Abstract:
By focusing exclusively on large multinational groups, the global minimum tax (GMT) aims to target most of the world's profit shifting while keeping aggregate compliance costs at an acceptable level. This policy brief presents new evidence on profit shifting behavior across the size distribution of multinational enterprises (MNEs) to study whether the current size threshold strikes the right balance between these two conflicting objectives. Using German microeconomic administrative data with no reporting gaps for tax havens, we first document reductions in tax payments after tax haven subsidiaries are added to a group and confirm their outsized productivity. As the group size increases, so does the likelihood of including tax haven subsidiaries. Second, we introduce a new methodology to estimate shifted profits at the group level and find an exponential group size gradient in profits shifted to tax havens. A total of EUR 19 billion was shifted to tax havens by German MNEs in 2022. This includes profits shifted out of Germany and out of other countries by German-owned MNEs. Large groups targeted by the GMT account for 95 percent of this amount. While this is mainly a function of their size, we also document a positive gradient in profit shifting aggressiveness - profits shifted relative to total employment. Third, we relate revenue potential from taxing excess profits in low-tax jurisdictions to GMT compliance costs, using a 15 percent benchmark rate. For groups currently covered by the GMT, revenue gains significantly dominate costs, while extending coverage to additional groups yields only modest net gains. Using coarser macroeconomic data, we show that Germany is not the most aggressive profit shifting country. MNEs from the US, which has recently been exempted from important statutes of the GMT, are more aggressive. Such exemptions undermine the effectiveness of the GMT, and our results instead support policy consistency of the GMT in the face of such recent unilateral challenges.