Is the Global Minimum Tax on MNE Profits Well-Targeted?

Abstract

BEPS Pillar Two institutes a common set of tax rules across countries amounting to a global minimum tax on the profits of large multinational enterprises (MNEs). This paper estimates the share of the FDI stock subject to additional tax by country. First, it considers the scope of the tax rules: The minimum tax only applies to the low-tax affiliates of MNEs above certain revenue thresholds. The results indicate (i) MNEs above the Pillar Two revenue threshold account for most international investment and (ii) their low-tax affiliates often hold a disproportionate share of the FDI stock, even in countries where average or statutory tax rates are high. Second, it estimates the share of FDI subject to additional tax based on the reform’s current implementation status, as of mid-2024: While more than 95% of the global FDI stock originates from countries agreeing to the reform, actual legislation has lagged. Low-tax affiliates are subject to the minimum tax if any part of the MNE ownership chain falls within a country implementing Pillar Two. Since this is not observed, I use a probabilistic absorbing Markov chain approach to find the share of FDI potentially subject to the minimum tax, following Casella (2019). Finally, this study combines information on the scope and implementation to assess the preliminary impact. Offshore financial centers and developed regions account for most of the tax base; however, a large share of the FDI stock in developing countries is potentially subject to additional tax over coming years – around 20% to 25% in the typical case.