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

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.