The Minimum Tax Mirage: Why the Race to the Bottom Never Quite Ends

For four decades, the headline story of corporate taxation was a one-way descent. Statutory rates across the advanced economies fell from the high forties and fifties of the early 1980s toward a global average near the low twenties, capital steadily migrating toward jurisdictions that promised to keep more of its return. The diagnosis was universal and the remedy seemed obvious: if every government undercuts its neighbor, install a floor below which no one may cut. The OECD-brokered global minimum tax, the Pillar Two framework now legislated across most of the developed world, was sold as exactly that floor, a coordinated 15 percent effective rate on large multinationals that would finally end the race to the bottom. It has not ended. It has changed venue. The contest for mobile capital did not stop when the rate floor went in; it migrated into the parts of the tax code the floor does not reach, and into the public budget lines the floor was never designed to police.

What the Floor Actually Caps

Pillar Two applies to multinational groups with consolidated revenue above roughly 800 million dollars (the threshold is fixed in euros, at 750 million). Where such a group’s income in a given country is taxed below 15 percent, a coordinated top-up tax claws the effective rate back up to the floor. The mechanics matter more than the slogan. The rate is calculated jurisdiction by jurisdiction, on a defined base, and that base is not simply book profit.

The framework carves out a slice of income tied to real activity before the top-up is even computed. This substance-based income exclusion shields a return equal to a fixed percentage of payroll plus a fixed percentage of the carrying value of tangible assets in the country. The permanent figure is 5 percent of each, but the rules phase down from a more generous opening (10 percent of payroll and 8 percent of assets) over a transition lasting into the early 2030s. The intent was reasonable: tax the paper profit booked in a brass-plate jurisdiction, not the genuine factory and workforce. The effect is to write, into the heart of an anti-avoidance regime, a standing reward for putting bodies and buildings somewhere. The floor caps the rate on shifted profit. It does not cap the inducement to relocate the substance that generates profit, and it expressly protects a slice of return on that substance from the minimum altogether.

Competition Did Not Die; It Moved Down the Stack

A rate floor disciplines exactly one variable: the headline number multiplied against the base. It leaves untouched every other lever a finance ministry controls. So the lever-pulling moved to where the rules are silent. The base itself, the timing of deductions, accelerated depreciation, the definition of qualifying income, and above all the treatment of credits and direct subsidies became the new battleground.

The decisive design choice sits in how Pillar Two treats incentives. An ordinary tax credit reduces tax paid, which lowers the measured effective rate and therefore triggers more top-up. But a credit that is refundable in cash within four years, a qualified refundable tax credit in the framework’s language, is treated as income rather than as a reduction in tax. Counted as a receipt rather than a tax cut, it barely dents the effective rate. The same is true of an outright cash subsidy. The arithmetic is unforgiving and entirely predictable: a government that hands a multinational a dollar through a non-refundable credit pushes that firm toward the top-up; a government that hands over the identical dollar as a refundable credit or a grant leaves the floor intact and the subsidy fully felt. Coordination on the rate created a powerful, codified preference for one delivery channel over another.

The Refundable-Credit Arms Race

Treasuries read the rules and acted accordingly. Singapore, long a master of the targeted incentive, introduced a Refundable Investment Credit offering benefits of up to 50 percent of qualifying spending on activities it wishes to anchor: regional headquarters, advanced manufacturing, research, and green and digital projects. Because the credit is refundable in cash within four years, it does not undermine the country’s own minimum top-up tax; the incentive and the floor coexist by design. Ireland, whose low-rate model Pillar Two was widely assumed to dismantle, structured its research and development credit so that it pays out in cash and qualifies as a grant-equivalent under the framework, and continues to deploy cash grants for capital expenditure, training, and employment through its development agency.

This is not evasion. It is compliant competition. Each jurisdiction is doing precisely what the rules permit, converting the old contest over the statutory rate into a contest over the after-grant cost of locating an activity within its borders. The headline rate converges on 15 percent everywhere, which is the visible victory; the real price a multinational pays, net of refundable credits and cash inducements, continues to diverge sharply, which is the invisible defeat. A regime built to make tax competition transparent has instead made it more sophisticated and harder to read, because the action has moved from the rate, which sits on the face of the statute, to the expenditure side of the budget, where it is dispersed across agencies and line items.

Why Coordination Was Always Going to Leak

The deeper reason the floor cannot hold the line is structural, and it predates any particular rule. Capital is mobile; tax bases are not. A holding company can be reincorporated in an afternoon and intellectual property can be licensed from anywhere, but a workforce, a port, a grid connection, and a consumer market sit where they sit. That asymmetry is the engine of competition. As long as a government can improve the after-tax return on an investment by acting on the levers it still controls, and as long as the investment can move while the country cannot, the incentive to compete survives any single instrument aimed at any single lever.

Coordination among sovereigns is also inherently fragile, because each participant faces a private temptation to defect at the margin while publicly endorsing the common floor. A small open economy that captures a regional headquarters, a chip plant, or a data-center cluster gains concentrated employment, supply-chain depth, and prestige; the cost of the subsidy is diffuse, and the revenue forgone is, by the floor’s own logic, revenue it would not otherwise have collected. The collective interest in a high effective rate everywhere collides with each member’s individual interest in being the cheapest compliant place to land the next factory. Treaties can suppress the crudest form of that defection, the naked rate cut. They cannot abolish the underlying payoff, which simply re-expresses itself through whatever channel the treaty left open.

The Carve-Out at the Center

The clearest evidence that coordination bends to power, not the other way around, is the accommodation reached for the largest player. A side-by-side arrangement endorsed by the Group of Seven allows groups parented in a jurisdiction with sufficiently robust domestic rules, the United States foremost among them, to be excluded from the framework’s two principal enforcement mechanisms, the income inclusion rule and the undertaxed profits rule, on the theory that the home country’s own regime sits alongside the global one rather than under it. Domestic minimum top-up taxes legislated by host countries still bite, but the extraterritorial reach that gave Pillar Two its teeth against the most aggressive profit-shifters is blunted for the firms that shift the most.

The significance is less about any one country’s exemption than about what the exemption reveals. A genuinely binding global floor would apply hardest to the most powerful tax base and the most mobile capital. Instead, the most powerful jurisdiction negotiated a parallel track for its champions. Coordination held only to the extent that the dominant party consented to be bound, and the dominant party consented only on terms that preserved its own latitude. That is not a flaw in implementation; it is the recurring condition of any rule that constrains sovereigns who retain the option to walk.

Who Wins When the Base Cannot Move

The arithmetic of the original problem has not changed. Credible estimates put the profit shifted into low-tax jurisdictions at close to a trillion dollars a year, with associated revenue losses commonly placed in the range of 200 billion dollars annually, the bulk of it executed by the very largest groups. A 15 percent floor genuinely recaptures some of that, and the convergence of headline rates is a real accomplishment that earlier decades never achieved. But the floor redistributes the contest rather than ending it, and in that redistribution the advantage flows to whoever holds the most mobile asset and the deepest fiscal pocket.

The winners are large multinationals, which now bargain over refundable credits and grants instead of rates, and wealthy states with the budgetary room to fund those inducements and the leverage to negotiate carve-outs. The losers are smaller and poorer jurisdictions, whose only competitive instrument was ever the low rate the floor now forbids, and whose treasuries cannot match a cash-grant auction. The strategic lesson is the durable one. You cannot legislate away an incentive that arises from an asymmetry between what moves and what stays. You can only choose the form the competition will take, and force it into channels that favor scale, sophistication, and bargaining power. The race to the bottom did not end. It put on a suit, learned the new rules, and started running where the floor cannot follow.

Read our full Report Disclaimer.