The Use of Corporate Income Tax Incentives to Attract FDI After Pillar Two

  1. Executive Summary 
  2. Tax Holidays
  3. Investment tax Credits
  4. Accelerated Depreciation
  5. Investment Allowances
  6. Reduced Corporate Income Tax Rates
  7. Conclusion
Executive Summary
Whilst corporate tax incentives are by no means the only type of tax incentives that a jurisdiction could consider to promote foreign direct investment (FDI), they have traditionally been a key aspect of the overall tax policy.
The impact of Pillar Two on corporate income tax incentives will be considerable.  One of the policy reasons behind the Pillar Two global minimum tax is to end the so-called race-to-the bottom with jurisdictions competing on corporate income tax rates.
In a historic report from 2001 ‘Corporate Tax Incentives for Foreign Direct Investment‘, the OECD stated that there is considerable support for lowering statutory tax rates as a means to reduce a host country’s effective tax rate and promote FDI. 
This is less likely the case going forwards. After Pillar Two, simply reducing the statutory corporate income tax rate to a level such that this results in the jurisdictional GloBE effective tax rate (ETR) being below 15% could potentially result in top-up tax. 
There are also a number of other disadvantages with a very low corporate income tax rate, in particular, it may encourage profit shifting within MNE groups to take advantage of the low tax rate and may not result in any significant tangible investments in a jurisdiction. 
Aside from the benefits to the jurisdiction of having tangible infrastructure investments, not least the potential spill-over effects into other areas (eg transferable skills developed by training employees that can be used in other industries), the Pillar Two rules specifically ‘reward’ such investments. 
Given the importance of the substance-based income exclusion in determining Pillar Two top-up tax, expenditure-based incentives that are tightly defined to encourage qualifying investments are one of the key tax incentives post Pillar Two.
Accelerated depreciation also has an added advantage given its lower impact on the GloBE ETR.
Other tax incentives such as those relating to property tax, payroll tax, import tax and sales taxes are also often used. Their impact under the Pillar Two GloBE rules depends on the extent to which they impact on GloBE income or covered taxes.
There could potentially be some overlap if, for instance, a tax credit was given against corporate income tax for a proportion of an in-scope company’s employer payroll taxes.  See our article, Modelling the Impact of Payroll Tax Incentives Post Pillar 2.
In this analysis we look at the key corporate tax incentives and assess their potential FDI impact taking into account the Pillar Two GloBE Rules. 
Tax Holidays

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