The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition

Xuyang Chen and Rui Sun
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Xuyang Chen: Université catholique de Louvain, LIDAM/CORE, Belgium

No 2025019, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper investigates how the OECD’s global minimum tax (GMT) affectsmultinational 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. Our simulations show that introducing a GMT with moderate minimum rate raises both countries’ revenues and the large country’s welfare. However, it may reduce the small country’s welfare if the welfare weight of private income is high.

Keywords: Corporate taxes; Global minimum tax; Profit shifting; SBIE; Tax competition (search for similar items in EconPapers)
JEL-codes: F21 F23 H25 H73 H87 (search for similar items in EconPapers)
Pages: 62
Date: 2025-09-01
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