GB720 Unit 2 Policy Instrument Analysis Example

A Minimum Tax No Single Country Chose: A Unit 2 Policy Instrument Analysis of Pillar Two and a Hungarian Plant

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Purdue University Global

GB720: Business Policy in a Global Economy

Unit 2 Policy Instrument Analysis

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[Date]

Harwell Structures and its figures are composite and illustrative; the tax rules, agreements and sources cited are real.

The Instrument and the Firm

Pillar Two, as the global minimum tax is usually called, reaches multinational groups whose combined revenue tops 750 million euros a year. It aims to ensure that such groups pay an effective tax rate of at least 15 percent in every jurisdiction where they operate. If a group's profits in a country are taxed below 15 percent, a top-up tax is collected, by the host country if it has adopted a domestic minimum tax, or otherwise by the parent's country or other countries under backstop rules, as the European Union's implementing directive sets out (Council of the European Union, 2022).

Harwell Structures, with group revenue of about 1.3 billion dollars, falls within scope. Its battery enclosure plant near Gyor, opened in 2022, is subject to Hungary's corporate income tax rate of 9 percent, the lowest in the European Union. Before Pillar Two, the plant's low rate, combined with an investment tax allowance negotiated at entry, was a significant reason for locating there.

Classifying the Instrument

Hood (1983) classified the tools of government into four kinds: nodality, the use of information; authority, the use of legal command; treasure, the use of money; and organization, the direct use of government capacity. The global minimum tax is an authority tool. It does not spend money or provide services; it changes what other governments' tax rules can achieve. Its distinctive feature is that it reorders the treasure tools other states use. A tax holiday or reduced rate, which was once a form of treasure offered to attract investment, now produces a top-up tax elsewhere, so its value to the investor shrinks.

Interests at the Table

Several interests shaped the agreement reached by about 136 jurisdictions in October 2021. European treasuries wanted to protect their tax bases from profit shifting to low-tax jurisdictions. The United States, which had enacted its own tax on low-taxed foreign income of American multinationals in 2017, sought a global floor that would reduce the competitive disadvantage of that tax. Low-tax hosts, including Hungary and Ireland, negotiated for room to keep attracting real investment, which produced a carve-out that excludes from the top-up calculation a return on payroll and tangible assets. Business groups pressed for simplicity and for safe harbors that reduce compliance costs. Developing countries sought rules that would let them collect more of the tax themselves. No single government designed the result. It reflects compromises among all of these interests, which is why its carve-outs, thresholds and backstops can seem complicated: each one answers a concern raised by a particular party during the negotiations.

From Statement to Directive

The 2021 statement was a political agreement, not law. The European Union turned it into law through a council directive adopted in December 2022, which required member states to implement the rules from 2024. Hungary, which had resisted the directive for months, ultimately accepted it and adopted a qualified domestic minimum top-up tax, which allows Hungary itself to collect the top-up on low-taxed profits of large groups operating there rather than leaving it to other countries.

One Allowance, Repriced

The instrument's effect on Harwell is clearest in the investment allowance the company negotiated at entry. The allowance reduced the plant's corporate tax in its first years by letting it deduct a share of its investment against taxable profit. Under Pillar Two, that reduction lowers the plant's effective rate below 15 percent, so a top-up tax is due and, under Hungary's domestic minimum tax, collected by Hungary. Much of the allowance's value is therefore lost. A cash grant of the same size would be treated differently: grants generally count as income in the Pillar Two calculation rather than as a tax reduction, and certain refundable tax credits receive similar treatment (OECD, 2022). The instrument has repriced the incentive forms available to host governments, making grants and refundable credits more valuable relative to allowances and holidays.

Pillar Two did not ban tax incentives; it changed which kinds of incentive still deliver what they promise.

What Harwell Has Done in Response

Harwell's tax team modeled the effect on the Hungarian plant in 2023. With the investment allowance, the plant's effective rate for the first years was well under 15 percent, so a top-up tax would be due. The company's response was threefold. It stopped counting the allowance's full value in its investment appraisals for a planned expansion of the Gyor plant. It asked its advisers to identify which Hungarian incentives would survive the minimum tax calculation, which pointed toward cash grants for training and equipment. And it raised the issue with the Hungarian investment promotion agency, which had begun redesigning its offers. None of these responses changes the law. Each is a way in which a firm adapts its own decisions to an instrument it had no part in designing, while also trying to influence how its host government responds.

What Hosts Are Now Choosing

Host governments competing for factories now face a choice they did not face before 2021. They can keep tax holidays and allowances, knowing that much of their value will be collected as top-up tax, possibly by another country. They can adopt a domestic minimum tax so that they, rather than the parent's country, collect the top-up. Or they can shift to grants and refundable credits that survive the minimum tax calculation. Hungary has done the second and is reported to be considering the third. Each choice affects which firms can still benefit: grants require negotiation and administrative capacity on both sides, which favors firms with experience dealing with governments.

What Two Years Cannot Show

The rules took effect for most groups in 2024, and the first top-up tax returns will not be filed until later. Two years of evidence cannot show whether the instrument has reduced profit shifting, whether hosts' new incentives will be as effective as the old ones, or whether the backstop rules will hold together as countries implement them differently. The United States has not adopted the rules and has taken positions against parts of them. The analysis therefore describes how the instrument works and what it has changed in the incentives offered to firms like Harwell, not its final effects.

References

Council of the European Union. (2022). Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union. Official Journal of the European Union, L 328.

Hood, C. (1983). The tools of government. Macmillan.

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