GloBE minimum tax: effects on investment and tax competition in low-tax countries

Abstract

This paper builds a model to show that the substance-based income exclusion (SBIE) rule in the OECD’s Pillar 2 provides multinational firms with an incentive to locate investment in low-tax countries. SBIE allows the multinational to deduct a share of its tangible assets and payroll expenses from the tax base of the Pillar 2 top-up tax. The size of the incentive increases as the corporate tax rate of the low tax country decreases. We also consider a tax competition model and show that some countries may respond to the GloBE rules by lowering their corporate tax rates even to zero. We argue that the mechanism causing these results is that the tax base of the GloBE top-up tax and the income concept used to calculate the GloBE effective tax rate are defined differently.

Recommended citation: Kari, Seppo, and Viertola, Marika. 2023. "GloBE minimum tax: effects on investment and tax competition in low-tax countries." VATT Mimeo 71.