The Compliance Dilemma of the Global Minimum Tax

To tackle profit shifting, the OECD/G20 Inclusive Framework proposes a Global Minimum Tax that requires that if a multinational enterprise (MNE) declares its operations in a jurisdiction taxing less than the global minimum tax, the countries where the real economic activity takes place would have the right to tax the difference. The general presumption is that (unconstrained) high-tax countries will gain and low-tax countries will lose because the constrained taxes will reduce their inward profit shifting. The purpose of this paper is to show, by means of a formal model of international tax competition with heterogeneous countries, that the consequences of the global minimum tax can be just the opposite. The key feature of our analysis is that the minimum tax will change the dynamics of tax competition together with the enforcement incentives. We show that in this broader framework, the low-tax country always gain and that there exists a critical threshold for the minimum tax beyond which enforcement cooperation will break down making the high-tax country worse off with minimum tax. The minimum tax threshold is decreasing in the extent of the tax asymmetry. We call this new effect the compliance dilemma