Why Minimum Corporate Income Taxation Can Make the High-Tax Countries Worse off: the Compliance Dilemma

Minimum taxation means that if a multinational enterprise (MNE) declares its operations in a jurisdiction taxing less than the minimum tax, the countries where the real economic activity takes place would have the right to tax the difference. There is a revival of the minimum tax standard for two reasons. First, there is concern about the complexity of assigning taxing rights and the effectiveness of profit-splitting rules in eliminating profit shifting. Second, the minimum tax standard has the merit of tackling multinational tax avoidance at its root. However, this argument ignores the strategic interaction between minimum taxation and tax compliance. Building upon Hindriks and Nishimura (2021), we develop a framework in which effective international tax compliance requires enforcement coordination between countries (e.g. exchange of information). We show that under sufficient market asymmetry (translating into the tax differential), minimum taxation may induce the low-tax countries to withdraw from international tax compliance agreements. We then show that such a breakdown of cooperation can make the high-tax country worse off compared to the absence of minimum taxation.