The Organization for Economic Co-operation and Development (OECD) recently published detailed rules that are meant to assist in the implementation of a major change to the international tax system, which will ensure multinational enterprises (MNEs) will be subject to a minimum 15 percent tax rate from 2023.
These rules define the scope and set out the mechanism for the so-called Global Anti-Base Erosion (GloBE) rules. They introduce a global minimum corporate tax rate of 15 percent. The minimum tax will apply to MNEs which meet a set revenue threshold.
It is envisaged that the GloBE rules will provide a co-ordinated system of taxation that will ensure qualifying MNEs pay this minimum level of tax on income arising in each of the jurisdictions in which they operate.
The rules create a “top-up tax” that will be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, falls below the minimum 15 percent rate.
Kenya has several regimes which might be deemed to fall under the preferential tax regime. For instance, companies operating within export processing zones (EPZs) are exempt from corporate income tax in their first ten years of operation.
On the other hand, companies operating within a special economic zone (SEZ) are subject to corporate income tax of 10 percent in their first 10 years of operation in Kenya.
Companies operating in EPZs and SEZs may thus be required to pay a top-up tax in Kenya or where they are headquartered if they meet the criteria set out under the GloBE rules. This will reduce the fiscal incentive that they enjoy and in turn force the government to implement other equally beneficial non-fiscal measures that will still attract foreign direct investment (FDI) into these regimes.
There is no doubt that FDI plays a critical complementary role to domestic public and domestic private investment. The new tax rules will affect how countries will promote their attractiveness to investors outside the traditional realm of low tax rates and fiscal incentives.