Re-Allocating Taxing Rights and Minimum Tax Rates in International Profit Taxation

Abstract

Research QuestionIn 2019, a group of OECD countries presented a proposal on the reform of international profit taxation. The proposal is based on two pillars: (i.) the re-allocation of taxing rights away from source countries (where goods are produced) to market countries (where goods are consumed), and (ii.) the introduction of minimum taxation. What are the macroeconomic implications of re-allocating taxing rights and introducing minimum rates in international profit taxation? ContributionWe assess this question in a three-region dynamic macroeconomic model in which profit taxation is explicitly modelled as opposed to assuming a general income tax on the return to capital, which is generally the case in standard models. In our model, households own firms, which undertake production, employment and investment decisions with a view to maximizing profits. ResultsWe find that, in low-tax economies, the average profit tax rate faced by firms will rise as a response to the introduction of minimum tax rates and the re-allocation of taxing rights. On the one hand, this reduces price competitiveness of firms located in these regions and, thereby, demand for goods produced there, and output. On the other hand, higher profit tax revenues resulting from increased rates help to reduce other taxes. Moreover, lower expected future output requires less capital in production in the long run. Firms hence invest less and (temporarily) augment dividend payments. This raises the disposable income of households, who (at least temporarily) increase consumption. The opposite holds for high-tax economies. When taxing rights are re-allocated, additional wealth transfers between regions mitigate these effects. In terms of welfare, low tax economies can benefit from an increase in profit taxation.