The Global Minimum Tax and Special Economic Zones

This policy brief by the International Institute for Sustainable Development (IISD) examines the impact of the Pillar Two global anti-base erosion (GloBE) rules on Special Economic Zones (SEZs), particularly in developing countries. It argues that the Global Minimum Tax (GMT) reduces the effectiveness of traditional corporate tax incentives, prompting a need for countries to shift toward non-fiscal incentives and sustainable investment models.

• The Pillar Two global anti-base erosion (GloBE) rules require multinational enterprises (MNEs) with annual consolidated revenues exceeding EUR 750 million to pay a minimum effective tax rate (ETR) of 15% in every jurisdiction where they operate. If the ETR is lower, a top-up tax is applied via a qualified domestic minimum top-up tax (QDMTT), an income inclusion rule (IIR), or an under-taxed payments rule (UTPR).
• Common corporate income tax (CIT) incentives used in SEZs—including 100% exemptions, performance-based exemptions, and reduced fixed rates—are at high risk of being neutralized by GloBE rules. Because these incentives lower the ETR, in-scope MNEs may no longer benefit from them as the resulting top-up tax effectively transfers the foregone revenue to another jurisdiction.
• Research indicates that tax incentives in SEZs are often ineffective for long-term success and can lead to a 'race to the bottom.' While they may attract initial foreign direct investment (FDI), they do not compensate for poor infrastructure or a bad investment climate, and tax holidays have been linked to poor employment and export performance over time.
• Reforming SEZ tax incentives carries legal risks, particularly regarding investor-state dispute settlement (ISDS) claims under bilateral investment treaties (BITs). The risk is highest when fiscal stabilization clauses are present, though some tribunals have found that without such clauses, investors cannot reasonably expect a tax regime to remain unchanged.
• The document recommends that countries transition from profit-based incentives to cost-based incentives (such as capital allowances and depreciation), which are less impacted by GloBE. It also suggests leveraging SEZs as models for the energy transition by focusing on non-fiscal needs like renewable energy infrastructure and streamlined licensing.
• The Forum on Harmful Tax Practices (FHTP) has previously targeted SEZs that use 'ring fencing' or lack transparency. Since 2000, the FHTP's work has led to the abolition of eight SEZs and the identification of 31 others with harmful features requiring amendment.

APA

Ndubai-Ngigi, J. W., & Readhead, A. (2024). The Global Minimum Tax and Special Economic Zones. International Institute for Sustainable Development. https://www.iisd.org/system/files/2024-07/global-minimum-tax-special-economic-zones.pdf

Chicago

Ndubai-Ngigi, Joy Waruguru, and Alexandra Readhead. The Global Minimum Tax and Special Economic Zones. International Institute for Sustainable Development, 2024. https://www.iisd.org/system/files/2024-07/global-minimum-tax-special-economic-zones.pdf.

Wikipedia

{{cite report |last1=Ndubai-Ngigi |first1=Joy Waruguru |last2=Readhead |first2=Alexandra |title=The Global Minimum Tax and Special Economic Zones |publisher=International Institute for Sustainable Development |date=July 2024 |url=https://www.iisd.org/system/files/2024-07/global-minimum-tax-special-economic-zones.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ndubaingigi2024global, author = {Ndubai-Ngigi, Joy Waruguru and Readhead, Alexandra}, title = {{The Global Minimum Tax and Special Economic Zones}}, institution = {International Institute for Sustainable Development}, year = {2024}, month = jul, url = {https://www.iisd.org/system/files/2024-07/global-minimum-tax-special-economic-zones.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }