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The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition

Author

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  • Chen, Xuyang
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.

Suggested Citation

  • Chen, Xuyang, 2024. "The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition," MPRA Paper 121893, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:121893
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate taxes; Global minimum tax; Profit shifting; SBIE; Tax competition;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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