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A new framework to assess the fiscal impact of a global minimum tax on FDI

Author

Listed:
  • Bruno Casella
  • Baptiste Souillard
Abstract
The OECD agreement in principle on a global minimum corporate income tax – Pillar Two of the Base Erosion and Profit Shifting project – is a major step in international tax regulation and coordination. Yet, its consequences for foreign direct investment (FDI) have received limited attention thus far. In the present paper, the authors detail the analytical framework developed to underpin the findings of the World Investment Report 2022: International Tax Reforms and Sustainable Investment. The paper introduces the notion of FDI-level effective tax rate (ETR). Unlike standard ETRs, FDI-level ETRs embed the profit shifting schemes of multinational enterprises (MNEs). They capture not only the taxes paid on income reported in the host country of the foreign investment but also those levied on income shifted to offshore financial centres (OFCs). The effect of Pillar Two on these two components of the tax base determines the increase in the overall tax rate faced by MNEs, which ultimately affects the investment decisions of MNEs. After empirically calibrating ETRs, profit shifting and FDI-level ETRs of more than 200 countries, the authors quantify the effect of Pillar Two on FDI-level ETRs. The results show that after the reform FDI-level ETRs are likely to increase by 2 to 3 percentage points in non-OFCs, which corresponds to an increase in the corporate income tax liability for MNEs between 14 and 20 per cent.

Suggested Citation

  • Bruno Casella & Baptiste Souillard, . "A new framework to assess the fiscal impact of a global minimum tax on FDI," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    • Handle: RePEc:unc:tncjou:92
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    References listed on IDEAS

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    1. Dobranschi, Marian & Nerudová, Danuše & Solilová, Veronika & Litzman, Marek, 2023. "An alternative measure of profit shifting and corporate income tax losses," Journal of Multinational Financial Management, Elsevier, vol. 70.
    2. Vera Santomartino & Barbara Bratta & Paolo Acciari, . "Analysing MNEs structure and activities using country-by-country reports. Evidence from the Italian dataset," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    3. Souillard, Baptiste, 2022. "Intra-industry spillovers of profit shifting and investments in tax havens," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 581-599.

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