Why This Matters

Although the United States has indicated it will not join a global tax deal brokered by the OECD, most developed economies and several other countries and jurisdictions are well underway to implementing a key element of the agreement – a global minimum tax of 15 percent, also known as Pillar 2. In this report, we estimate how the full implementation of Pillar 2 will impact effective average tax rates (EATRs)—a measure used by economists to compare the tax burden on new profitable investments, particularly in the context of multinational operations and cross border investments – on foreign investments made by US multinationals.

What We Found

We present results depending on how much profit is shifted and for two different types of multinationals: those with a residual GILTI liability in the current system (when the total GILTI liability of a company is larger than its foreign tax credits) and those with excess foreign tax credits.

We show that the broad implementation of Pillar 2 across the world will increase the tax burdens on many US multinationals but not all.

• Pillar 2 will raise taxes on low-tax income reported in tax havens. US corporations that have residual GILTI liability from income reported in low-tax jurisdictions will no longer be able to use new foreign tax credits against that liability and will face substantial increases in their EATRs.
• Pillar 2 reduces how much taxes multinationals can avoid with profit shifting: EATRs increase by about 6.7 to 8.8 percentage points on average.
• Multinationals with excess foreign tax credits (their GILTI liability is lower than their foreign tax credits) that do no shift profit will see no change in their EATR. If they shift a quarter of new profits, their EATR will go up by 3.6 percentage points on average.

Our estimates show that Pillar 2 works as intended: US multinationals engaging in profit-shifting or reporting profits in low-tax jurisdictions will face higher tax burdens. Multinationals that do limited profit-shifting will see little or no increase in their tax burdens.

Transitioning to a country-by-country GILTI system would be the most critical step in reducing profit-shifting incentives with little impact on multinationals that do not report a significant fraction of their income in low-tax jurisdictions or shift income generated by their new investments. The planned increase in the GILTI rate to 13.125 percent in 2026 combined with a country-by-country GILTI system would mostly align the US with Pillar 2.

We also present the impact of two illustrative GILTI reforms on EATRs. 

How We Did It

We built on the International Investment Capital Model at the Tax Policy Center that can estimate the tax burden on new foreign investments under current US and foreign law before the implementation of Pillar 2.