The impact of the international tax reforms under Pillar One and Pillar Two on MNE’s investment costs

Pillar One and Pillar Two would introduce new rules for the taxation of multinational enterprises (MNEs). This paper assesses the impact of these proposals on MNEs’ investment costs. The analytical framework extends the forward-looking effective tax rates (ETR) model of Devereux and Griffith (International Tax and Public Finance 10: 107–126, 2003) to consider the ETRs for an investment performed by an entity belonging to an MNE group accounting for the possibility that MNEs use their organisational structure to shift profits to low tax jurisdictions. The model incorporates a stylised version of the tax provisions proposed under Pillar One and Pillar Two. The results, covering over 70 jurisdictions, account for differences in tax bases and rates, and are empirically calibrated to map the global activities of in-scope MNEs. The global GDP-weighted average change in the EATRs from Pillar One and Pillar Two is estimated to be 0.4 percentage points, representing a small impact compared to the weighted average EATR in the sample (24%) as well as the 6 percentage point reduction observed in the period 1999–2017 across OECD countries. Overall, the analysis suggests that both Pillars would reinforce each other in lifting the floor of the ETR distribution, thus reducing tax rate differentials across jurisdictions.