Minimum Tax Rules to Squeeze Investment of Multinational Companies Up to 2%

JAKARTA. The United Nations Conference on Trade and Development (UNCTAD) stated that the implementation of pillar II in the global tax agreement will reduce the flow of direct investment or Foreign Direct Investment (FDI) from multinational companies in all countries, by 2%.

In its report entitled World Investment Report 2022, UNCTAD assessed that the clause of applying a minimum tax rate of 15% would make multinational companies move their investments from jurisdictions with low tax rates to high taxes.

The existence of pillar II is considered to increase corporate income tax (PPh) from multinational companies on their overseas profits. So far, on average they only pay less than 20% tax, even though most developing and developed countries set the rate at around 25%.

However, under the pillar II clause, multinational companies that are taxed below 15% will be subject to top-up by the jurisdiction that applies the clause. As a result, the corporate income tax that must be paid is greater than usual.

"Implementation of top-up taxes can make a big difference in revenue collection," said UNCTAD in the report released on Thursday (9/6).

Alternative Incentives: Finance, Infrastructure and Subsidies

UNCTAD stated that this would have a significant impact on countries that promote investment by offering tax incentives.

Some of the incentive schemes offered are varied, ranging from accelerated depreciation, tax holidays, both exemptions from all tax payable or part of them, as well as various other incentives.

UNCTAD estimates that the accelerated depreciation facility can still be used. Meanwhile, the tax holiday facility will no longer be attractive to investors.

Thus, countries that have been relying on tax incentives to attract investment must prepare alternative policies that will not be affected by Pillar II.

UNCTAD predicted competition from countries to attract investment will shift from offering tax facilities to financial incentives, infrastructure provision,s or subsidies.