For a Better GLOBE: A Minimum Effective Tax Rate for Multinationals
7 Pages Posted: 22 Mar 2021
Date Written: February 15, 2021
An initiative is needed to break the logjam in the international negotiations to reform taxation of multinational enterprises (MNEs). The primary agreed goal of the project on Base Erosion and Profit Shifting (BEPS) was to better align MNEs’ taxable profits with the location of real economic activity. The more recent phase of the process has established that this entails starting from each MNE’s global consolidated profits and applying formulaic methods to ensure that those profits are taxed by at least one, and only one country. It has also become clear that countries wishing to defend their corporate tax base should ensure that MNEs’ global profits are subject to a minimum effective tax rate, to end both profit shifting and tax competition.
We propose a modified version of the proposal for a global anti-base erosion tax (the GloBE) that would integrate its two main components to provide a balanced allocation of taxing rights to the home and host countries of MNEs. This could command the wide basis of support needed for rapid adoption by a coalition of willing countries, allowing immediate action for a sharp reduction of the revenue losses caused by the current rules.
Our methodology for a minimum effective tax rate (METR) could be applied to MNEs by any countries that choose to do so, whether they are home to MNEs, host of MNEs, or both. Building on the GloBE, the METR would be compatible with existing tax treaties, but being non-discriminatory it also complies with other international obligations. Although it could be introduced unilaterally, interested countries, supported by regional groupings and international organisations, should develop mutually agreed rules for application of the METR. Integrating many elements of the current proposals and aligning with the identified direction of travel, the METR both attacks immediate concerns and contributes to the momentum for a more comprehensive multilateral agreement.
A longer and more detailed paper on the METR with economic consequences is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3796030
Keywords: international tax, multinational corporations, BEPS, Pillar One, Pillar Two, GloBE
JEL Classification: F23, F42, F69, K33, K34
Suggested Citation: Suggested Citation