum tax.

Immediate expensing:
- Maintains the time-value of fully deducting the cost of investment.
- Does not impact the GloBE effective tax rate.
Scope considerations:
- The analysis focuses on in-scope multinationals and the interaction between domestic rent taxation and GloBE minimum tax rules.

Do not pursue a policy objective of guaranteeing the exact bare minimum tax intended by GloBE.
If no domestic profit tax exists:
- Evaluate introducing a general profit tax beyond GloBE requirements.
- Include a qualifying GloBE domestic minimum top-up tax as a backstop to align with international rules.
Re-evaluate the use of efficient rent taxation for in-scope multinationals given the likelihood of the GloBE minimum tax becoming binding when statutory rates are below certain cutoffs.
Use immediate expensing where policy aims to preserve the time-value of investment deductions without altering GloBE effective tax outcomes.

Source: Deciphering the GloBE in a Low-Tax Jurisdiction, IMF Working Papers 2024/064.