{"title":"The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition","authors":"Xuyang Chen","doi":"arxiv-2409.05397","DOIUrl":null,"url":null,"abstract":"This paper investigates how the OECD's global minimum tax (GMT) affects\nmultinational enterprises (MNEs) behavior and countries' corporate taxes. We\nconsider both profit shifting and capital investment responses of the MNE in a\nformal model of tax competition between asymmetric countries. The GMT reduces\nthe true tax rate differential and benefits the large country, while the\nrevenue effect is generally ambiguous for the small country. In the short run\nwhere tax rates are fixed, due to tax deduction of the substance-based income\nexclusion (SBIE), a higher minimum rate exerts investment incentives but also\nincurs a larger revenue loss for the small country. We show that under high\n(low) profit shifting costs the former (latter) effect dominates so that the\nsmall country's revenue increases (decreases). In the long run where countries\ncan adjust tax rates, the GMT reshapes the tax game and the competition\npattern. In contrast to the existing literature, we reveal that the minimum\nrate binds the small country only if it is low. With the rise of the GMT rate,\ncountries will undercut the minimum to boost real investments and collect\ntop-up taxes. For small market-size asymmetry and intermediate profit shifting\ncost, the revenue loss from the elimination of profit shifting may dominate the\nrevenue gain from taxing the true profits generated by substantive activities,\nso that even a marginal GMT reform may harm the small country. Otherwise, it\ncan raise the small country's tax revenue.","PeriodicalId":501273,"journal":{"name":"arXiv - ECON - General Economics","volume":"24 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2024-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"arXiv - ECON - General Economics","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/arxiv-2409.05397","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
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.