Publication on global minimum tax

First, the authors address the question, of whether the global minimum tax will indeed be a global tax as the agreement does not oblige countries to introduce the minimum tax but only to accept the application of the tax by other signing countries. The incentive to introduce the regulation is, from the perspective of a single country, low as it potentially increases the tax burden on all profits of multinational entities (MNEs) active in this country, and might therefore trigger the relocation of real activities into other countries. The likelihood of this decreases, however, with the number of countries introducing the minimum tax. Thus, the authors analyze headquarters and subsidiary location information of around 5,000 MNEs that are potentially affected by the minimum tax. The results highlight that almost all MNEs headquartered in the Western Hemisphere are active in several G7 countries. This means, that a small group of countries, for example, Germany, France, and Italy, is already sufficient to trigger a global rollout of the minimum tax.

Second, the authors analyze the implication of the exclusion of profits from real activities from the global minimum tax (substance-based income exclusion). The profits are assumed to equal a fraction of wage costs and the book value of tangible assets. Based on European financial statement data, the authors show that this excludes between 20 and 40% of corporate profits from the global minimum tax. In other words, the tax rate on total corporate profits is not 15% but only between 9 and 12%. In addition, the results highlight substantial heterogeneity between countries and industries, as well as firms’ capital structure.

Devereux, M. P., Paraknewitz, J. & Simmler, M. (2023), Empirical evidence on the global minimum tax: what is a critical mass and how large is the substance-based income exclusion? Fiscal Studies, 44, 9– 21. https://doi.org/10.1111/1475-5890.12317