A New Framework to Assess the Fiscal Impact of a Global Minimum Tax on FDI

The OECD agreement in principle on a global minimum corporate income tax – Pillar II of the BEPS project – is a major step in international tax regulation and coordination. Yet, its consequences for foreign direct investment (FDI) have received limited attention thus far. The theme chapter of the 2022 World Investment Report (WIR) on 'International Tax Reforms and Sustainable Investment' addresses this gap. In the present paper, the authors detail the analytical framework developed to underpin the WIR findings. The paper introduces the notion of FDI-level effective tax rate (FDI-level ETR). Unlike standard ETRs, FDI-level ETRs embed the profit shifting schemes of multinational enteprises (MNEs). They capture not only the taxes paid on income reported in the host country of the foreign investment but also the taxes levied on income shifted to offshore financial centers (OFCs). The effect of Pillar II on both components of the tax base determines the increase in the overall tax rate faced by MNEs, which ultimately affects MNEs’ investment decisions. After empirically calibrating ETRs, profit shifting, and FDI-level ETRs for more than 200 countries, the authors quantify the effect of Pillar II on FDI-level ETRs. The results show that FDI-level ETRs increase by 2 to 3 percentage points in non-OFCs after the reform. This corresponds to an increase in MNE corporate income tax liability of 14 to 20 percent