Revenue Effects of the Global Minimum Tax by demandside

ARTICLE Revenue Effects of the Global Minimum Tax Under Pillar Two Mona Baraké*, Paul-Emmanuel Chouc**, Theresa Neef*** & Gabriel Zucman****

In October 2021, 137 countries and jurisdictions agreed to implement a major reform of the international corporate tax system, i.e., a global minimum tax of 15% on the profits of large multinational companies. This article presents simulations of the revenue effects of the global minimum tax. Two possible scenarios are considered regarding who collects the minimum tax: The country in which the headquarters are located based on the income inclusion rule (IIR) or the host country of foreign affiliates as laid out under the qualified domestic minimum top-up tax (QDMTT). The Organization for Economic Cooperation and Development’s (OECD’s) tabulated country-by-country report (CbCR) statistics are complemented with data by Tørslov, Wier, and Zucman (2020). Based on a sample of eighty-three parent countries, it is estimated that headquarters countries could collect a total revenue of EUR 179 billion globally. The EU Member States could receive EUR 67 billion from a 15% minimum top-up tax. Carve-outs, provisions that decrease the tax base for real economic activity, reduce the potential tax revenues by approximately 14% to 22% over the entire sample. Under the current agreement, the European Union can expect a total tax revenue of EUR 55 billion yearly. The analysis accentuates how the distribution of revenues varies depending on which country has the priority to collect. Under the IIR in which the headquarters country collects the top-up tax, a country receives more revenues when it hosts more headquartered multinationals. With qualified domestic top-up taxes that give the host country of the foreign affiliate the priority to collect the top-up tax, low-tax jurisdictions that have attracted affiliates of many multinationals could be among the main beneficiaries of the reform. Static estimates that take the distribution of profits and taxes paid as given, are presented. Thereafter possible behavioural effects that may affect the estimates are discussed. Keywords: International taxation, tax deficit, global minimum tax.

INTRODUCTION

on the implementation of a 15% global minimum tax via the OECD’s Pillar Two proposal. This agreement was detailed in the OECD’s Model Rules and transposed into a draft directive by the European Commission in December 2021. This article estimates how much countries could collect from a global minimum tax of 15% on large multinational companies’ profits. Two different scenarios are considered. First, the revenues are collected by the country in which the headquarters of the multinational are located (in the following referred to as headquarters country) which is comparable to the income inclusion rule (IIR) of the OECD/G20 agreement. In a second scenario, the host country where the affiliate of the multinational company has its tax residence and profits are recorded collects the additional tax revenues. The latter case corresponds to the qualified domestic minimum top-up tax (QDMTT) that was first introduced in the OECD’s Model Rules of December 2021 under which the QDMTT has priority over the IIR. All results in this study are first-round

Globalization has afforded new opportunities for multinational corporations to reduce their tax bills. As countries compete to attract investments, they may have incentives to reduce their corporate tax rates. In addition, multinational companies can record earnings in jurisdictions where they can minimize their tax bill where they often employ a small number of workers and own few tangible assets by shifting paper profits to tax havens. International capital mobility and profit shifting have led to a substantial decline in the taxes effectively paid by multinationals globally. This evolution is unlikely to be sustainable, neither politically nor economically. Multinationals have possibilities to book their profits in lowtax countries, but governments can choose to tax those offshore profits. Since 2019, the Organization for Economic Cooperation and Development (OECD) has been considering a minimum corporate tax rate for multinational companies’ profits. In October 2021, 137 countries and jurisdictions agreed

Notes *

EU Tax Observatory. Email: mona.barake@taxobservatory.eu.

EU Tax Observatory. Email: paul-emmanuel.chouc@ip-paris.fr.

***

EU Tax Observatory & World Inequality Lab. Email: theresa.neef@taxobservatory.eu.

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UC Berkley & EU Tax Observatory. The authors would like to thank the participants in the World Inequality Lab Conference (2021) and the Hybrid Intertax & Cideeff Seminar on Pillar Two (2022) for their helpful comments and discussions. They also gratefully acknowledge Gaspard Richard for excellent research assistance.

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