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arXiv · 2409.05397

The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition

Xuyang Chen·Rui Sun
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Abstract

This paper investigates the OECD's global minimum tax (GMT) in a formal model of tax competition between asymmetric countries. We consider both profit shifting and real responses of multinational enterprises, and highlight the role of the substance-based income exclusion (SBIE) in investment incentives and tax rate setting. 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, the GMT reduces the small country's revenue if profit shifting costs are low and increases it otherwise. In the long run where countries adjust tax rates, the GMT reshapes the tax game and the competition pattern. We reveal that the minimum rate binds the small country only if it is low. With the rise of the GMT rate, countries will set tax rates below the minimum to boost capital investments and collect top-up taxes. Simulations show that a moderate GMT rate can raise both countries' revenues and the large country's welfare in the long run. However, it may reduce the small country's welfare if the welfare weight of private income is high.

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Xuyang Chen, Rui Sun. 2024-09-09. The Global Minimum Tax, Investment Incentives and Asymmetric Tax Competition. https://arxiv.org/abs/2409.05397

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