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Taxing Multinationals – Unforeseen Challenges for Developing Economies

The argument between some major multinationals – particularly Big Tech – and tax authorities has been going on for years. The EU in particular has fought with companies and opportunistic member states to ensure that Big Tech contributed fairly. However, nothing much happened and some Big Tech companies allegedly pay virtually no tax at all. This led to an international discussion within the developed world, and an agreement to introduce a minimum tax of 15% on the foreign profits of the largest multinational enterprises (MNEs). However, according to the UNCTAD World Investment Report 2022, this proposal may have major implications for international investment and investment policy and particular challenges for investment in the developing world. The report, entitled “International tax reforms and sustainable investment”, provides a guide for policymakers to navigate the complex new tax rules and to adjust their investment strategies.

The proposed reforms, planned for 2023 or 2024, aim to discourage multinationals from shifting profits to low-tax countries. Key implications are:

  • Increased tax revenues from multinationals for most countries.
  • Higher taxes on foreign profits of multinationals.
  • Potential downward pressure on new investment by multinationals.
  • Reduced effectiveness of low tax rates and fiscal incentives to attract investment.
  • Urgent need for investment promotion agencies (IPAs) and special economic zones (SEZs) to review investment attraction strategies.
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