Introduction The Russian invasion of Ukraine has triggered a profound macroeconomic disruption across Central and West Asia, characterized by soaring commodity and energy prices, disruptions in supply chains and shifts in trade and capital flows. This conflict, while marked by adversities, has also yielded certain positive spillover effects, including increased re-exports of goods to the Russian Federation, an influx of affluent Russian migrants fostering growth in various sectors like hospitality, real estate, and finance, as well as the relocation of businesses and Foreign Direct Investments (FDIs) from the Russian Federation to many developing economies in the subregion. Russia's recent suspension of double tax conventions (DTCs) with countries deemed “unfriendly” (including low taxing jurisdictions like Cyprus, Malta, Ireland, and Singapore) is expected to intensify this trend, potentially heightening tax competition. Asian Development Bank’s developing member countries (DMCs) across Central and West Asia have long recognized FDI as a catalyst for growth and economic transformation. Many have sought to attract it by creating a tax-friendly environment for international investors and multinational enterprises (MNEs) through investment incentives and DTCs. Despite the widespread use of tax incentives, their economic impact and net benefits are poorly understood, often resulting in revenue loss for governments without evident value. While DTCs aim to alleviate double taxation and facilitate cross-border trade and capital flow, they are increasingly perceived as potential avenues for tax abuse. Developing countries reportedly lose billions in revenue annually due to base erosion and profit shifting (BEPS) practices, where MNEs exploit gaps and mismatches in tax rules and treaty networks to avoid paying taxes. The intricacies of such practices, usually shrouded in complex financial schemes and opaque international corporate tax structures, often surpass the administrative capacity and auditing capabilities of developing countries to adequately address them. The rise of the digital economy has also disrupted traditional tax rules, which typically allocate profits based on physical presence within a jurisdiction, thereby compounding the challenges for domestic revenue mobilization. As BEPS and the global minimum tax proposal continue to reshape the landscape of international taxation, developing countries in Central West and Asia need to reevaluate their tax incentives. Considering factors beyond favorable corporate tax treatment to attract foreign direct investments, all while safeguarding their tax system against international tax avoidance and treaty abuse, is a must. Participation in International Tax Cooperation on BEPS Amid growing discontent with the outdated global tax architecture, the Organization for Economic Cooperation and Development (OECD), under the auspices of the G20, developed a 15-point action plan on BEPS. The aim is to restore coherence to international tax rules on cross-border profits, align taxation with real economic substance, and improve tax transparency, certainty, and predictability for businesses. Over 140 countries, including many Central and West Asian developing nations (refer to the table below), have joined this initiative through the OECD-led Inclusive Framework on BEPS (BEPS IF). By joining the BEPS IF, countries collaborate to ensure effective implementation of the BEPS package, with a specific focus on the four BEPS minimum standards[1]. This involves a peer review process that evaluates and monitors the implementation of these standards by each member country of the BEPS IF. Joining this framework can lead to significant changes in a country's tax policies, treaty structure, and administrative practices, which might understandably raise concerns for DMCs. Conducting a preliminary self-assessment enables governments to gauge potential revisions needed within domestic legal, treaty, and administrative framework, as well as the necessary resources, including human capital and IT systems. These resources are essential for the successful and timely implementation of the said four minimum standards. This assessment will allow DMCs to make informed decisions and should include a review of a country’s: Preferential tax regimes that provide benefits to geographically mobile business income (such as income from intangibles and financial services) without requiring substantial activities, leading to a harmful impact on other countries’ tax base[2]. Practice related to the issuance of certain “in-scope” tax rulings[3]. Domestic legal and administrative framework to impose and enforce country-by-country reporting (CbCR), confidentiality, and its appropriate use. Exchange of Information (EOI) framework for spontaneous exchange of in-scope tax rulings and automatic exchange of CbCR. Existing DTCs against Action 6 (preamble text and the inclusion of a Principal Purpose Test (PPT) and/or a Limitation-on-Benefit (LOB) provision) and Action 14 (a Mutual Agreement Procedure (MAP) provision in conformity with the latest OECD Model Convention), in combination with a preliminary analysis of the government’s interest in joining the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) under Action 15. Position regarding the July 2023 Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy to ensure a fairer distribution of profits and taxing rights among countries and jurisdictions with respect to the world’s largest MNEs. Participation of DMCs in Central and West Asia in International Initiatives for Cooperation on Taxation (as of 20 November 2023)[4] Country Global Forum on Transparency and Exchange of Information for Tax Purposes Convention on Mutual Administrative Assistance in Tax Matters (MAC) OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) Two-Pillar Solution (2023 Outcome Statement) Afghanistan* No No No No No Armenia Yes Yes Yes Yes Yes Azerbaijan Yes Yes Yes Yes Yes Georgia Yes Yes Yes Yes Yes Kazakhstan Yes Yes Yes Yes Yes Kyrgyz Republic No No No No No Pakistan Yes Yes Yes Yes No Tajikistan No No No No No Turkmenistan No No No No No Uzbekistan Yes No Yes No Yes * ADB placed on hold its assistance in Afghanistan effective 15 August 2021. Impact of BEPS on Tax Incentives and International Investment The base erosion and profit shifting reforms represent a remarkable achievement in the realm of multilateral tax policy development and coordination. Among the pivotal reform proposals, members of the BEPS IF collaboratively developed a consensus-based response to address the tax challenges stemming from digitalization of the economy. This takes the shape of a two-pillar solution[5]: Pillar One aims to redistribute taxing rights to market jurisdictions, whereas Pillar Two seeks to establish a minimum level of effective worldwide corporate taxation of 15% for large MNE Groups with annual revenues at or above EUR 750 million. In cases where a country does not tax an in-scope MNE entity at the minimum rate, such as by offering tax incentives that drive the effective tax rate below 15%, the global minimum tax proposal allows other countries to impose a top-up tax to bring the effective rate to the agreed minimum. From an investment perspective, the BEPS proposals could bring about profound changes in the way countries in Central and West Asia compete to attract inward FDI through tax incentives, impacting both BEPS IF members and non-members alike. While the Action 5 Minimum Standard aims to eliminate harmful design features of certain preferential regimes, the global minimum tax under Pillar Two will render tax incentives that allow in-scope MNEs to generate substantial low-taxed profits in a jurisdiction without providing substantial tangible investment or jobs de facto ineffective. Countries offering such incentives may not only forgo the tax revenue associated with the tax concessions that no longer serve them but also risk witnessing this revenue being collected by other jurisdictions at their expense—unless they redesign their tax incentives and/or introduce a qualifying domestic minimum top-up tax (QDMTT) themselves. While some tax incentives will be less likely affected by the global minimum tax proposal (e.g., incentives that encourage capital- or labor-intensive investments or tax incentives that require a certain level of investment and employment in the jurisdiction), and some not affected at all (e.g., tax incentives targeted to small and midsize enterprises (SMEs) and smaller MNEs or out-of-scope income, such as shipping income), DMCs must reassess their existing tax incentives and exercise caution when considering new ones. Ways to Enhance International Competitiveness Beyond Tax Incentives As the global minimum tax takes effect in 2024, factors beyond favorable corporate tax treatment are expected to play a more significant role on investment location decisions. Tax certainty. For investors, taxes represent a business cost. Like any other cost, investors require tax to be a stable, predictable, and plannable factor for the long term when building a viable business case for their investment projects. While tax incentives may hold appeal for short-term investors, as they can be withdrawn at any time, designing them is becoming more challenging due to the demands of Pillar Two. Long-term investors, however, prioritize mutually collaborative and enduring relationships with governments. They are known to be willing to accept a higher tax burden as a trade-off for tax certainty and a lower risk of costly tax disputes. From the government's perspective, greater tax certainty results in improved taxpayer transparency, governance, compliance, and, ultimately, higher tax revenues. Collaborative compliance relationships. Collaborative relationships supporting tax certainty also offer significant benefits to tax administrations. These benefits include enhanced compliance, more efficient auditing, streamlined data gathering and processing, reduced dispute resolution procedures, and improved governance through formalized authorizations and procedures. For countries with capacity limitations, such as many developing countries in Central and West Asia, these savings in effort and cost are particularly valuable. It seems more sensible to invest in cooperative compliance rather than extensive auditing. For a collaborative compliance relationship to exist between tax authorities and taxpayers, open and transparent communication, as well as mutual trust, are crucial. The success of such a relationship depends on the attitudes and a change in mindset of both parties. MAP framework. Foreign investors benefit from a well-functioning MAP practice by gaining a swift and effective resolution to any unintended double taxation issues they may face without the need for lengthy and costly legal intervention in domestic courts. This process ensures tax certainty and prevents disputes, providing investors with assurance and stability in their cross-border business activities. For developing countries, implementing a MAP framework in accordance with Action 14 Minimum Standard, which includes the appointment of a competent authority function and the issuance of regulations and procedures for easy taxpayer access and timely processing of MAP requests, typically does not significantly impact their capacity as their MAP-caseloads are generally low. Balancing FDI against International Tax Avoidance and Treaty Abuse Maintaining international competitiveness while combating international tax avoidance and treaty abuse presents a complex challenge. Despite the presence of anti-abuse measures in tax treaties and domestic laws within Central and West Asian economies, the main issue for tax administrations lies in effectively identifying potentially abusive schemes without creating unwarranted suspicions that could discourage genuine investors. Identifying abusive cases requires an understanding of complex international tax schemes, labor-intensive audits of contracts, examination of factual dealings, and conducting inquiries abroad to ascertain the extent of potential avoidance or abuse. Tax avoidance or treaty abuse encompasses a wide range of topical areas of DTCs. Transfer pricing and withholding taxes remain focal points in international taxation, demanding substantial resources and attention from tax administrators. Transfer pricing involves setting prices for internal transactions between affiliated companies. International tax administrations predominantly focus their efforts on implementing the OECD Transfer Pricing Guidelines, which are widely accepted and obligatory for countries participating in the Inclusive Framework. Collaborative compliance relationship with businesses and international cooperation through bilateral or multilateral advance pricing agreements (APAs) and information exchanges—particularly the compulsory spontaneous exchange of tax rulings (Action 5) and automatic exchange of transfer pricing country-by-country data (Action 13) under the minimum standards—are crucial in preventing potential misapplications and ensuring compliance. Withholding taxes are another area where tax avoidance often occurs, notably through "treaty shopping." Schemes, such as the interposition of shell companies as conduits, the creation of dual-resident company structures, or dividend stripping arrangements, can exploit a country’s DTC to avoid or reduce withholding taxes, potentially putting substantial tax revenue at stake. Action 6 of the minimum standard aims to prevent treaty shopping by incorporating anti-abuse provisions in DTCs, allowing countries to deny treaty benefits in inappropriate circumstances. Preventing treaty shopping and abuse demands a well-defined audit strategy based on a careful assessment of the main tax leak risks across a country’s DTC network. Analysis of income flows, recipient data, and risk indicators is essential to select cases for further examination. Strengthening capacity in this area requires enhancing information gathering capabilities and cultivating expert knowledge of international taxation within the tax administration. Establishing specialized units dedicated to combatting international tax avoidance and expanding existing transfer pricing units can significantly bolster operational capabilities. This is especially crucial given the intricate interplay between withholding taxes and transfer pricing issues. Policy Recommendations In navigating the evolving global tax landscape, developing countries in Central and West Asia, particularly those not yet part of the BEPS Inclusive Framework, should adopt a proactive approach and consider the following measures: Assess preparedness for BEPS minimum standards and global minimum tax proposal. Conduct a preliminary self-assessment to determine the relevance of the minimum standards in addressing the country-specific BEPS concerns and identify the necessary revisions needed within the domestic legal, treaty, and administrative framework for implementing the standards. Identify the presence of entities in in-scope MNE Groups for the application of the global minimum tax, assess their economic activities, and determine the types of tax incentives offered to them. Evaluate whether existing tax incentives might reduce the effective tax rate of those entities below 15%, potentially triggering the application of top-up taxes in other jurisdictions. Evaluate domestic responses. Evaluate the efficiency and effectiveness of tax incentives by conducting a cost-benefit analysis and consider options for reducing or reforming the incentives. Determine the feasibility of introducing a QDMTT to avoid unnecessary revenue loss and assess its compatibility thereof with international investment agreements and tax stability clauses. Engage stakeholders for input on potential impacts and strategies. Prioritize tax certainty and compliance facilitation. Establish consistent policies, clear and non-controversial laws, accessible and knowledgeable tax administration officers, defined reporting and information requirements, advance guidance on the interpretation and application of laws, and effective dispute resolution mechanism. Foster collaborative compliance relationships with taxpayers to support tax certainty and to enhance compliance. Establish a MAP framework in accordance with the minimum standard and utilize existing expertise within tax treaty negotiators to facilitate this process. Develop capacities to address international tax avoidance and treaty abuse more effectively. Enhance information-gathering capabilities within tax administration, for example by strengthening domestic anti-avoidance rules and reporting requirements for paying agents. Adopt standardized reporting frameworks like CbCR and Common Reporting Standard (CRS) to ensure transparency and facilitate international information exchange. Develop a well-defined audit strategy based on key tax leak risks across the DTC network by: (a) Examining the flows of foreign payments to countries where the DTC provides for zero or low withholding tax rates, prioritizing larger and high-risk transactions.(b) Identifying the recipients of those payments to determine potential conduit arrangements through affiliated companies, trusts, or other fiduciary entities.(c) Selecting the cases based on risk indicators for additional information requests to paying or claiming agents before granting relief or refund at source; and(d) Establishing a digital database of foreign payments and their recipients, allowing tax officials to verify whether a refund or relief has already been granted. Establish specialized units within tax administration dedicated to combatting international tax avoidance. Invest in training programs to enhance the expertise of tax officials in understanding complex international tax structures and schemes. [1] The OECD/G20 BEPS IF Minimum Standards are the following: 1) BEPS Action 5 on countering harmful practices, 2) BEPS Action 6 on preventing treaty abuse, 3) BEPS Action 13 on transfer pricing documentation and country-by-country reporting (CbCR), and 4) BEPS Action 14 on improving dispute resolution mechanisms. [2] Key factors for harmful regimes are the following: 1) no or low effective tax rates (gateway criterion), 2) ring-fenced from the domestic economy, 3) lack of transparency, 4) no effective exchange of information, and 4) purely tax-driven without substantial activities. [3] This includes six categories of taxpayer-specific rulings: 1) rulings relating to preferential regimes, 2) unilateral advance pricing agreements (APAs) or other cross-border unilateral rulings in respect of transfer pricing, 3) cross-border rulings providing for a downward adjustment of taxable profits, 4) permanent establishment (PE) rulings, 5) related party conduit rulings, and 6) any other type of ruling agreed by the FHTP that in the absence of spontaneous information exchange gives rise to BEPS concerns. [4] Various CIS countries, including Armenia, Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbekistan, are parties to the 1992 Agreement between the Governments of the State Parties of the Commonwealth of Independent States on the Agreed Principles of Tax Policy. Kazakhstan withdrew from this agreement in 2022. [5] Of the current 145 members of the BEPS IF, five member countries did not sign the July 2023 Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy: Belarus, Canada, Pakistan, the Russian Federation and Sri Lanka (as of 15 November 2013). Resources OECD. 2022. Tax Incentives and the Global Minimum Corporate Tax: Reconsidering Tax Incentives after the GloBE Rules. Paris. UNCTAD. 2023. The Global Minimum Tax and Investment Treaties: Exploring Policy Options. IIA Issues Note. Issue 4. Y. Miyaki, S. Fung, and B. McAuley. 2022. Tax Expenditures Drain Revenues Needed for Development. Development Asia. 30 September. Ask the Experts Yuji Miyaki Public Management Specialist (Taxation), Public Sector Management and Governance Sector Office, Sectors Group, Asian Development Bank Yuji Miyaki specializes in the development and implementation of policies related to public finance and capacity development in Central and West Asia. Prior to ADB, he help positions at the Ministry of Finance and the National Tax Agency in Japan. His international tax policy experience includes negotiating tax treaties and designing international taxation through tax law and regulation revision. He also worked as an administrator at the OECD Centre for Tax Policy and Administration. Sissie Fung International Tax Policy Specialist (Consultant), Asian Development Bank Sissie Fung is an independent international tax policy expert, working with ADB since 2017. She supported more than 15 developing countries across Asia and the Caribbean in strengthening domestic resource mobilization through capacity development in the areas of tax policy review, tax expenditures analysis, international taxation (BEPS, tax treaties and information exchange), progressive taxation on income and wealth, environmentally related taxes, and subnational taxes. She previously worked with the UNDP and the Kingdom of the Netherlands. Hans Mooij International Tax Administration Specialist (Consultant), Asian Development Bank Hans Mooij is an independent international tax expert with experience in policy, treaty negotiations, administration, and dispute resolution. He has worked with the Netherlands government, the OECD, the UN, and both public and private clients. He served as a professor at the International Tax Center Leiden and lectures at universities in both developed and developing countries. Leave your question or comment in the section below: View the discussion thread.