The Compliance Dilemma of the Global Minimum Tax

Jean Hindriks and Yukihiro Nishimura
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Yukihiro Nishimura: Osaka University

No 2022013, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: To tackle profit shifting, the OECD/G20 Inclusive Framework proposes a Global Minimum Tax that requires that if a multinational en- terprise (MNE) declares its operations in a jurisdiction taxing less than the global minimum tax, the countries where the real economic activity takes place would have the right to tax the difference. The general presumption is that (unconstrained) high-tax countries will gain and low-tax countries will lose because the constrained taxes will reduce their inward profit shifting. The purpose of this paper is to show, by means of a formal model of international tax competition with heterogeneous countries, that the consequences of the global minimum tax can be just the opposite. The key feature of our analysis is that the minimum tax will change the dynamics of tax competition together with the enforcement incentives. We show that in this broader framework, the low-tax country always gain and that there exists a critical threshold for the minimum tax beyond which enforcement cooperation will break down making the high-tax country worse off with minimum tax. The minimum tax threshold is decreasing in the extent of the tax asymmetry. We call this new effect the compliance dilemma.

Keywords: Profit shifting; Tax competition; Tax enforcement (search for similar items in EconPapers)
JEL-codes: C72 F23 F68 H25 H87 (search for similar items in EconPapers)
Pages: 20
Date: 2022-03-03
New Economics Papers: this item is included in nep-int, nep-iue and nep-pbe
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2022013

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