Though the eventual implementation of this agreement will take a long time because of ratification issues, the initiative represents a unique moment of global fiscal convergence. In the long run, the global minimum tax rate for MNEs could impact economies’ potential growth via different channels:
- The capital repatriation or productivity growth channel: countries with corporate tax rates below 15% will be less attractive and MNEs could be tempted to repatriate capital into their domestic economy. This repatriation is likely to produce a positive productivity shock in the economy benefiting from it, whereas the country seeing a capital outflow will register a negative productivity shock with long-term consequences.
- The terms of trade channel: countries benefitting from capital repatriation will also reinforce their capacities of production and therefore reduce their dependency on imports (the inverse for countries with tax rates below 15%, which could face a higher dependency on imports).
- The public debt channel: capital repatriation will contribute to reinforce the growth potential of economies that see capital flowing back home. This will create new fiscal resources and contribute to reduce the level of debt as a percentage of GDP, or at least reduce its pace of growth. In contrast, countries that see their tax competitiveness deteriorating because of the global minimum tax could find it harder to stabilize their public debt.
- The public investment channel or crowding-in/crowding-out effect: countries that gain in competitiveness thanks to this global rebalancing could have a higher incentive to increase the size of public investment as a percentage of GDP, in particular in a context where demand for public goods is expected to rise post Covid-19. This channel of transmission is ambiguous in terms of impact as both crowding-in or crowding-out effects could follow. We assume a continuation of the five-year trend preceding the creation of the tax.
- The corporate tax revenues channel or redistribution channel: higher corporate tax revenues as a percentage of GDP could follow a movement of capital repatriation for countries with a corporate tax rate above 15%. Countries with corporate tax rates below 15% will suffer from a lower level of competitiveness and register capital outflows, followed by lower fiscal revenues normally earned from corporate profits of foreign firms.
To identify the winners and losers from this landmark decision, we first estimate the growth potential of a sample of 16 economies (between Q1 1993 and Q4 2020) in function of the growth in productivity, growth of active population, the share of imports in total economy, the share of public investment as a percentage of GDP, public debt as a percentage of GDP and the share of corporate tax-fiscal revenues as a percentage of GDP (see annex 1 for the precise results of our estimates). Next, we study the impact on each variable after a shock, allowing us to take into account the different transmission channels mentioned above.
We assume that the size of the shock on each channel will depend on the gap between a country’s corporate tax rate in 2020 and the 15% level. Consequently, we identify three groups of countries: Group 1 (small distance) has a distance taken in the first tercile of all the distances, Group 2 has medium distance and Group 3 a high distance compared with the 15% threshold (see Table 1, and appendix for full details on other assumptions).
Table 1: Distance between current corporate tax rate and global minimum tax rate of 15%.