The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition

Chen, Xuyang (2024): The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition.

Abstract

This paper investigates how the OECD's global minimum tax (GMT) affects multinational enterprises (MNEs) behavior and countries' corporate taxes. We consider both profit shifting and capital investment responses of the MNE in a formal model of tax competition between asymmetric countries. The GMT reduces the true tax rate differential and benefits the large country, while the revenue effect is generally ambiguous for the small country. In the short run where tax rates are fixed, due to tax deduction of the substance-based income exclusion (SBIE), a higher minimum rate exerts investment incentives but also incurs a larger revenue loss for the small country. We show that under high (low) profit shifting costs the former (latter) effect dominates so that the small country's revenue increases (decreases). In the long run where countries can adjust tax rates, the GMT reshapes the tax game and the competition pattern. In contrast to the existing literature, we reveal that the minimum rate binds the small country only if it is low. With the rise of the GMT rate, countries will undercut the minimum to boost real investments and collect top-up taxes. For small market-size asymmetry and intermediate profit shifting cost, the revenue loss from the elimination of profit shifting may dominate the revenue gain from taxing the true profits generated by substantive activities, so that even a marginal GMT reform may harm the small country. Otherwise, it can raise the small country's tax revenue.

• Item Type: MPRA Paper
• Language: English
• Keywords: Corporate taxes, Global minimum tax, Profit shifting, SBIE, Tax competition
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H73 - Interjurisdictional Differentials and Their Effects; H - Public Economics > H8 - Miscellaneous Issues > H87 - International Fiscal Issues ; International Public Goods

References

Baraké, M., Chouc, P. E., Neef, T., Zucman, G., 2022. Revenue effects of the global minimum tax under Pillar Two. Intertax 50(10), 689-710.

Bilicka, K. A., 2019. Comparing UK tax returns of foreign multinationals to matched domestic firms. American Economic Review 109(8), 2921-2953.

Buettner, T., Poehnlein, M., 2024. Tax competition effects of a minimum tax rate: empirical evidence from German municipalities. Journal of Public Economics 236, 105148.

Chen, X., Hindriks, J., 2023. Multinational taxation under pressure: the role of tax deductibility. CORE/LIDAM Discussion Paper 2023/13.

Crivelli, E., De Mooij, R., Keen, M., 2016. Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis 72(3), 268-301.

Davies, R. B., Martin, J., Parenti, M., Toubal, F., 2018. Knocking on tax haven's door: multinational firms and transfer pricing. Review of Economics and Statistics 100(1), 120-134.

Department of Finance, 2023. Minister McGrath notes Ireland's application of effective 15% corporation tax rate for in-scope businesses. 31 December, 2023. https://www.gov.ie/en/press-release/d4fcf-minister-mcgrath-notes-irelands-application-of-effective-15-corporation-tax-rate-for-in-scope-businesses-from-today/.

Devereux, M. P., Lockwood, B., Redoano, M., 2008. Do countries compete over corporate tax rates? Journal of Public Economics 92(5-6), 1210-1235.

Devereux, M. P., Simmler, M., Vella, J., Wardell-Burrus, H., 2021. What is the substance-based carve-out under Pillar 2? And how will it affect tax competition? EconPol Policy Brief 39. ifo Institute, Munich.

Devereux, M. P., Vella, J., Wardell-Burrus, H., 2022. Pillar 2: rule order, incentives, and tax competition. Policy Brief. Oxford University Centre for Business Taxation, Oxford.

European Commission, 2021. Proposal for a Council Directive on Ensuring a Global Minimum Level of Taxation for Multinational Groups in the Union, COM(2021) 823 final.

Ferrari, A., Laffitte, S., Parenti, M., Toubal, F., 2023. Profit shifting frictions and the geography of multinational activity. CEPR Discussion Papers (17801).

Haufler, A., Kato, H., 2024. A global minimum tax for large firms only: implications for tax competition. CESifo Working Paper No. 11087.

Hebous, S., Keen, M., 2023. Pareto-improving minimum corporate taxation. Journal of Public Economics 225, 104952.

Hugger, F., Cabral, A. C. G., Bucci, M., Gesualdo, M., O'Reilly, P., 2024. The global minimum tax and the taxation of MNE profit. OECD Taxation Working Papers No. 68.

IMF, 2023. International corporate tax reform. IMF Policy Paper No. 2023/001.

Janeba, E., Schjelderup, G., 2023. The global minimum tax raises more revenues than you think, or much less. Journal of International Economics 145, 103837.

Johannesen, N., 2010. Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens. Journal of International Economics 81(2), 253-264.

Johannesen, N., 2022. The global minimum tax. Journal of Public Economics 212, 104709.

Kanbur, R., Keen, M., 1993. Jeux sans frontieres: tax competition and tax coordination when countries differ in size. The American Economic Review 83(4), 877-892.

Keen, M., Konrad, K. A., 2013. The theory of international tax competition and coordination. Handbook of Public Economics 5, 257-328.

Kind, H. J., Midelfart, K. H., Schjelderup, G., 2005. Corporate tax systems, multinational enterprises, and economic integration. Journal of International Economics 65(2), 507-521.

Koethenbuerger, M., Mardan, M., Stimmelmayr, M., 2019. Profit shifting and investment effects: the implications of zero-taxable profits. Journal of Public Economics 173, 96-112.

Mardan, M., Stimmelmayr, M., 2018. Tax revenue losses through cross-border loss offset: an insurmountable hurdle for formula apportionment? European Economic Review 102, 188-210.

OECD, 2021. Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS, Paris: OECD Publishing.

OECD, 2023. The Multilateral Convention to Implement Amount A of Pillar One. Paris: OECD Publishing.

Perry, V. J., 2023. Pillar 2: tax competition in low‐income countries and substance‐based income exclusion. Fiscal Studies 44(1), 23-36.

Riedel, N., Runkel, M., 2007. Company tax reform with a water's edge. Journal of Public Economics 91(7-8), 1533-1554.

Schjelderup, G., Stähler, F., 2023. The economics of the global minimum tax. International Tax and Public Finance 1-18.

Tørsløv, T., Wier, L., Zucman, G., 2023. The missing profits of nations. The Review of Economic Studies 90(3), 1499-1534.

UNCTAD, 2022. International tax reforms and sustainable investment. World Investment Report 2022.

Vives, X., 2000. Oligopoly Pricing: Old Ideas and New Tools. MIT Press, Cambridge, Massachusetts.

Wang, Y. Q., 1999. Commodity taxes under fiscal competition: Stackelberg equilibrium and optimality. American Economic Review 89(4), 974-981.

Wier, L. S., Zucman, G., 2022. Global profit shifting, 1975-2019. NBER Working Paper No. 30673.