Predicting the Global Min Tax's Cash Haul

Last month the Organization for Economic Cooperation and Development issued a new estimate of revenue effects from its 15% global minimum tax, also known as “Pillar Two.” The new working paper updated a November 2023 one, using data from as recently as 2020. The new report estimated that the policy would reduce profit-shifting by half, and low-taxed profit by two-thirds. It also had a slightly downward revision of the potential revenue gains for governments, from $220 billion annually in a January 2023 estimate to $155-$192 billion in the newest paper.

Something to note–these kinds of estimates normally need to be taken with a grain, or maybe a whole truckload, of salt. That’s not to knock the OECD’s data scientists, some of the best in the world. But there are so many unknown factors with this–how taxpayers will respond, how governments will respond, how other economic movements will affect revenue, how technological developments could impact tax-planning with intangibles. There are things we don’t know about the future, and then things we don’t know about the present. Tax-shifting is infamously difficult to define and measure, and the data is always delayed by a few years at least. That leads to some guesswork.

The report incorporates data from 2017-2020, which is at least closer to today. But it also notes that 2020 was strongly affected by the COVID pandemic. Furthermore, the Tax Cuts and Jobs Act wasn’t passed until the end of 2017, and may not have affected 2018 very much. (Although it may be possible that the reduced revenue gain estimate reflects how much the TCJA disincentivized profit-shifting by U.S. companies, leaving less for the OECD’s similar minimum tax to pick up.)

In short, these reports can be helpful in seeing the very broad strokes, questions of scale and movement. But always best to remember the context.

That said, the latest report had a few eye-popping statistics, beyond the headline figures mentioned above.

One that I found interesting is that while the OECD estimates that profit-shifting will be reduced by half, and this will cause a 30% drop in income for “investment hubs”–the organization’s diplomatic term for tax havens–this still represents a small amount of the overall revenue raised. The report finds that Pillar Two will reduce the overall amount of global low-taxed profit–what is taxed at less than 15%–by 70%, with most of the rest protected by the substance-based carveout or other inclusions. But only about 14% of that is due to reduced profit-shifting. The rest will be collected by the minimum tax directly.

A minimum tax or anti-abuse rule doesn’t have to raise money to work. Ideally, it may raise relatively little, while most of the dividends come from changes in taxpayer behavior. If companies see that there’s little to be gained through shifting income offshore, they’ll leave most of it onshore to be taxed, increasing revenue for that jurisdiction. So a well-designed minimum tax may ultimately create mostly indirect revenue gains.

But the OECD apparently doesn’t think that will be the case here. The report notes most low-taxed income isn’t due to profit-shifting, but incentives and other policies. And in many cases, the income that would have been shifted will still benefit from incentives anyways.

“The application of the GMT is more effective in lifting the level of taxation of all previously low-taxed profit, independent of the reason that resulted in low taxation,” the report states.

Of course, how could the OECD possibly know how companies will respond to the global minimum tax? The report can only use previous estimates of how companies have responded to changes in profit-shifting incentives in the past, with some adjustments. But the global minimum tax is likely to create a whole board.

Profit-shifting has shown itself to be rather sticky in recent years, however. After the 2017 Tax Cuts and Jobs Act, many U.S. taxpayers opted to keep their structures intact, wary for whatever reason of bringing valuable IP home. (I heard one tax practitioner recently put it this way–when it comes to IP the U.S. is like Hotel California, except you can’t even check out.) It’s possible many companies have reasons other than tax–regulatory, for instance–to keep money in lax, low-tax jurisdictions.

This all matters because the nature of the revenue gains–whether they’re direct or indirect–could influence who ultimately benefits from Pillar Two. Last year I wrote that developing countries could be underestimating how much the global minimum tax would increase their revenues, due to reduced profit-shifting. That could be an ideal scenario because it would mean that their cash-strapped, overburdened tax administrations wouldn’t need to rely on the complex Pillar Two tools themselves/ They could simply benefit from easier compliance due to reduced profit-shifting incentives.

This latest OECD report suggests that I may have been the one misestimating. If reduced profit-shifting is a relatively small part of the haul (though still in the tens of billions of dollars), then more of it may go to where the taxpayers are headquartered, in wealthier jurisdictions. Or developing countries will have to collect it themselves through a domestic qualified minimum top-up tax, a potentially difficult new administrative burden.

It’s worth noting, though, that the report does predict that revenue gains would be fairly evenly spread around the world, and between developing and developed countries. (Not so much for tax havens, who would see a dramatic decrease.)

As I said, something to consider with some wariness and skepticism. But these numbers will surely affect the political dynamics as countries around the world continue to implement the Pillar Two rules, and as developing countries push for an alternate plan at the United Nations.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• The House of Representatives comfortably passed the bipartisan tax deal on Wednesday evening, sending it over to the Senate. Sen. Ron Wyden, D-Ore., one of the authors and negotiators of the agreement, hopes that chamber will move on it quickly, without any Washington "razzmatazz." (And presumably also avoiding rigamarole, tomfoolery and jiggery-pokery.) That's a bit unlikely, given how the "world's greatest deliberative body" normally prefers to put its own stamp on anything, whether it needs it or not. And senators have begun to raise concerns, especially about the lack of a provision dealing with the state and local deduction cap--an issue so important to some suburban lawmakers they may be willing to hold everything else up to get it. (Others worry it could help President Biden win re-election.) So we'll see, although every pessimistic prediction about this has been proven wrong so far. To review, this bill would reinstate until 2025 immediate expensing for domestic (but not foreign) R&D costs, and would loosen a limit on the deductibility of interest expense. It would also expand the child tax credit, a major priority for Democrats.
• The Tax Foundation, a conservative-leaning think tank, released an extensive analysis of the TCJA's international provisions this week. It notes that a key provision, the tax on global intangible low-taxed income, has raised a substantial amount of revenue, indicating that it is working–to a degree–to reduce income-shifting. But it also notes that many taxpayers aren't unwinding their pre-TCJA tax structures. "Overall, stasis, rather than a reduction in profit shifting, seems to be the outcome of U.S. and OECD efforts thus far," wrote Alan Cole, author of the study. Definitely worth a look.
• The OECD on Monday released a statistical report on its International Compliance Assurance Program, a pilot program which allows companies to work proactively with the organization and global tax authorities to identify areas where there is a low risk of noncompliance, so they can be deprioritized in real-time, rather than through the examination or audit process. (It bears some resemblance to the U.S. Compliance Assurance Process, which works in a similar way.) It found that the average time to complete assessments was 61 weeks, over the target minimum of 52 weeks–but this was affected by the global pandemic. However, 80% of participants had at least some low-risk areas identified. Given that disputes are expected to increase substantially once the global minimum tax is in place, more taxpayers could flock to this program.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

Volto, first appearing in Don Winslow of the Navy #22. A Martian who can attract and repel objects by yelling "VOLTO!" His abilities are powered by....Grape Nut Flakes, which apparently he can't get on Mars.

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