The International Monetary Fund (IMF) has warned that corporate tax cuts in major economies can have negative effects on global growth. According to the IMF's October 2026 World Economic Outlook, a one percent cut in the average statutory corporate income tax rate among peer economies can prompt governments to reduce their own rate by around 0.4 percent. This can lead to a reduction in foreign output by up to 0.5 percent after two years as mobile capital shifts toward the lower-tax jurisdiction.
The IMF's analysis highlights the growing cross-border spillovers from corporate taxation as multinational companies increasingly rely on mobile intangible assets such as patents, software, and trademarks. The report notes that international efforts to curb profit shifting have changed the nature of tax competition, with governments turning to targeted tax incentives and measures aimed at attracting actual investment. Egypt is classified as part of the broader sample of Emerging Market and Developing Economies (EMDEs) used in the chapter's panel regressions.
The way corporate tax cuts are financed is critical to their impact beyond national borders, according to the IMF. Debt-financed tax cuts can hit foreign economies by pushing up global real interest rates, crowding out investment in other economies, and depressing global output. Deficit-neutral tax cuts generate much smaller negative spillovers because they do not create the same pressure on global interest rates. The IMF also warned against financing tax cuts by reducing public investment, which can weaken productivity and potential output over time.
Multinational corporations generate more than 20 percent of global GDP and 15 percent of global corporate profits, according to the IMF. The growing importance of intangible assets has allowed companies to separate the location of reported profits from the location of their underlying economic activity, creating significant opportunities for profit shifting. International measures introduced since the 2010s have reduced those opportunities, but the IMF notes that companies with a high share of intangible assets are around 2.5 times more sensitive to tax differences than other firms.
As profit shifting becomes more difficult, tax differences increasingly affect where companies actually invest. The tax sensitivity of new greenfield foreign direct investment has increased since 2017, with the average tax elasticity of new projects reaching around -1.4. Investment by existing foreign affiliates has also become more responsive to tax differences. A one percent increase in the effective marginal tax rate relative to peers reduces investment by around 0.17 percent, with this sensitivity doubling after 2017.
For emerging and developing economies, the IMF's analysis points to a different policy priority: strengthening tax enforcement rather than joining a race to lower corporate tax rates. Stronger anti-avoidance enforcement in emerging markets can raise CIT revenues by around 0.3 percent of GDP, broaden the tax base, and allow governments to maintain public capital spending. The measures also produce a small positive impact on GDP of around 0.04 percent.
The IMF recommends that governments prioritize transfer-pricing enforcement, controlled foreign corporation rules, and interest-limitation rules over broad statutory CIT cuts. Where investment incentives are needed, policymakers should favour cost-based measures, such as research and development (R&D) tax credits and accelerated depreciation, over profit-based tax holidays. The IMF also urges governments to preserve fiscal space for infrastructure and other productive public spending.
Key points
- Corporate tax cuts in major economies can weaken investment and output abroad by pushing up global interest rates and diverting capital.
- Emerging markets can gain more from strengthening tax enforcement rather than joining a race to lower corporate tax rates.
- The IMF recommends prioritizing transfer-pricing enforcement and cost-based investment incentives over broad statutory CIT cuts.
