Strategic Incentives for Adopting the Global Minimum Tax

Taxation Law Research Programme (TLRP)

Strategic Incentives for Adopting the Global Minimum Tax

26 January 2024

Powerpoint is available HERE.

International agreements on the taxation of multinationals emerged rapidly in the last two years, as exemplified by an EU directive on a global minimum tax (commonly known as “Pillar Two”) and other countries’ announcement to implement similar rules. According to a popular narrative, the speed of Pillar Two adoption may be partly attributable to certain enforcement mechanisms that elicit the participation even of those not sympathetic to Pillar Two’s stated goals. Such mechanisms, acting on nations’ self-interest, make Pillar Two “incentive compatible” and characterizes it with a “devilish logic.”

This Seminar examines this narrative by systematically analyzing strategic incentives for adopting or retaining Pillar Two’s three components: the Income Inclusion Rule (IIR), the Qualified Domestic Minimum Top-Up Tax (QDMT), and the UTPR or under-tax profit rule. It finds that such incentives are surprisingly weak for national-income-maximizing governments. Specifically: (1) IIR adoption is irrational conditional on QDMT adoption by other countries in response; (2) QDMT adoption is rational if and only if in response to IIR adoption, and the combination of IIR and QDMT adoption is therefore unstable; (3) in many policy-relevant circumstances, QDMT adoption is not an effective response to UTPR adoption, and IIR adoption is generally not an effective response to UTPR adoption. In addition, the Seminar draws an important distinction between two interpretations of the UTPR (extraterritorial v. non-extraterritorial), and identifies conditions under which they are equivalent (generating weak enforcement effects) and where they diverge. The Seminar’s findings suggest that if countries are motivated by national self-interest, then even after many adopt Pillar Two, the regime may still unravel. Indeed, the fact that Pillar Two contemplates very substantial wealth transfers among countries makes its “incentive compatibility” highly unlikely. The Seminar also shows the extraterritorial and non-extraterritorial interpretations of the UTPR raise distinct normative questions about international law; normative debates about the UTPR should therefore pay closer attention to the UTPR’s positive features.

About the Speaker
Wei Cui teaches at the Peter A. Allard School of Law, University of British Columbia. His scholarship spans a wide range of topics in tax law and policy. In the area of international taxation, his recent writing has examined rationales for global tax cooperation, strategic incentives for adopting the global minimum tax, the destination-based cash flow tax, formulary apportionment, measures for taxing non-residents’ capital gains, and the digital services tax as a tax on location specific rent. He is currently writing a book that reconceptualizes the history and subject matter of international income taxation in light of the evolution in international trade. Professor Cui is the author of The Administrative Foundations of the Chinese Fiscal State (2022) and (with Schenk and Thuronyi) Value Added Tax: A Comparative Approach (2nd ed., 2015), both published by Cambridge University Press. He was a visiting professor of law at New York University School of Law in fall 2022, and had previously held visiting appointments at Michigan, Columbia, and Melbourne Law Schools, among other institutions. Before becoming a full-time academic, Wei practiced U.S. and Chinese tax law for over 10 years in New York and Beijing. During 2009-2010, he was Senior Tax Counsel at the China Investment Corporation. He has also served as a consultant to China’s National People’s Congress, Ministry of Finance and State Administration of Taxation, as well as to the United Nations.

Chair: Professor Richard Cullen, TLRP Convenor

Enquiries: Flora Leung at aiiflhku@hku.hk