Global minimum tax and the proposed green tax credit
Published in VATT Mimeo 74, 2024
Abstract
The Finnish Government proposed a green tax credit (GTC) to encourage industrial investments that support the transition to a climate-neutral economy. This study examines the potential negative effects of the global minimum tax (GMT) on the incentives for projects eligible for such tax credits. Although Finland’s corporate tax rate exceeds the GMT threshold, generous tax incentives could lower a company’s effective tax rate (ETR) below the minimum, potentially triggering GMT liability. Using the King-Fullerton framework, we model the interaction between GMT and GTC and find that GMT’s overall impact on investment incentives is modest. However, the effect of the GMT on the tax incentives is more pronounced for companies with little other business activities in Finland, such as foreign multinational companies. This differential impact arises for two reasons: first, the GTC is targeted at specific new investments, minimizing its influence on the ETR of large industrial companies with other activity in Finland. Second, the GTC includes a 10% annual deduction ceiling, further limiting its effect on ETR and the risk of GMT liability.
Recommended citation: Kari, Seppo, and Viertola, Marika. 2024. "Global minimum tax and the proposed green tax credit." VATT Mimeo 74.