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How Inclusive Is the Inclusive Framework for Developing Countries?: Transcript

Posted on Feb. 14, 2024

As pillar 2 moves to implementation, are developing countries prepared to participate? Do tax administrations in these nations still face disadvantages, and do they need additional support? Can the rules be improved to better safeguard developing countries? 

In a February 7 Taxing Issues webinar, Tax Analysts President and CEO Cara Griffith moderated a panel of experts explaining the advantages and disadvantages of the inclusive framework for developing countries and additional steps for further inclusivity. The panel was comprised of Anarella Calderoni, advisor, international cooperation and taxation directorate at the Inter-American Center of Tax Administrations, Abdul Muheet Chowdhary, senior programme officer at the South Centre, Allison Christians, H. Heward Stikeman Chair in the Law of Taxation at McGill University Faculty of Law, Thomas Lassourd, senior policy advisor and technical assistance coordinator at the International Institute for Sustainable Development, and Stephen Shay, Paulus Endowment Senior Tax Fellow and adjunct professor at Boston College Law School and retired partner and consultant to Ropes & Gray.

Cara Griffith: Welcome, everyone. I'm Cara Griffith, president and CEO of Tax Analysts. Thank you for joining us today to discuss and debate the impacts of pillar 2 on the developing world.

Today's event is another in Tax Analysts' series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage debate on tax issues. We've enjoyed bringing the tax community together with leading policymakers and experts for bipartisan discussions on the future of tax policy and administration, and we'll continue to do so. As always, we welcome your feedback on how we can make our webinars more useful, as well as your suggestions on future webinar topics. You can send your feedback and suggestions to We also welcome your questions for today's event. Please use the chat feature to submit questions during the webinar.

For our panel discussion, I'll begin by asking a few questions, and then I'll turn to questions from you, our audience. And I promise to get to as many of them as time permits. In our audience today, we have people from 57 different countries, so I very much encourage your questions and comments throughout the conversation. For those of you that would like CPE credit today, please be sure that you participate in the program for at least 50 minutes and answer at least three of the poll questions that will appear throughout the webinar. They will appear on the right side of the viewing window above the comment section. To receive credit for your answers, you need to register with Pigeonhole, our interactive Q&A system, by providing your name and email. Also, please remain in the default viewing window because you will not be able to see the questions if you expand to the full screen. The course materials, which were sent on in advance, are also available for downloading under the viewing window. I encourage you today to download the materials because there's a lot there and on the screen the text gets a little bit small, so please do so so you'll be able to follow along with us.

And now on to today's topic. For several years now, we've been keeping our eye on the BEPS project, which the OECD and G20 countries launched because they saw a need for a comprehensive, global, consensus-based tax regime that addressed both the allocation of profits, as well as base erosion and profit shifting. According to the OECD, base erosion and profit shifting are costing countries around the world $100 billion to $240 billion a year in lost revenue, which is between 4 to 10 percent of global corporate income tax revenue. To date, over 140 countries have signed onto the BEPS inclusive framework, which includes, of course, a two-pillar solution. Pillar 1 addresses nexus and profit allocation, while pillar 2 introduces the global minimum tax of 15 percent.

The rules provide instructions for countries to implement the so-called global anti-base-erosion, or GLOBE, provisions that would ensure that large multinational corporations pay a minimum level of tax on the income they generate in each jurisdiction in which they operate. The inclusive framework was the product of a novel approach to tackling global corporate tax issues. Every country, whether an OECD member or not, could participate. It marked quite possibly the first time that developing countries could play a meaningful role in modernizing the international corporate tax system. But that doesn't mean that every country felt like they had an equal say in the process or that its concerns were addressed. Many developing countries have big questions about the OECD's revenue assessments. They don't believe the data on how much tax revenue they may or may not gain from the two pillars. Now today we're going to focus on pillar 2 and the global minimum tax.

There are lots of questions about whether the developing world will benefit from the tax, or actually be hurt by it and suffer tax revenue losses. Developing countries tend to have relatively high corporate income tax rates, so they aren't considered tax havens, but they provide tax exemptions and incentives to specific sectors and industries to encourage investment within their borders. So some corporations with operations in those countries might actually have low effective tax rates. Under a global minimum tax, developing countries may find that it's a disadvantage to offer tax incentives if that means that it's going to translate into an effective tax rate that's lower than 15 percent. Now, the OECD has provided a lot of guidance in 2023 on how to apply pillar 2's rules. In October, it released the minimum tax implementation handbook. It's also released a host of guidance on various safe harbors, the subject-to-tax rule and other items such as currency conversion, tax credits and the application of substance-based income inclusion.

Now, implementation is underway, but a lot of questions remain, particularly for the developing countries. Are they ready to participate? Have their concerns been addressed? And what additional safe harbors do they need? Well, we have an outstanding panel today to address all of these questions and a lot more. So let me introduce them. First we have Anarella Calderoni. She's with the Inter-American Center of Tax Administrations, working within the center's directorate of international cooperation and taxation. Next we have Abdul Muheet Chowdhary, who is with the South Centre, where he leads the South Centre Tax Initiative and serves as senior program officer. We have Allison Christians, who is a law professor at McGill University, and she's focused most of her career on national and international tax law and policy. And next, Thomas Lassourd, who's with the International Institute for Sustainable Development's Economic Law and Policy Program, where he serves as a senior policy advisor and technical assistance coordinator. And last but not least, we have Stephen Shay, who is a senior tax fellow and adjunct professor at Boston College Law School.

I want to thank you all for being here, and I'm very excited for this conversation. So to kick us off, Allison, let me turn to you. I did the super high-level 30,000-foot overview of pillar 2, but can you briefly explain a little bit more in-depth the pillar 2 rules and the current status of adoption in the developing world?

Allison Christians: Sure. Just going through the rules, we only need maybe four or five days to work our way through it. So thanks for having me and giving me this task. I think we have to assume at this point everybody's at least heard of the GLOBE package and has some sense that there's some minimum tax in there somewhere. And I think the best you can do at a very high level is just bring to mind the major design elements here. So what are the major design elements? I think they are set and that we're now working out what are those going to look like in real life? But the major design elements are a series of interconnected commitment projectors — a series of top-up taxes by all the various countries that might be interested in trying to get tax revenue from large multinationals. So you have this threshold of €750 million and once a company exceeds that, then all the countries in which that company is operating should be paying attention and seeing which part of their revenue they're going to get.

And the way they're going to get that revenue is through these top-up tax rules or minimum tax rules. Most people will start with the income inclusion rule. That's kind of where the BEPS project started. The idea was, well, we already have CFC taxes, so we're just going to expand out the kinds of income that gets subject to those kind of shareholder level flow-through taxes to include some active income. And that's the IIR, the income inclusion rule, which is the parent imposing that. But then of course we see that, well, what about going back down again? Well, we can have a qualified domestic minimum tax instead taking that first bite. And then if those two countries, neither source nor residence necessarily — ultimate residence, ultimate parent necessarily — wants to tax, then we slipped in this UTPR idea — this undertaxed payments or profits rule that it used to be called — which is more or less just another commitment projector.

It says, if you don't tax, I will. So this design is the, "well, if you don't tax, I will" school of international tax. And the whole program is built around that idea that somewhere, somebody is going to grab some tax. And of course this idea comes from, as you stated, Cara, from the base erosion and profit shifting. The idea is, well, you know what? Tax competition has gone too far, and we need to pull back. We need to make countries use their tax systems just a little less to attract capital. And the way we're going to do that is that we're going to get this minimum tax in place so that at some level, capital is not chasing zero anymore. Now they're chasing somewhere around 15 percent. But of course, as always, the devil's in the details. And I think a couple of major points for me to note when we talk about lower-income countries — countries that used tax incentives a lot — I think we have to have a caveat.

All countries use tax incentives a lot. They all do. We see package after package of government giving away tax revenues to giant multinationals to try to attract capital. And now the question is just, well, can you shift? So for lower-income countries looking at this design where, if I don't tax you will, you might say, well, they should just tax now, right? So qualified domestic minimum tax is a good strategy. Well, not so fast because there are a couple more design elements, specifically things that make countries keep competing with their tax systems. Namely, substance-based income exclusion, which is just a little cushion of income that you can have that isn't subject to tax at high rates and won't be swept up in this regime. So that's one for lower-income countries to watch because basically what we're saying to these countries is, keep competing. Keep using your tax system for this substance-based income.

And the other, I think, design feature that I think is of concern when you're thinking about GLOBE and you're thinking about, well, I'm going to use my tax system, how do I use it? Well, we've opened up this space for refundable credits, which actually is more expensive than nonrefundable credits. Now this is a little bit of jargon and a little bit of strategic maneuvering here, but basically, before GLOBE, if you wanted to give money to a company but maybe not give too much — not give away the store — you might say, well, we'll give you a tax credit if you do X thing that we want you to do. And then companies would do X thing, and then if they had income, you would reduce their tax on it. But with a refundable tax credit, you're just giving them more money.

And so I think this is a design feature that has crept into, let's say, the plumbing of pillar 2 that I think, now that we're going to start seeing implementation, now is when we're going to start to find out, well, what are the impacts of all those little things that we put in there? Now there's obviously much more to GLOBE, a lot of complexity, things that only a real tax accountant/tax lawyer could love. And, I think, an excessive amount of administration and possibility for uneven implementation, and that causes its own problems because how are we going to resolve those going forward? So in terms of a state of the play of pillar 2, I think what we have for sure is, the major design elements are in place. They're probably immovable at least for a while until we see how they work out, and they're at odds with each other.

On the one hand, minimum tax. On the other hand, keep using your tax system and in some ways, even in more destructive ways than was the case in the past. And then I will just add that when you look at the GLOBE system, the system of top-up taxes being designed around CFC, we aren't actually sure if wealthy countries that have been imposing CFC taxes are going to be happy if those taxes are undermined — are taken away effectively — by qualified domestic minimum taxes. So I'm not sure that it's even only a developing world question about whether you're going to get more under GLOBE. This is a real shifting, real potential for reallocation. But with all of these different and competing and mutually inconsistent, directionally inconsistent design features, it's hard to say where things are going to shake out. And that's why, now that we're moving into implementation stage, the data starts to become really important because we need to see what's going on.

And as countries start implementing, are they raising more revenues? Are they raising the same? Are they getting actually less because now they have switched to refundable tax credits, for example? And then the last piece for developing countries is of course that developing countries have a lot of agreements — stabilization agreements and the different kinds of arrangements — that richer countries don't have. And those weren't developed in the design of GLOBE, and I don't think have been well addressed. And so we're going to have to see how that plays out. So I won't talk any more about the structure, even though I've only given you the very basic minimum. I'll just say that now we're looking at implementation, and it's this rollout period. So we can see the European directive, but even there, European countries may be implementing in different ways.

It's not necessarily even one European rule for all — it's not. And the rest of the world is nothing official yet, or most of the rest of the world is nothing official yet, with a few pockets here and there. And from there, I think we have to get more granular region-by-region. And that's why I'm really glad to see Anarella on the panel today because she's going to give us some more information, I think, about Latin America and I'll turn it over from there. Thanks.

Anarella Calderoni: Thank you very much. If we could please put up the slide of CIAT implementation stage. Here I just wanted to give an example of what's going on in Latin America. And as Allison said, there is very little that has actually been implemented yet. What we did at CIAT was a survey of 12 countries, 11 in Latin America and one Caribbean country. This survey was done in September 2023 where we asked where they were in the process of adopting these rules. And all of the countries did respond that they have started to learn about the proposed rules and assess the potential impact of them. However, there's been no real adoption of either the qualified domestic minimum top-up tax or the income inclusion rule or the undertaxed payments rule. One country, which is Colombia, did adopt a corporate income tax reform, which is similar to the qualified domestic minimum top-up tax, but it's a modified version.

So at the time of the survey, they did express to us that they were in the process of redesigning this to align it more to that proposed in the GLOBE rules. Ten countries did start to coordinate between the tax administration and the Ministry of Finance, which is important to discuss things like the infrastructure or the new processes that will be needed to adopt these rules. But on the bright side, there are four countries that at the time of this survey reported were in the process of designing tax reforms. And given how quickly this initiative is advancing, it would be interesting to do this survey again now just six months later to see if any of these reforms have been passed already. So that's a bit of what's going on in Latin America there just to set the stage.

Cara Griffith: Wonderful. Thank you so much, Anarella. It's really useful to have that detailed information using Latin America as an example. Abdul, I want to turn to you and we're going to jump into one of the biggest issues that maybe there is right now and talk about the potential revenue impact. And I was wondering if you could give us an overview of your opinion on the potential revenue impacts of pillar 2 on the developing countries.

Abdul Muheet Chowdhary: Thank you Cara, and to your team as well, for this event and the opportunity to share some views. I think if we are going to talk about revenue, we should start from something concrete. So I request if the Shell report slide can be put up to see how a particular case would look like of the GLOBE rules in practice. So this is data of Shell's public country-by-country report. It's available on their website, and this is for the year 2020, and it basically tells you about their revenues, profits, and taxes and things like that. And one of the first countries you can see on the list is Argentina. And you can see that Shell in 2020 derived $200 million in revenue from Argentina and paid zero in taxes.

Now the question is, that if Argentina wants to collect something from Shell, will the GLOBE rules be of any use to them? Would QDMTT be of any use to them? And the answer is no. Argentina can still bring in the QDMTT and have a situation where a taxpayer can derive $200 million in revenues and still pay them zero in taxes despite having the GLOBE rules, despite having QDMTT. And the reason why is one of the fundamental problems in the design of the QDMTT, and that will affect the revenue estimates more generally as we will continue to see. The reason why, is that the starting point of the GLOBE rules and the QDMTT are the profits that are actually declared in the jurisdiction. But if you look at the case of Argentina in this case and Shell, Shell has declared $240 million in losses. So the profit before tax is actually all in negative.

And this is a classic case which many developing countries face, where you have large corporations which derive lots of money and then through their various tricks end up declaring very little to losses really, and end up paying practically nothing. And the GLOBE rules don't address this problem of profit shifting. They start from the profits that have already been declared, though the objective of the GLOBE rules was to close all remaining base erosion and profit-shifting issues. So what we've been advising our member states at the South Centre — we have 55 member states from across the developing world — is that you can bring in GLOBE, you can bring in QDMTT, and you can still collect zero. And directly in response to this, the OECD came out with two papers, 67 and 68, where they tried to make the argument that there is a lot of profits which are declared in high-tax jurisdictions but which are taxed below 15 percent. And if we examine that data, that tells us about who are the real winners from the GLOBE rules. Can we go to the OECD slide of figure 20 please?

Now here you can see in panel A, it gives you two sets of data. At the very top is profits, which are taxed below 5 percent, and those are the very low-tax profits. And below that are profits which are low-tax profits, and these are taxed below 15 percent. And you can see where are these profits declared. And if you look at the profits which are declared, which are taxed at below 5 percent, you can see that 80 percent of them are declared in the tax havens. Now remember, the GLOBE rules are only applicable if the profits are taxed below 15 percent. If they're taxed more than 15 percent already, the GLOBE rules are useless. So here we see that 80 percent of the profits are declared in the tax havens which are taxed below 5 percent. So that tax havens are the real winners. They're called investment hubs here. And if you look at the profits which are taxed below 15 percent, again we see that 41 percent are declared in the tax havens. Then the second-highest category, 38 percent is declared in the high-income countries of the developed countries.

So again, the real winners are the developed countries and the tax havens. The developing countries, you see the profits which are taxed below 15 percent, only 1.6 percent are declared in lower middle-income countries. So virtually none of the profits which will actually end up being taxed under the GLOBE rules, under QDMTT, is declared in developing countries. Only 1.6 percent of the profits taxable under the GLOBE rules are actually declared in developing countries. So for the majority of developing countries, the GLOBE rules and QDMTT are going to be of virtually no use and, in fact, they will most likely end up spending much more on the cost of implementing them than they would end up collecting anything.

Cara Griffith: It's a huge shame listening to you. And Thomas, I wanted to turn to you. Two things: I wanted to give you an opportunity to respond, to give your thoughts on revenue estimates and then also give us any insight that you might have on whether the OECD is going to release country-specific estimates and how accurate we think any of these estimates might be.

Thomas Lassourd: Thanks a lot. Yes, I wanted to complement a little bit on Abdul. I have a slightly more optimistic perspective. A lot of his arguments resonate very true, but I think there's one element that we haven't properly accounted for, and there's a lot of unknown there. It's around the changing profit-shifting behavior of multinational companies. Because if the investment hubs that don't really tax much of the profit for now end up having been subject to the minimum tax, either directly or indirectly through other countries' UTPRs or the [inaudible], that will become a lot less appealing for multinational companies to shift their profits to these jurisdictions, especially because they don't have any economic activity there or almost none of it. There's a lot of assumptions — where is that profit going to move? Is it going to stay there taxed at 15 percent, or is it going to shift to other jurisdictions?

Some of them developed countries, some of them developing countries. So there's quite a bit of unknown here and we can have some estimates, but this could have some positive impact for developing countries as well. Those $200 million of losses in Argentina might come back somehow and become profits after that, depending on how multinationals optimize their tax planning. Just to talk about numbers, the OECD themself, they publish numbers around what they estimate the revenues would be globally between $150 and $200 billion a year. So as you said, a small part is now expected to go to developing countries, but of the overall profit, they estimate about one-third would come from the changes in profit-shifting behaviors. So that's quite significant, but it's also subject to a lot of uncertainty. And so in their own assumptions they project different scenarios around how would they expect multinationals to change their profit-shifting behavior when the rules are implemented.

But no one really knows. We have some estimates around this elasticity of investment to tax rates, but no one has ever done anything on that scale. So it is going to change a lot of things, and I think we will have to wait to see exactly how that changes where profits are allocated. So, if I turn to your second question around the estimates, so we have these global estimates and also break them down by levels of economic development and by region. We haven't seen any country-level estimates, and I don't think we will because the data that is used for those global estimates, it's aggregate data from country-by-country reports that countries have shared, anonymized, and aggregated at the country level with the OECD. That data is public, by the way. Anyone can use it. But it's at a very high level, so it doesn't have all the specific profits and tax payments of companies in each country.

Only a few countries, the ministries, share that data, but for a majority of the multinationals, it's not available. So those estimates are based on aggregate data with some — so we don't know exactly how that's going to be disseminated in countries. It's based on those estimates of profit-shifting behavior, which are unsure as well. So it's still useful at a global level, the country level, but if you were to use those assumptions at the country level, the margin of error is such that it would be risky to communicate it to the public — to the authorities, even — because then that could lead to the wrong reactions to GLOBE, the wrong policies, because you don't have a great estimate. So what's really important for countries, every country is to do its own economic assessments of the impact of GLOBE. And that's based on rigorous, detailed data that every country has. It's taxpayer data based on their detailed country-by-country reports or more granular data from their financial statements.

With that data, you can come up with which company is going to be including GLOBE, how much what's their ETR, their GLOBE ETR in your country, and determine what's the revenue at stake in terms of GLOBE. We published a guide actually with Steve and Allison, and we included a checklist in that guide that governments can use to make sure that they use the right data and they have a step-by-step process to make up their own estimates. I think a lot of countries have the capacity to do it themselves, the tax authority and the Ministry of Finance have the right economic analysts to do that work, and then other countries can request support to do that. We're actually working at the moment, IISD and ISMP and the OECD, we're doing some of that work for Papua New Guinea, looking at the economic impact of pillar 2, and then looking at all of the incentives they have in place and then different options that they can adopt in responding to pillar 2.

Cara Griffith: It does seem like it's going to be a challenge for the developing countries even to start to undertake some of these and that they will need support. Which sort of leads me to the next question I wanted to ask of Anarella, was looking and thinking about tax administration and the challenges that tax administrations are facing in developing countries as they move towards attempting to implement pillar 2. Could you give us some sense of what you are seeing?

Anarella Calderoni: Yes, absolutely. Well, first I'd like to throw out a caveat, which is that the challenges vary a lot from developing country to developing country because there are a few developing countries that have well-established tax administrations with more resources, expertise, tested processes, and then there's developing countries with tax administrations that have more restrictions due to lack of resources, outdated technology, or no treaties, not enough legislation. So it will vary. But in general, I think the challenges that most countries are facing when trying to implement the GLOBE rules in a way that sustains the objective of fair global distribution — we have to keep that in mind — these challenges are linked to the resources that this requires. So I'm going to break it down into three categories. One is at the political strategy level, first of all understanding the complexity of the rules. I think Allison mentioned this, and anyone who's tried to read these proposals will probably agree that they're quite complex to understand.

Then, politically, there needs to be the correct climate to be able to present tax reforms and push those through. We need to adapt — or countries need to adapt — the GLOBE rules to be coherent with their domestic legislations. In this regard, for example, I've heard some people express that the QDMTT could even be considered unconstitutional because you're taxing something that wasn't done in your jurisdiction. So there's some challenges to be faced there, as well as how countries are going to need to find alternatives to be able to continue being economically competitive when their tax incentives have been neutralized. As well as, some countries still need to be able to sign treaties that allow them to exchange information or the MACC to be able to receive country-by-country reports to be able to control the companies that are going to be under the GLOBE rules, under the scope.

Then a second category at an administrative level, again, adapting the tax reforms that are adopted to the rules and processes in place at the tax administration level. This is going to be costly in terms of implementing new programs or systems and modifying control procedures that are in place already. Developing human resources and technical training at the tax administration, officials are either going to have to redirect their workload to focus on the GLOBE rules or hire new experts, and the availability of domestic experts is limited. As well as, there is the challenge of public government salaries are often not as lucrative as those in the private sector. So the availability of personnel is an issue, and the financial commitment that's going to be necessary to adopt technologies that allow [...] to control the MNEs [multinational enterprise]. For example, there needs to be CRS or a program to process CBC information.

And then the last category is just other general challenges. I think first of all, kind of obvious, but the language barrier of these rules being proposed in only, I think, I'm not sure, Spanish or French and English. I'm not 100 percent sure how many languages it's been translated into, but that is an issue. And then there are details that will need to be analyzed as they come into practice, such as what will happen with currency exchanges, or withholding taxes, or synchronizing the thresholds between countries. And finally, just the opportunity cost of taking the resources away from equally important needs in the tax administration. That's it.

Cara Griffith: That last point is a really good point, is that it's doing any project, you take resources away from one thing and other things fail. I think that was a very good summary of the challenges that tax administrations are facing. Stephen, if we could take a step back and look more holistically at the whole rules. In your opinion, have the final rules addressed the concerns of the developing countries?

Stephen Shay: Well, thank you, Cara. Let me start by saying I'm just speaking for myself. I work with a number of different groups and don't want to attach my views to them. So I think I would start out by saying there is real heterogeneity among developing countries. We have this habit of saying the global South, the global North — life is much more complex. So another caveat is, I don't think we have clarity, certainly not around a single view. There are a range of views. I think dominating the question of whether the final rules have addressed the developing countries' concerns is the starting point that Anarella made, which is, they weren't really designed initially to address developing country concerns. And anybody who's drafted a document knows the old saying, if you get the engine going in the right direction, everything else follows.

Well, if your engine isn't going in your direction, then you're playing caboose for the rest of the time, and there is a fair amount of that that's going on based on my conversations with developing countries. The other observation I would make is just how many countries have not yet focused. So to say there is an answer as to whether the rules have addressed concerns, I think we need to look at that over a longer period and give more countries time to see how the rules work in their particular circumstances. Complexity is only slightly reduced. Indeed, you could make arguments that some efforts to have safe harbors or to create ameliorative rules actually add to complexity. So I think there's good effort. I do think that one very important rule that is favorable to developing countries, and this isn't the only one by far, is the fact that in the qualified domestic minimum top-up tax, CFC taxes are not stacked first or ahead of those taxes. The domestic tax comes first.

If I had to pick one rule that is really structurally important for that to be effective and that is favorable to developing countries, that would be a rule. I also understand from something I think David Bradbury said publicly a number of months ago, the African Tax Administration Forum, ATAF, has been fairly engaged with the OECD on a variety of rules, and others have as well, but it seems to me it varies from case to case. So that's a long answer to your question, which is in part optimistic. Yes, some concerns have been addressed, but it's still we're starting from a position that has a lot of makeup to go, I think, to make this set of rules work well for developing countries. And I should say, the rules aren't going to change. So it's really — I think the attitude we're going to have to have is how do we make them work with what we have?

Cara Griffith: Right. I think that's a good point — that this ship has sort of sailed and now here we are. Abdul, I want to turn to you to let you respond to Stephen and also ask for your opinion on how you think developing countries should be responding to pillar 2.

Abdul Muheet Chowdhary: Thank you, Cara. Just to respond to build on what Steve said, if you see, the QDMTT was brought into the rules at the very last minute. For the longest time, the first bite of the apple was given to the developed countries. And at the South Centre, what we saw was that the reason the QDMTT was brought in, was because the developed countries realized that developing countries are going to respond with a slew of alternative minimum taxes and they wanted to constrain the taxing right by having the power to decide what would be a qualified domestic minimum top-up tax through a very rigorous peer review process. So what we have now is a QDMTT which puts great constraints on what kind of a source tax a developing country can impose. So the objective behind the QDMTT is not benevolent — to let developing countries have the first bite — it's to constrain their potential responses to the income inclusion rule.

What we have been advising our member states is that they should bring in three basic policy responses. Number one, alternative minimum taxes, either based on turnover or on tangible assets. So in the case of Argentina and Shell, where you had $200 million in revenues, you would tax 1 or 2 percent of those revenues in case they paid zero. So you would be guaranteed of at least some money in your pocket. That's the first option. The second option which we gave to them was to deny deductions to payments made to low-tax jurisdictions. This was the original undertaxed payments rule. You don't need any treaty or whatever, you can just bring this in. And this is much easier and is being done by Australia and Ireland, in fact. And the third option — and all of these are complementary really — the third thing which we have told is to rationalize tax incentives, which really have been excessively generous.

And this is one of the benefits of pillar 2, that at least some of these excessively harmful tax incentives can be re-looked at. Now, one of the responses we hear is that if a country brings in an alternative minimum tax, it may not be creditable in the country of residence. The U.S. may say, for example, that, "Oh, we won't give you a tax credit, but you know what? Double taxation is primarily the headache of the country of residence. It's not the headache of the country of source." And if the country of residence refuses to give tax relief, the sufferer will be its own MNE. So developing countries don't really have much to lose in that sense. And given that they do have to respond, these are some of the options that they should be thinking.

Cara Griffith: I think that's very interesting. Thomas, I want to turn to you again, to let you respond and then also give your own opinion on how you think developing countries should be responding to pillar 2.

Thomas Lassourd: Thanks. So I do agree with a lot of what Abdul said, and there's one — and it's a good point — that around how countries will treat alternative minimum taxes, there's a bit of uncertainty now. We don't know yet. If we just read the GLOBE rules strictly, to be considered a covered tax, any tax, including an alternative minimum tax, should be based on measure of profits. So in theory, minimum taxes based on turnover would not be considered covered taxes for the purpose of calculating effective tax rates. And so that might lead to recent countries refusing to give credit for those alternative minimum taxes if they're based on turnover. But no one has tested that possibility yet. So maybe that's where the interest of European countries can still be somehow pushed forward and using the framework can maybe change the way they interpret some of the rules if there's enough of a constituency behind.

So I like this idea, Abdul. I really stand behind. I also think that, first of all, coming back to my previous point around how to respond, before choosing what's the best response, you should really make a good assessment of the situation in your country. Some countries might not even have that much excess profit that would be put there. And so if the ETR for all of the international entities present in their countries is above 15 percent, there's probably no need to go ahead and waste administrative resources on quick implementation. It's more about what's the size of the revenue stake that will determine what's the right response. And so sometimes it'll be alternative minimum tax, could be a QDMT if a country has the right level of administrative capacity, is close enough with the OECD that they want to really implement the rules the way they were designed.

And I also agree with Abdul, there's an opportunity here around tax incentives. It was — a lot of them are considered wasteful. A lot of countries were starting to understand that they could review their incentives even before pillar 2. And maybe that's the opportunity, the momentum they needed to really start this process and get the political capital, the window of opportunity to go ahead and review all of those incentives. Removing some of the most detrimental, like tax holidays that have very limited impact actually on investment, and replace them maybe with other incentives that might be GLOBE-compliant but also more effective in terms of attractive investment and less costly for their revenue base.

Cara Griffith: So you brought up tax incentives, which I wanted to get Stephen and Allison's opinion on. Allison, you mentioned something in your opening and Stephen, I was just interested in your opinion because this topic seems to come up over and over as to whether or not the developing countries can continue to use tax incentives post-pillar 2 implementation. So Stephen, maybe I'll turn to you first and then Allison second.

Stephen Shay: The short answer is yes, but. The incentives are affected differently depending on the incentive. So the incentives that are most adversely affected by pillar 2 are those that are tax holidays and things of that nature. The incentives that are less affected by pillar 2 are in the nature of investment incentives. So very beneficial depreciation, and that has a lot to do with the interaction with accounting rules. How much that was intended is not entirely clear. So the incentives picture is a little complicated, but a point I would make is, you've asked about tax incentives. There's no question that quite a number of countries are looking at the issue of, can they adopt alternatives in the form of grants, or rebates, or so on? And the pillar 2 rules on the one hand are quite clear. You can't simply adopt a rebate system that's rebating to the taxpayer what they would've paid under pillar 2.

But where that line is, if you have an objective incentive system to benefit an industry that isn't tied into pillar 2 taxes, then that becomes much less clear. It seems that at a far end of that spectrum, it should be acceptable just as any country can adopt their own system of grants or expenditures. But when it's a workaround, then it's not really intended to be treated as acceptable. And what could be done about that, and what the response is, is unclear. But what makes it even more unclear is as of now, that appears to be left to a peer review system. And until we have some of those peer reviews, we won't know answers. So having been asked this question by more than one country, that's pretty much all I can say, is — I can say, here are the rules. We know there's a bright line, which should be OK if you adopt grants.

There's a very gray area where, if you're just trying to do a workaround, you're at some risk of being found that — that is, your QDMTT is shot down as a result. And so for that, we don't yet have an answer. If I could just pick up on one issue about QDMTT and going outside of it and so on, or not adopting it, and that is the political issue. If you're a politician in a country, even if the amount is small, but your opposition wants to point out that the tax is being paid to another country that you could have collected, that's a hard political fact to have to deal with. And so we shouldn't just look at the tax analysis. We have to take into account the political economy realities as well when we think about QDMTTs. Allison, I think I took all your time maybe.

Allison Christians: You said the things that needed to be said. I think I could just add an observation to this, is where's the GAAR for governments here, right? The general anti-avoidance rule. So a lot of governments spend a lot of time worrying about, well, what's the wily taxpayer going to do to avoid whatever rule we put in place? And then you build an international tax system, and you start asking, well, what are the governments going to do to stop wily governments from skirting whatever obligations they've agreed to? So it's interesting to kind of see this play out where what we are talking about now is that the basic economic fact has not been changed by GLOBE. And that is, that every country is going to use every tool they have at their disposal to attract capital, including by undermining other countries' interests.

And if the GLOBE is supposed to stop that, and also stop taxpayers from doing all of the things that Abdul was talking about — transfer mispricing and all of this stuff that you hinted at there — this system, it started with a small book, but like every tax system, will balloon into a massive edifice of rules and anti-avoidance rules. And in the peer review process, if that's not public, if it's not obvious to everyone that what's happening here is that countries that have a lot of resources and are creative and bold and innovative will jump in and figure out some way to give those companies money. And it will take time, it will take a lot of time to fix that. And the GLOBE rules, I don't think the OECD is up for that task. I don't think these rules are written for that level of scrutiny and understanding the institutional task that you've given yourself.

But it's just a big piece of this program that we think that countries sign on to agreements and then do the things they said they're going to do. That's not what they do. They sign on and they agree to things, and then they go about trying to figure out, well, how do I give the taxpayer money? How am I going to do it now that these people over here have said I can't do it in fashion A? How do I do it in fashion B for as long as I possibly can? And I think I add to that, that Abdul, when you talked about deduction denial, I've suggested that as well, but you see you're going to get into trade obligation, free trade problems as well. I think there you're going to see resistance, you're going to see taxpayers suggesting that you can't do that and still call it an income tax, or talking about fair and equitable treatment, or any kind of number of problems. And those stabilization agreements are lurking.

So I think when you say, well, this is what a country should do, we know for sure that's what countries are going to do, we're not going to be able to see it. We're not going to be able to be like, oh look at them getting around these rules, and now what are we going to do about it? I think it's going to be, this is just the start of the next cycle of contestation. We have an agreement on a big mansion with a bunch of empty rooms. We see the picture, the design, but we have not populated it with all of the detail that is going to show us what we've actually created here. And until you see how wily politicians and wily lawmakers figure out a way around, you won't know how you're going to defend yourself against that. And I just want to add one more thing, which is, the same logic that has been around for 100 years with respect to source taxation.

And that is, that when there's double taxation, the source country actually does bear the burden of the tax. Even though that's not fair and that's not good, but they do because if the country of residence is not giving a tax credit, then the taxpayer is maybe going to argue with the U.S., you should give me a foreign tax credit. But they're also going to look at that source tax and say, well, that's a cost — a pure cost — and I can go somewhere else and not pay that cost. So it's always been a principle in international tax that the source country bears its own tax because it impacts how willing companies are to make those investments. So in the short term, you might get a little more tax. In the long term, if there's double taxation, residence country wins that fight pretty much, I think.

Cara Griffith: Yeah, it's amazing how quick people learn to change their behavior. Thomas?

Thomas Lassourd: I think Anarella raised her hand before me.

Cara Griffith: Oh, sure. Anarella?

Anarella Calderoni: Thank you. I think I'm probably going to say something similar to you, Thomas, but it made me think about the barriers to exit for companies. I think a lot of us eat, sleep, and breathe tax, and we don't stop to think that there are other things that companies look for in their investment decision strategy, and multinational entities can be incentivized in other ways to remain in a jurisdiction, such as more attractive factors of production, or friendly investment climate, or working visas for employees, for example. And also, we should keep in mind that a lot of companies are also not under the scope of GLOBE. So those are just some aspects that can come into play here. And Thomas?

Thomas Lassourd: Thanks. Actually it's a different point, but it's complementary. I've a little bit to say on those questions around the impact on investment of GLOBE rules. It's important to associate not just the nature of finance and tax authority, but also the parts of government that are in charge of investment law and policy. It seems obvious, but in a lot of developing countries that's not the case. They don't really speak to each other or not enough. And so, as Steve was saying that a lot of countries have yet to realize what's the content of the GLOBE rules, there may be some awareness already in tax administrations and ministries of finance. There is very little awareness in those corners of governments. So any response would probably associate these professionals who work on investment codes.

They're often responsible for granting and tax incentives or for designing subsidies or those workarounds that Allison was describing. So it's important to have an integrated approach, maybe create an intelligence task force and consult every part of government to have a coherent approach with respect to pillar 2.

Cara Griffith: Abdul, did you want to respond?

Abdul Muheet Chowdhary: Yes, I just wanted to add two points building on what Allison said. One is that we still don't have conclusive evidence on the role of tax treaties in basically bringing in investment. We don't know for sure that because we have a tax treaty, it has helped bring in investment. So this concern of double taxation, I would say is not substantiated by clear empirical research, which proves that the fact that you cannot resolve this would mean that the company would go away. So that's something to keep in mind in the context of what Allison said, that even if there is no tax credit in the country of residence, we still don't know for sure empirically and conclusively what the implications of that would be. And the second point I wanted to make is that countries will have to really keep this in mind as they weigh the options of deciding to go with the GLOBE.

If they feel risk averse and they want to go with the GLOBE, then there is the other cost of compliance with the GLOBE, which, as mentioned, is likely to be extremely high. And then you have the other factor of continuously evolving regulations, where you have so-called agreed administrative guidance, which is becoming more and more complex. And one of the real questions which the OECD should be thinking about is to reform the process of governance through which these rules are made. Nobody really knows how the so-called agreed administrative guidance was agreed upon. It's a completely opaque process. And this opacity, which permeates the inclusive framework, has been really one of the key reasons why we had a vote in the U.N. recently to have a framework convention which would decisively shift power towards the U.N. instead of the OECD. So I hope the OECD learned some lessons at least.

Because from the two-pillar solution, really only the GLOBE rules are actually going somewhere. So if they want to salvage this part of it at least, then the least they can do is clean up the governance issues which have really led the developing countries to move towards the United Nations.

Cara Griffith: Stephen, did you want to respond?

Stephen Shay: Actually, I was going to build on something Allison was talking about, which is the need for transparency and just not limit that to governments. I think just what Abdul put up at the beginning, the Shell country-by-country data, which they, I guess, have disclosed on their own volition, they should at least get credit for that, and we would hope other companies would do the same. And indeed, and my own personal view is, it should be mandated over a broader range of companies. And that's not to create something to shoot at. I think what Abdul put up before, for me, raises as many questions as it answers, but I'm assuming that Shell will have answers, or should have answers. And that's a kind of dynamic that I think would be positive for this overall process of countries and companies trying to work through what the right answer is. That's just a quick comment.

Cara Griffith: I couldn't agree more. There is a need for transparency here, and there does seem like there has been, as Abdul mentioned, there's been an opaqueness with regard to the whole process, and it's hard to see behind the curtain as to who's pulling what strings and who's doing what. And additional data and transparency would certainly be welcome. Anarella, I want to turn to you for at least one more question and just talk about, in terms of the tax administrations, they're still certainly facing disadvantages. What additional support do they truly need in order to either make pillar 2 happen in their world, or to make a determination that it's not, and they move towards something else? What would benefit the developing countries?

Anarella Calderoni: Thank you, Cara. I'll try and be quick here. I'd like to answer this question in two parts. First, by stepping back and realizing that although pillar 2 and GLOBE rules are all we can talk about in the international tax world right now, from a developing country perspective, you do need to have the basic building blocks of what makes a tax administration strong: the ability to exchange information, a comprehensive risk analysis system, transfer pricing regimes. And I think it's important to note that GLOBE isn't the most important of these. It is definitely important, but if you're not able to control the multinational enterprises in the first place, then it's not going to be as effective. So keeping that in mind from a developing country perspective.

And then secondly, I think that we're asking this question of what disadvantages are there, a little too early. I think it's going to become more clear once there's more practical experience and results because right now it's mostly just estimated impacts. At that point, then countries will be more prepared to say what works for them, what doesn't. And in terms of more support, for example, it could be organizing their concerns and putting them on the international table through something like what Abdul mentioned, the platform for tax collaboration in Latin America, or sorry, the one at the U.N., and there's also one for Latin America and the Caribbean. There was a summit in Cartagena recently last year.

Then, for example, we've also had a country reach out to us at CIAT to make a proposal for the calculation of amount B of pillar 1. And that was something we coordinated with speakers from across the continent, the OECD, ATAF, and centers like the South Centre. All of these regional organizations I think are going to be key to support the advancements of these international rules to make them more equitable.

Cara Griffith: Wonderful. Thank you. This has been so informative and interesting. I want to encourage those that are listening, if you want to send in comments to our events inbox, we would be glad to take them. In a lot of ways, hearing what issues are out there, understanding the concerns of the developing countries, and for us being able to then put that to a panel like this, I hope is helpful as we move forward and try to either implement pillar 2 or develop a better system going forward.

I want to thank the panel today. You all were terrific, and it was very informative, and I hope to have each of you on again for another panel. We'll continue to do updates on what is going on in the developing world and in the world of international taxation. So thank you very much, and I hope everyone enjoys the rest of their day.

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