Global minimum tax and tax incentives

Abstract

This study examines the impact of global minimum tax (GMT) on the tax savings that firms derive from national tax incentives, which many governments use to stimulate economic activity. The GMT framework includes two approaches to treat such national tax rules: tax reduction treatment (TRT) and income treatment (IT). By incorporating these rules into the King and Fullerton (1984) framework, we calculate effective tax rates (EMTR and EATR) to assess the effects of these treatments. We show that while tax reduction treatment significantly reduces the tax benefits, income treatment has a more modest impact. However, in both cases, the effective tax rate on investment can remain low, primarily due to the substance-based income exclusion (SBIE) included in the rules of GMT. We also find that the effective tax rate is sensitive to inflation, staying very low or even negative at low inflation rates but increasing sharply with higher inflation.