Economic policy

Rene Gayle | Rethinking tax incentives as an economic policy tool – Part II | Remark

Leaders of GLOBAL FINANCE from the Group of the 7 Richest Nationals recently agreed to approve a minimum global corporate tax rate of 15%. The first part of this article examined the resulting wave of global concern about the likely impact of this historic decision, particularly on developing countries, such as Jamaica, which have grown accustomed to using tax regimes preferences as a tool to better compete and attract foreign investment. . This Part II suggests proactive measures that regional policy makers can consider to mitigate the likely impact.

With the G20 meeting fast approaching, regional policymakers should actively conduct impact assessments and design negotiation, response and mitigation strategies even now, when much remains to be determined. In fact, now is the perfect time for Caribbean governments to come forward, voice their concerns and suggest alternative approaches.

Dr. Kari Grenade, a Caribbean economist, for example, has recommended that Caribbean governments work with other developing countries and engage the G20 on a mitigation framework for developing countries that should include, among other elements strategic, explicit compensation for lost revenue. Given the higher tax revenues that should be redirected to donor countries, it is argued that such a strategy should not be difficult to implement. The UK alone (based on data from the International Institute for Policy Research, a leading UK-based think tank) is expected to generate an additional £7.9 billion in revenue annual taxes thanks to the global minimum.

Another possible mitigation proposal is for the most affected countries to have preferential access to “Building Back a Better World” (an initiative launched at the recent G7 summit to compete with China’s Belt & Road initiative) by offering loans to developing countries to combat climate change. , health and safety, digital solutions and gender equality. However, the details remain unknown and some are already wary of the conditionalities that should be attached to these loans, including express disincentives to engage with China’s Belt & Road initiative.

Regional Collaboration Opportunity

The lack of negotiation and the inability to rethink and rethink our economic incentives policy could result in Caribbean countries being caught off guard if the proposals are implemented. There is tremendous opportunity for regional collaboration and cooperation on the issues at stake, including recognizing our collective strength in jointly advocating on the issues and engaging in the global negotiating mechanism. in block. Yet with less than a week to go before the G20 meeting, CARICOM (a long-time supporter of tax harmonization in the Caribbean) remains silent on an issue that will have a huge impact on so many of its constituents.

The Jamaican government has not yet expressed its position on the global minimum rate.

However, a few CARICOM countries, such as Barbados and the Bahamas (which are considered low-tax and no-tax jurisdictions, respectively), have spoken out against the proposed rate, with some calling it “yet another case of wealthier nations moving the goal post”. Barbados, for example, which currently has a corporate tax rate of 5.5%, will have to almost triple its rate if the 15% tax floor comes into effect. Barbados has instead proposed an “economic substance” exclusion, which it hopes will allow it to continue to offer eligible multinationals the existing rate. However, such a proposal is unlikely to gain traction without wider support.

The Bahamas, which has a zero percent corporate tax rate, also said it would push back on the proposals because it remains within a state’s sovereign prerogative to determine its own tax rules. While this is true, given the way the proposed tax rules are supposed to work, it will not be advantageous for zero/low tax jurisdictions not to comply. Specifically, the default rule that will apply when a large multinational corporation establishes a subsidiary in a zero/low tax jurisdiction is known as the income inclusion rule. Based on this rule, if a multinational company establishes a subsidiary in Barbados, where it is eligible to pay corporation tax of 5.5%, then the parent company will be liable to pay the difference of 9, 5% in its home country, thereby redirecting lost tax revenue back to the home country. This therefore significantly erodes the attractiveness of the lower tax rate of 5.5 percent, since the company will be forced to pay the difference in its home country anyway.

Jamaica’s tax benefits

In the case of Jamaica (which under its IMF program had begun to reduce discretionary tax exemptions), the government may have to raise the preferential corporate tax rates available to investors under laws such as Income Tax Relief (Large-Scale Projects and Pioneer Industries) and the Special Economic Zones (SEZ) Act, which offers a corporate tax rate of 12.5% ​​to investors in SEZs, in order to be deemed compliant with the global minimum. It will, however, be important for Jamaica to ensure that it does so in a manner that does not trigger potential claims for compensation from investors protected by applicable bilateral investment treaties or other agreements. commercial or contractual guarantees.

Time will ultimately tell what the introduction of a global minimum corporate tax will really mean for developing countries like those in the Caribbean region. In the meantime, decision makers cannot sit back and wait for the outcome to happen. On the contrary, the region should ensure that it is actively engaged in international discussions so that the interests of the region can be taken into account.

René Gayle is a lawyer and legal advisor. She can be contacted at [email protected]