Abstract

The Global Minimum Tax (GMT) is applied only to firms above a certain size threshold. We set up a simple model of tax competition and profit shifting by heterogeneous multinational firms to evaluate the effects of this partial coverage of the GMT. A non-haven and a haven country are bound by the GMT rate for large multinationals, but can set tax rates for firms below the threshold non-cooperatively. We show that the introduction of the GMT with a moderate tax rate increases tax revenues in both the non-haven and the haven country. A gradual increase in the GMT rate, however, triggers a sudden change in the tax competition equilibrium from a uniform to a split corporate tax rate, at which tax revenues in the non-haven country decline. Gradual increases in the coverage rate will benefit the non-haven country and harm the haven country when at least one country splits its tax rate. We also discuss the quantitative importance of these results in calibrated versions of our model.