GB720 Unit 10 Policy Research Paper Example

After the Tax Holiday: A Unit 10 Policy Research Paper on the Global Minimum Tax and Who Gains From the Incentives That Replace It

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Purdue University Global

GB720: Business Policy in a Global Economy

Unit 10 Policy Research Paper

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[Date]

The document counts, firm sample and Harwell Structures are composite and illustrative; the tax rules and the studies cited are real.

Abstract

The global minimum tax reduces the value of tax holidays and reduced rates for large multinational groups. This paper argues that host governments are responding by shifting incentives toward cash grants and refundable tax credits, which retain more value under the minimum tax rules, and that this shift favors firms able to negotiate individually with governments. Evidence comes from coded policy documents of twelve host governments from 2021 to 2025 and from disclosures by forty multinational manufacturers. The claim would be false if hosts kept relying on tax holidays or if firms without government affairs capacity received the new incentives at similar rates.

Introduction

When the OECD and more than 130 jurisdictions agreed in 2021 to a minimum effective tax rate of 15 percent for large multinational groups, much attention focused on profit shifting by technology and pharmaceutical firms. Less attention went to manufacturing investment, where host governments have long used tax holidays, reduced rates and investment allowances to attract plants. Under the minimum tax rules, an incentive that lowers a group's effective rate in a country below 15 percent produces a top-up tax, so much of its value is lost to the investor. Some incentives fare better: grants usually enter the calculation as income, not as reduced tax, and qualifying refundable credits get comparable treatment (OECD, 2022). The claim of this paper is that host governments are shifting toward these forms, and that the shift changes which firms benefit.

Where the Claim Sits in the Literature

Two literatures meet in the claim. Research on tax competition has studied how countries compete for mobile capital by lowering tax rates. Devereux et al. (2008) found evidence that OECD countries set their corporate tax rates in response to those of other countries, consistent with strategic competition. The minimum tax was designed to limit that competition, and an early question is whether it simply moves competition from rates to other instruments.

Research on corporate political activity has studied how firms differ in their capacity to influence governments. Hillman et al. (2004) reviewed evidence that firms with greater political resources and experience engage more actively and, in some settings, gain more. If incentives move from general tax rates, which apply automatically, to negotiated grants, which require applications and bargaining, firms with greater nonmarket capacity should gain relative to others.

The paper connects these literatures by asking whether a rule designed to limit tax competition shifts the advantage to firms that compete well in negotiation.

Method

Policy documents. The study coded investment promotion laws, budget statements and incentive guidelines from twelve host governments that compete for automotive and battery manufacturing, including Hungary, Poland, the Czech Republic, Slovakia, Mexico and several others, for the years 2021 to 2025. Each document was coded for the forms of incentive offered, tax holiday, reduced rate, allowance, grant or refundable credit, and for whether access was automatic or negotiated. A second coder independently coded a random third of the documents, with agreement on incentive form in 91 percent of cases.

Firm disclosures. The study examined annual reports and tax disclosures of forty multinational manufacturers with plants in those countries, coding whether each reported receiving grants or refundable credits from 2024 onward and whether it disclosed a government affairs function. The disclosures are uneven; some firms report incentives in detail and others not at all.

Findings

Of the twelve host governments, nine adopted a domestic minimum top-up tax by 2025, allowing them to collect top-up taxes themselves. Seven introduced or expanded cash grants or refundable credits for large investments over the same period, and five of those seven made access depend on individual negotiation or ministerial approval. Only two reduced tax holidays explicitly, but in nine countries new tax holidays offered to large groups after 2023 were accompanied by grants of comparable size. The pattern supports the first half of the claim: hosts are shifting incentive form.

Among the forty firms, twenty-three disclosed receiving grants or refundable credits from 2024 onward. Of the twenty-six firms that disclosed a dedicated government affairs function, nineteen reported such incentives, about 73 percent. Of the fourteen without one, four did, about 29 percent. The difference is consistent with the second half of the claim, though it could also reflect firm size, since larger firms are both more likely to have government affairs staff and more likely to receive large grants.

A rule written to stop countries from competing on tax rates may have moved the competition to the negotiating table.

What Would Show the Claim Is Wrong

Either half of the argument could break on the evidence. If the coded documents showed hosts relying on tax holidays and reduced rates as heavily after 2023 as before, the first part would fail. If firms without government affairs functions received grants and refundable credits at rates similar to firms with them, once size was taken into account, the second part would fail. The current evidence supports the first part more strongly than the second, because the size confound has not yet been addressed.

The Illustrative Case, Kept in Its Place

Harwell Structures' Hungarian plant illustrates the mechanism without proving it. As described in Unit 2, the plant's investment allowance lost much of its value under the minimum tax, and the company's response was to seek grants for training and equipment through direct discussions with the government. Harwell has a government affairs function, which made those discussions possible. The case shows how the shift works for one firm; the document and disclosure evidence, not the case, carries the claim.

Limits

The study's evidence is descriptive. It cannot rule out that firm size, rather than nonmarket capacity, explains which firms receive the new incentives. The firm disclosures are incomplete. The period is short, and hosts' responses may change as the minimum tax matures and as the United States position evolves. A stronger test would compare firms of similar size with and without government affairs capacity, using grant award records from host governments.

Conclusion

The global minimum tax appears to be changing the form of competition for manufacturing investment rather than ending it. Host governments are offering more grants and refundable credits, often through negotiation, and firms able to negotiate are receiving more of them. For policymakers, the finding suggests that limiting tax competition may require attention to grant competition as well. For firms, it suggests that nonmarket capacity has become a more valuable asset in location decisions than it was when tax rates did the work automatically.

References

Devereux, M. P., Lockwood, B., & Redoano, M. (2008). Do countries compete over corporate tax rates? Journal of Public Economics, 92(5-6), 1210-1235. https://doi.org/10.1016/j.jpubeco.2007.09.005

Hillman, A. J., Keim, G. D., & Schuler, D. (2004). Corporate political activity: A review and research agenda. Journal of Management, 30(6), 837-857. https://doi.org/10.1016/j.jm.2004.06.003

OECD. (2022). Tax incentives and the global minimum corporate tax: Reconsidering tax incentives after the GloBE rules. OECD Publishing. https://doi.org/10.1787/25d30b96-en