The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition

Chen, Xuyang and Sun, Rui (2025): The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition.

Abstract

This paper investigates the OECD's global minimum tax (GMT) in a formal model of tax competition between asymmetric countries. We consider both profit shifting and real responses of multinational enterprises, and highlight the role of the substance-based income exclusion (SBIE) in investment incentives and tax rate setting. 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, the GMT reduces the small country's revenue if profit shifting costs are low and increases it otherwise. In the long run where countries adjust tax rates, the GMT reshapes the tax game and the competition pattern. We reveal that the minimum rate binds the small country only if it is low. With the rise of the GMT rate, countries will set tax rates below the minimum to boost capital investments and collect top-up taxes. Simulations show that a moderate GMT rate can raise both countries' revenues and the large country's welfare in the long run. However, it may reduce the small country's welfare if the welfare weight of private income is high.

• Item Type: MPRA Paper
• Language: English
• Keywords: Global minimum tax; Profit shifting; Capital investment; 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 > 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.

Bukovina, J., Lichard, T., Palguta, J., Zudel, B., 2025. Corporate Minimum Tax and the Elasticity of Taxable Income: Evidence From Administrative Tax Records. American Economic Journal: Economic Policy 17(2), 358-387.

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.

Dahlby, B., Ferede, E., 2012. The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments. International Tax and Public Finance 19(6), 844-883.

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.

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.

Egger, P., Loretz, S., Pfaffermayr, M., Winner, H., 2009. Firm-specific forward-looking effective tax rates. International Tax and Public Finance 16(6), 850-870.

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).

Garcia-Bernardo, J., Janský, P., 2024. Profit shifting of multinational corporations worldwide. World Development 177, 106527.

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

Haufler, A., Mardan, M., Schindler, D., 2018. Double tax discrimination to attract FDI and fight profit shifting: The role of CFC rules. Journal of International Economics 114, 25-43.

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.

Kleven, H. J., & Kreiner, C. T., 2006. The marginal cost of public funds: Hours of work versus labor force participation. Journal of Public Economics 90(10-11), 1955-1973.

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.

Lobel, F., Scot, T., Zúniga, P., 2024. Corporate taxation and evasion responses: Evidence from a minimum tax in Honduras. American Economic Journal: Economic Policy 16(1), 482-517.

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.

Mardan, M., Stimmelmayr, M., 2020. Tax competition between developed, emerging, and developing countries–Same same but different?. Journal of Development Economics 146, 102491.

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.

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.