Articles OECD/International
Jingxian Chen* and Wilson Chow**
Global Minimum Tax Reform and the Future of Tax Competition This article focuses on the effects of global minimum tax reform on tax competition. It also discusses whether the new tax competition landscape will become more equitable and efficient, and, if not, how the OECD’s Inclusive Framework can better address these problems in the future. 1. Introduction For more than two decades now, the OECD has played a leading role in multilateral cooperation to counter, inter alia, harmful tax competition. Its latest action is the global minimum tax reform. As of 7 June 2023, 139 jurisdictions under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Inclusive Framework have committed to the two-pillar reform programme.1 Pillar Two introduces a global minimum tax rate of 15%. According to the OECD, Pillar Two “does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it”.2 However, this is just an intuitive and brief statement. The effect of Pillar Two on tax competition is more complex and it requires a deeper analysis at the theoretical level. In this context, this article aims to address the following three series of questions to contribute to the research on tax competition: (i)
What are the differences between Pillar Two and the OECD’s previous efforts to counter corporate income tax competition? What motivated the 139 jurisdictions to reach a consensus on Pillar Two? What lessons can be drawn from the history of the OECD’s efforts to counter tax competition? (See section 2.)
(ii) In what way, and to what extent, will Pillar Two restrict corporate income tax competition? Will there * **
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PhD Candidate, Institute of International Law, Wuhan University, China. The author can be contacted at jxchen. WHU@hotmail.com. Associate Professor, Faculty of Law, University of Hong Kong. The author can be contacted at wschow@hku.hk. The authors would like to thank Professor Jinyan Li, Professor Rick Krever and Professor Richard Cullen for their comments on an earlier draft of this article. The authors alone are responsible for any errors or oversights. OECD, Members of the OECD/G20 Inclusive Framework on BEPS Joining the October 2021 Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy as of 9 June 2023 (OECD 2023), available at www.oecd.org/tax/beps/oecd-g20-in clusive-framework-members-joining-statement-on-two-pillar-solutionto-address-tax-challenges-arising-from-digitalisation-october-2021.pdf (accessed 9 July 2023) [hereinafter Members of the OECD/G20 Inclusive Framework on BEPS]. OECD, International community strikes a ground-breaking tax deal for the digital age (OECD), available at www.oecd.org/tax/beps/internation al-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age. htm (accessed 22 Mar. 2023).
still be room for other forms of competition in the future, and if so, in what form? Specifically, what role can game theory play in explaining these issues?3 (See sections 3. and 4.) (iii) Will the new competition landscape lead to greater equality and efficiency? If not, how can the Inclusive Framework better address these problems in the future? (See section 5.) The authors’ conclusions are set out in section 6. 2. Comparison of Pillar Two with the OECD’s Previous Efforts to Counter Tax Competition 2.1. Introductory remarks The OECD’s campaigns against tax competition can be divided into three stages. The first stage (the pre-BEPS stage, for which, see section 2.2.2.) began with the publication of the Report on Harmful Tax Competition: An Emerging Global Issue (the OECD 1998 Report).4 In the second stage (the BEPS 1.0 stage, for which, see section 2.2.3.), the OECD released 15 Final Reports of the BEPS Project in 2015. BEPS Action 5 specifically targeted harmful tax practices,5 while other actions such as the controlled foreign company (CFC) rules and country-by-country (CbC) reporting may also indirectly restrict tax competition by reducing profit shifting.6 The third stage (the BEPS 2.0 stage, for which, see section 2.2.4.) is the current global minimum tax reform. Sections 2.2. to 2.4. compare these three stages in terms of their focus, methods and legitimacy. These sections reveal that tax competition is a complex and dynamic concept that takes on different forms at different stages. Correspondingly, the multilateral efforts to regulate tax competition are a gradual process, with changing emphases and methods at different stages.
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It should be noted that multinational enterprises (MNEs) may also make strategic responses to Pillar Two, making them players in the broader tax game. However, the focus of this article is limited to the strategic responses of jurisdictions. OECD, Harmful Tax Competition: An Emerging Global Issue (OECD 1998) [hereinafter the OECD 1998 Report]. OECD, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance: Action 5 – 2015 Final Report (OECD 2015), Primary Sources IBFD [hereinafter the Action 5 Final Report (2015)]. OECD, Designing Effective Controlled Foreign Company Rules – Action 3: 2015 Final Report (OECD 2015), Primary Sources IBFD and Transfer Pricing Documentation and Country-by-Country Reporting: Action 13: 2015 Final Report (OECD 2015), Primary Sources IBFD.
Bulletin for International Taxation August 2023
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