Pillar 2 could increase global corporate tax revenue by more than 8 percent, reduce low-taxed profit in tax havens by more than 80 percent, and — even in developed economies with high average rates — raise corporate revenue by more than 7 percent.
But wait! Before our mathphobic brains overload with statistics from the just-released OECD economic impact statement on pillar 2, let’s try to convey the gist of this 84-page report with a stylized story. (Felix Hugger et al., “The Global Minimum Tax and the Taxation of MNE Profit,” OECD Taxation Working Papers No. 68 (Jan. 9, 2024).)
In Plain English
In our simple tale the world has only two sets of countries. The L countries are relatively small and relatively few, their levels of economic substance are well below the norm, and average single-digit tax rates generally prevail across the board. The low rates serve those small economies well because they have had magnetic effects on multinational profit and occasionally even on some real investment.
The H countries are larger, more numerous, and more economically substantive. Average tax rates are high, but there are some pockets of low-taxed profit from targeted exceptions to the high-tax rules that can attract (and retain) multinational profit and investment.
We can estimate the incentive to shift profit from H countries to L countries by the disparity between their tax rates. Most folks — especially at the OECD and in H country governments — consider low rates in L countries a problem because they thwart the ability of H countries to raise taxes in the manner they deem necessary for domestic reasons (such as overall revenue goals and the proper distribution of the tax burden) and because it is unfair to purely domestic corporations.
And it is economic gospel that disparities in tax rates across jurisdictions can distort the efficient allocation of capital across international borders, allowing investment to flow to the lowest-tax locations rather than the most profitable (before tax) locations. Analogous to the great debates on free trade, what may be economically and politically advantageous from one nation’s point of view can be seriously detrimental to global economic growth.
What happens when we impose a 15 percent pillar 2 minimum tax on all profits in this simple world? There are four main effects. First, the increase in the L country tax rates from low single digits to the 15 percent pillar 2 minimum tax rate induces some (highly uncertain) amount of profit to shift back from the L countries (where it shouldn’t be) to H countries (where it belongs).
Second, a lot of pillar 2 minimum tax revenue will be collected on the not insubstantial amount of low-taxed profit in H countries, and there will be a not insubstantial amount of pillar 2 revenue collected on low-taxed profit not shifted out of L countries.
Third, as always, reduced tax differentials from the minimum tax will improve the allocation of capital. Qualitatively, this conclusion is easy, basic, and uncontroversial economics. But once you get into quantitative estimates, massive uncertainty and controversy abound, and politics (unfortunately) plays a big role.
Fourth, probably — depending on collection ordering rules and on governmental decisions about implementing rules — much of the new pillar 2 minimum tax revenue will accrue to governments under which affiliates of multinationals already have their low-taxed profit booked.
Now the Numbers
OK, that was a stylized, non-quantitative fictional story loosely based on the January 9 report. Now let’s venture closer to reality, at least as best we can see it through estimates created mostly with the available country-by-country report data from 2017 to 2020. Table 1 focuses on low-taxed profits and how pillar 2 could affect those profits. Table 2 is about some possible revenue effects of the pillar 2 minimum tax.
| High Income | Upper-Mid | Lower-Mid | Low Income | Investment Hubs | Total | |
|---|---|---|---|---|---|---|---|
(1) | Total profit (net of losses) | $2,968 | $1,643 | $191 | $10.5 | $1,117 | $5,929 |
(2) | Total net profit as % (across categories) | 50.1% | 27.7% | 3.2% | 0.2% | 18.8% | 100% |
(3) | Low-taxed profit as % total profit | 38.6% | 18.3% | 1.6% | 0.1% | 41.4% | 36.1% |
(4) | Low-taxed profit before pillar 2 ($) | $826 | $392 | $34 | $2 | $886 | $2,140 |
(5) | Low-taxed profit before pillar 2 (% of category profit) | 27.8% | 23.8% | 18% | 20.4% | 79.3% | 36.1% |
(6) | Low-taxed profit after pillar 2 (% of category profit) | 11.7% | 10.3% | 6.5% | 4.8% | 10.9% | 11% |
(7) | Low-taxed profit after pillar 2 ($) | $347 | $169 | $12 | $1 | $122 | $651 |
(8) | Reduction in low-taxed profit ($) | $479 | $222 | $22 | $2 | $764 | $1,489 |
(9) | Reduction as % low-taxed profit in category | 58% | 57% | 64% | 77% | 86% | 70% |
(10) | Reduction as % of total reduction | 32.2% | 14.9% | 1.5% | 0.1% | 51.3% | 100% |
Sources: Column 1: Felix Hugger et al., “The Global Minimum Tax and the Taxation of MNE Profit,” OECD Taxation Working Papers No. 68, at para. 11 (Jan. 9, 2024); Column 2: Author’s calculations. Column 3: Category percentages from Hugger, fig. 7 (in section 6); Total percentage from Hugger, para. 11, then used to calculate total dollar amount of low-taxed profit in column 4. Column 4: Author’s calculations. Column 5: Category percentages calculated by author, starting with total low-taxed profit calculated from data in Hugger, para. 11. Column 6: Percentages are from Hugger, para. 84. Columns 7-10: Author’s calculations corroborated with estimates (when available) discussed in text. | |||||||
For readability and because of publication time constraints, we are skipping over a lot of details, but let’s make at least a few observations. Total average annual profits net (that is, including losses) of large (“in scope” is the OECD lingo) multinationals worldwide is about $5.9 trillion. (Perspective: A somewhat comparable figure for foreign profit of U.S. multinationals in 2019 was $511 billion.) Of the $5.9 trillion total, about 36 percent was low-taxed (here that means taxed at a rate of less than 15 percent), so it could be caught in the pillar 2 net.
Of the $2.1 trillion in low-taxed profit, 70 percent (about $1.5 trillion) will be subject to tax. But that doesn’t easily translate into a revenue estimate for two big reasons. First, the pillar 2 tax base must be reduced by a substance-based income exclusion (which is generally low for investment hubs, but nevertheless it varies widely). Second, the substance-reduced, low-taxed profit must be multiplied by a top-up tax rate, which also varies widely.
| High Income | Upper-Mid | Lower-Mid | Low Income | Investment Hubs | Total |
|---|---|---|---|---|---|---|
Pillar 2 effect (lower bound %) | 7.2% | 3.5% | 4% | 4.5% | 18.5% | 6.5% |
Pillar 2 effect (upper bound %) | 15.2% | 4.8% | 7.8% | 10% | 37% | 8.1% |
Pillar 2 effect (lower bound $) | NA | NA | NA | NA | NA | $155 |
Pillar 2 effect (upper bound $) | NA | NA | NA | NA | NA | $192 |
Source: Total amounts and percentages from Felix Hugger et al., “The Global Minimum Tax and the Taxation of MNE Profit,” OECD Taxation Working Papers No. 68, at para. 17 (Jan. 9, 2024). Percentages for categories are approximations based on images presented in Hugger, Appendix B, fig. B.5. Dollar amounts are not available by category because nowhere in the report (as best we can tell) are data available on tax revenue by category before or after imposition of pillar 2. | ||||||
The report is a little less generous on details when it comes to revenue effects. But here’s the headline: Pillar 2 will increase somewhere between $155 billion and $195 billion, which is between 6.5 and 8.1 percent of the worldwide total. Perspective: U.S. average corporate revenue over 2017 to 2020 was $269 billion. If the United States were like the average, corresponding revenue gains would be between $18 billion and $22 billion. In 2022 corporate revenue jumped to $425 billion. Corresponding revenue gains would be between $28 billion and $34 billion (not directly taking into account likely offsetting increases in foreign tax credits from increased foreign taxes).