A Global Minimum Tax for Large Firms Only: Implications for Tax Competition

TL;DR

This paper examines the effects of a partial global minimum tax applied only to large firms, revealing how it influences tax competition, leading to discriminatory rates and overall welfare changes.

Contribution

It provides a novel analysis of how a targeted minimum tax impacts tax competition and firm behavior among multiple countries, including tax havens.

Findings

Havens commit to a uniform GMT rate for all firms.

Gradual GMT increases lead to discriminatory lower rates for small multinationals.

Global welfare and revenues improve with a GMT rate near 15%.

Abstract

The Global Minimum Tax (GMT) is applied only to firms above a certain size threshold, permitting countries to set differential tax rates for small and large firms. We analyse tax competition among multiple tax havens and a non-haven country for heterogeneous multinationals to evaluate the effects of this partial coverage of GMT. Upon the introduction of a low but binding GMT rate, the havens commit to the single uniform GMT rate for all multinationals. However, gradual increases in the GMT rate induce the havens, and subsequently the non-haven, to adopt discriminatory, lower tax rates for small multinationals. Our calibration exercise shows that introducing a GMT rate close to 15\% results in a regime where only the havens adopt split tax rates. Welfare and tax revenues fall in the havens but rise in the non-haven, yielding a positive net gain worldwide.