 to come back to whether this thing really is global. So what this is about is, as you may have heard, you may know a fair bit about it, there is currently really quite dramatic movement in the area of international corporate taxation. And so really after, as you probably know, the current system of international corporate taxation, based on the principle of arms pricing and so on, really goes back to the 1920s, if not further. So for about 100 years, there hasn't really been much change in the basic structure of the international corporate tax regime. But now suddenly, really over the last couple of years, two or three years, we've had really rapid change, we have the prospect of really rapid change to a new system that really departs from the long established norms of that system we've had for 120 years. So, and as I'll explain, you know, you often read in the press that this is a historic agreement and blah, blah, blah. And you might think, well, that's just journalists as usually trying to make things more important than they are. But in this case, excuse me, in this case, no, it really is a big, it really is a big deal. So to set the scene, what we had last October was agreements at a political level on a reform of the international corporate tax system, amongst something called the inclusive framework, many of you may know about that, which is a grouping brought together by OECD and G20. And this agreement now covers, I'm not quite sure exactly how many, but about 140, 140 countries. So that's a lot of countries, it's not the whole world by any means, but it's a lot of countries. And so what did they actually agree on? And as I say, it's a political agreement, not yet signed and sealed and delivered. But the political agreement has two elements, what are called two pillars. So pillar one, basically uses kind of formulaic methods by which I mean, some kind of, you know, algebraic formula for sharing out profits. And it uses a formula to reallocate part of the profits of the very largest multinationals, the very largest ones we're talking about here, to market countries, countries, meaning countries, sometimes called destination countries, countries in which final sales take place. So that really steps back from this whole principle of two of the key principles under the of the 1920s corporate tax system. One system, one principle was that we allocate profits by arms length pricing. That is we try and figure out what prices transactions within multinationals would have occurred at, had those had there occurred between independent parties. So one, one core principle of the old system has been arms length pricing. That's how we allocate profits across the bits of a multinational. Another principle has been that, well, if you simply export to a country, you don't have a physical presence there, you simply export to a country. Then under the 1920 system, you're not going to have any liability to corporate tax there. Of course, you may have liability to VAT and so on, but you wouldn't have a liability to corporate tax. Pillar one basically introduces these two principles which are quite different. One is we're allocating part of profits not by arms length pricing, but by a kind of mechanical formula. So we share the profits out according to some mechanical formula. And also, the largest, very largest multinationals have some liability tax simply if they export to a country without having any real physical or legal presence there. So pillar one, okay, you can see that's already stepping back from these core principles that we've had for a hundred years. Pillar two, which is the one that we're going to be concerned about. What does this do? This is, this establishes for the, for the largest multinationals, not the very largest, not only the very largest who are subject to pillar one, but the kind of next level down of big multinationals, establishes a minimum 15% rate of profit taxation. So again, this is something we've never had. We've had, you probably know that there has been a lot of talk about introducing minimum corporate tax rates over the years, internationally agreed minimum corporate tax rates. There are the only examples really, I think, are in WAMU and CMEK. But now this, the idea is that everybody will do this. Everybody will have a minimum effective rate of profit taxation of 15%. And that's pillar two, that's the one we're going to be talking about. So these are really big reforps. This is not, this is not small stuff. That's why I say this really is a historic agreement. It's historic, it's momentous, it's important, maybe not so much in terms of the sums of money that are involved at this point. We'll come back to that because a lot of the core system does remain in place. So it's not, it's not overturning quite everything, but it's certainly introducing fundamentally new principles. But even if it's not quantitatively a huge thing, I think it's a significant thing, but nonetheless, maybe not huge, but conceptually and intellectually, it really is clearly the most important development for at least 100 years in corporate taxation in general, one could argue. So what, as I say, we're going to focus on pillar two, the minimum corporate tax, excuse me, and with some focus too on what it means, in particular for low income countries. So before that, I should just say that while there is this high level political agreement, it hasn't yet been sort of agreed, you know, signed, sealed and delivered. There are still issues, there are issues in the EU. So it's possible that some of this, well probably no one's, no one's ever going to say it's not going to happen, but it might get pushed off for a long time. But nonetheless, let's proceed on the assumption that this is going to happen according to the schedule that has been laid down so far. Okay, so we're focusing on pillar two. Well, what is the point of pillar two? Why might one want to have a minimum effective rate of corporate taxation? Well, you know, the arguments that are given often depend on who they're being given to, who is the target for persuasion, but we can identify, I think, two kind of clear main objectives. One has been to limit tax competition, this sense that corporate tax rates, effective corporate tax rates around the world have been subject to kind of huge downward pressure over the last, since the kind of early 1990s, and that, you know, this has had the effect of essentially the world's governments shooting themselves in the foot, basically by losing revenue, as well as perhaps some equity concerns, but clearly revenue has been a major motivation here. So the idea is partly that if you set a minimum corporate tax rate, at least you're setting some kind of flaw on where corporate tax competition can end up. So that would be motive A. Motive B is to kind of limit the artificial shifting of profits from one jurisdiction to another, because clearly what happens is multinationals try to shift profits from where the tax rate's high to where it's low. So if you can raise the low rate, you can expect to limit the extent of profit shifting. Well, why might one want to do that? Well, to some extent, some people may see that as an aim in itself, as an end in itself, because they, there's this mantra of taxing, essentially taxing businesses where they add value, so to somehow tie tax payments to where real activities take place. I think that's more of a slogan than something one could achieve in reality with great precision. But nonetheless, some people, I think, see that as an end in itself. But even if it's not an end in itself limiting profit shifting, then we can certainly believe that if profit shifting becomes less attractive, then that will feed into objective A. That will make it less attractive for countries to cut their tax rates to attract shifted profits. And it'll make it less necessary for higher tax countries to lower their rates in order to protect themselves against profit shifting. Excuse me. So those, I think, have been the two motives that are most often mentioned. I think there is another objective that is sometimes mentioned, and that is to alleviate distortions to investment, to try and make sure that when multinationals are figuring out where to invest across the world, those decisions are less prone to be influenced by tax considerations. That is, it's kind of an efficiency concern. We, in the absence of any reason to want otherwise, we might want investment to occur wherever it's most efficient for it to occur. And we don't want taxes to distort those decisions, because otherwise we end up with less output collectively than we otherwise could have. However, there is a bit of attention in some of these, in some of this discussion, which is worth pointing out, which is on the one hand, there's clearly a desire to ultimately to raise average effective tax rates. That's really what you're doing when you're thinking about a minimum tax rate, you're trying to raise average effective tax rates. At the same time, when we think about distortions to investments, including kind of investment within countries, well, what would we think about there? We think that we, well, why would raising average tax rates actually reduce distortions to investment? It's not at all clear that it would. What you want to do in order to reduce distortions for investments, imagine kind of investment within countries now, is you want to have a low marginal effective tax rate, because we know the marginal effective tax rate is the thing that drives actual investment levels. And we know also that we can have taxes with high average tax rates, but low marginal average tax rates, if we try and attract tax rents, that is excess profits. So really in some sense, what we ought to be trying to do in all this, it seems to me, is finding ways in which the world as a whole can raise average effective tax rates, but have marginal effective tax rates close to zero, or at least leave countries with a way in which they can set low marginal effective tax rates while meeting whatever the kind of degree target is for average effective tax rates. Excuse me. So I'm not going to go into this in great detail, but I think when you think about this minimum tax, and in fact, when you think about this wider project in relation to tax avoidance that the OECD and G20 have been engaged on, something called the base erosion and profit shifting project, the BEPS project, many of you will know about. When we think about all that, in some sense, the standard we should be using, it seems to me, to judge that is, well, is this succeeding in raising average effective tax rates while lowering, or at least leaving countries free to lower, marginal effective tax rates? And as I say, I won't particularly linger on this, but I think there's kind of scope for a critique of the BEPS project in general, and the minimum tax, the approach to minimum taxation in particular. Anyway, those are the kind of some of the objectives, and clearly we're going to have to really think about, well, do we think the minimum tax as proposed will actually achieve all this? So let me, having sort of given the context, let me just give you a quick outline of what I'll be talking about. Well, first of all, I'm going to talk about what are the mechanics of Pillar 2? How does it actually work? Oh, excuse me. And that'll take a bit of time because it's actually more complicated than you might think. The idea that we're all going to have a minimum 50, we're all going to have an effective corporate tax rate of 50%, that may sound pretty straightforward, but as we'll see, the mechanics are more involved than that in ways that may well influence the impact of the minimum tax. And then that's what I'm going to focus on in the rest of the talk, is the impact of the minimum tax. And I'll talk about impact on profit shifting, tax revenue, investment, and then spend a little bit more time. I'll talk about those fairly briefly, but then spend a bit more time talking about what the minimum tax might mean for tax competition. They're just a few words of conclusion. Okay, so let me head on. So how does it work? Well, okay. I'm going to take a drink of water before we start this because you have to be focused to get all this right. So one thing to bear in mind is it doesn't apply to all multinationals, only the kind of ones that are sufficiently big, and big in the sense that basically their group revenue, the multinational as a whole, of about 750 million euros a year. So quite big, but not the very, not just the very biggest. And so then what you do, so you brought, you've defined all these multinational groups that are in scope. And then you look at each entity within that multinational group, each subsidiary, whatever it is, and every such entity is going to be liable potentially to what's called a top up tax to bring it up to this 15%. So how does the top up tax work? Well, that's what equation one is saying. So if you look at the first brackets, first bracketed term, T is what's called in the jargon covered taxes. But for the moment, just think about as the corporate tax that the entity actually pays. So big T is the corporate tax the entity actually pays. P is its accounting profit. So T over P is the actual corporate tax rate, actual corporate tax as a proportion of accounting profit. Okay, so that's in some sense the effective rate that the entity actually pays under the domestic tax system. Well, so what that first bracket does is says we're going to bring if that T over P is less than 15%, we're going to charge a top up tax to bring total tax up to 15%. So 15% minus the effective rate of domestic corporate taxation. That's the kind of the rate that we're going to apply. The thing that gets a bit more complicated is what is the base to which we're going to apply that top up? Well, it's not quite accounting profit P alone. Because in calculating the base, what we do is we take the accounting profit, and we deduct from it an amount big C, which is called the carvert. The jargon is the substance based income exclusion, but popularly known as a carvert. And the carvert is some fixed proportion of the entity's payroll and tangible assets. So the disproportion is just laid down in the rules. So P minus C, the base of the tax is accounting profit less some fixed proportion of your payroll and tangible assets. So what you can see is we apply the top up at the rate of 15% minus the actual effective rate, not to accounting profit, but to what is generally now called excess profit, that is profit in excess of the carvert. So that's quite an important little formula to bear in mind. And to note that because of this C, the carvert, it's not quite as simple as saying we're going to top up, we're going to make sure everybody pays 15% on accounting profit. It's there's some allowance for the carvert. And I think there's some, the kind of rationale often given for that is that, well, we want to allow some kind of tax break insofar as there are kind of substantial activities going on. We can talk later about whether that makes sense. I have a little remark about it in a minute, but there's some notion that, well, when there's substantial activity going on, maybe we don't really want to bring all profits up to the 15% tax. So formula one is important to bear in mind and we'll come back to it. A couple of other points just to mention. When I introduced that term, Big T, I said that was what's called covered taxes, covered, taxes covered by the agreement that means. So that in price is mainly going to be corporate income tax, but there are other things that might be included. For example, if there are special resource rent taxes in the extractive industries, then my understanding is that even though they're not in some sense of corporate income tax, they would be included in that amount. What's not so clear is, for example, whether things like royalties in the extractive sector or in other sectors, whether they would be counted as covered taxes or not. And you can see that may make quite a difference to the country concerned whether all these taxes are going to be essentially included as covered taxes. Because if they're included as covered taxes, that reduces the top up tax applied. One other thing is that the T, the Big T may also differ from, I said, I put in mind, your mind's the idea that T was the actual taxes paid. That's basically true except for some cases in which there are timing differences involved that might give rise to some kind of oddities in the application of this rule. For example, if you have accelerated depreciation and there are some adjustments made for that, which I'll come back to later. So here we have entity by entity. We apply this top up. We see if this top up tax is required or not. And strictly, it's not quite every entity. It's across every entity in the same multinational group within a particular country. So if a multinational group has two or three entities active in a particular country, this is done for the sum of those. But basically I'm going to talk about this as being levied at entity level. So notice too, this is not to do with the national, some kind of national effective tax rate. Everything is defined at entity level. Okay, so what does that mean? Well, that slide, oops, hang on, sorry. So that slide is just the top up tax, just the top up tax that someone is going to apply if the rate T over P is less than 15%. But of course, that's that top up tax, sorry, that top up tax is levied on top of the domestic tax. So if you think about the total tax that an entity pays in a country, it's going to be the top up tax plus the domestic, the kind of normal, regular domestic corporate tax. So the total tax is what's in that first line there. So T is just the tax you pay under the regular domestic tax. And then the second term is the top up tax exactly from the screen before. So two elements, domestic tax and then any top up. Now if you have gone a bit funny here with my slide, I'm afraid, but if you look at that first equation, you can simplify it based by collecting terms in T. And it turns out to be the same thing as what I for some reason called the label second. So the total tax, this is the total tax that the entity pays is comprised of two things. One, you take the effective rate, effective domestic rate, the T over P, and you apply that to the amount of the carve out. So the carve out ends up being taxed at the rate T over P. Essentially, because it's being excluded from the minimum, that's the that's the way it gets it effectively gets taxed. In addition, you have the second term, which is 15% of P minus C 15% of that excess profit term. So again, this is going to be quite helpful to bear in mind, because what does it tell us? Well, okay, so the minimum tax as we have it in that tasteful brown color, the minimal minimum tax is equivalent to having in terms of the total tax the entity faces, it's equivalent to taxing the carve out at the rate T over P, plus a minimum tax, this is the second term is really the true minimum tax, which is 15% of excess profit. Why do I say that's the absolute minimum tax minimum, minimum ish tax the ish I'll come back to. Well, because if you look at those two expressions, those two terms, the first one, the country could make zero if it wants to by setting T to zero. But there's nothing it can do about that second term, that second term is beyond the country's control, you know, barring games on defining P or defining C, there's nothing the country the country can do to affect that second term, it's just 15% of whatever accounting profit is with it with the ups with an accounting profit, whatever that is, less this mechanical car that whatever that is. So there are kind of no games to play on that second term. So that's why I say that the second term there is really like an absolute minimum, it's going to be really hard to get the tax that the entity pays below that. There may be one way of doing it, but that's pretty strange. And so that's that's why I say that's the absolute that's the absolute minimum. One other point that I think is quite interesting is again, if you look at that second term, it's excess profit. Well, it actually looks almost like a little bit like a rent tax. So rent tax, as you probably know, is a tax where essentially you allow all costs in effect to be deductible in calculating liability, including any financial costs. So for example, if you made C, if the if the carve out approximated the essentially the cost of the capital for the for the company, the cost of capital times its capital employment, then P minus C would basically be as pure profits. So that minimum would actually be like a rent tax, which has this nice property that you've probably come across that the rent tax basically has a as high an average rate as you want. In this case, it would have an average rate of 15%, but it would have a marginal effective rate of zero. So I don't think that was necessarily designed deliberately in probably rather suspect it wasn't a deliberate feature in designing the minimum. But it's potentially quite an interesting one as a way in which you could actually combine a minimum with a with the high average rate and a low marginal effective rate. Okay, so I hope that's kind of those are the kind of key mechanics. And you can see that, you know, as I was explaining, it's a little bit more, it's more complicated than simply 15% of a county profit because of that carve out. You know, if that carve out to zero, then tax is just 15% of accounting profit. But when C isn't zero, life is life is a bit more complicated. Okay. So what can we say about this? Well, another thing we should talk about is, well, actually, who gets the money from the top up tax? So someone is so I haven't said anything about who gets the money from that top up tax. And that has been really quite a big issue, as you can imagine, in the kind of political process of reaching agreement, particularly with a worry that really the source kind of developing countries, which typically going to be the source countries where the income arises. The concern was that they would be very much disadvantaged by the proposed, the what was called the rule order that was proposed rule order mean meaning who gets to have a go at the money in which order. So here are what the kind of most recent version of the proposed rules look like. Well, they actually give priority to the parent country to the parent side, the residence country, however you want to put it, under what's called an income inclusion rule, the IIR. Basically, that says that if the effective rate is less than 15%, then it's going to be the residence country, the parent country that imposes the top up. And that's a little bit like something called guilty that emerged from the to us tax reform of 2017. However, the second bullet. One very striking development very late in the process was that the model, the rules are now anticipated to include a way in which the host country, the source country can actually preempt the residence country by applying itself, what is called a qualifying domestic minimum top up tax, the QDM TT. So that's a terrible acronym. OECD is usually very good at acronyms, but that's an incredibly bad one. But that's this is a very important thing, because it means that, for example, imagine you're a you're a source country, you're a developing country that signed up to the agreement. What do you want to do? Do you want to sit back and suppose your effective rate is less than 15% on some entity. So as a host country, do you want to sit back and let the residence country get the money from the top up tax? Well, no, you don't. You want to get the money. And the way you get the money is by applying the qualified domestic minimum top up tax. Clearly, the investor doesn't care. The investor really doesn't care who they pay the money to. They care about the total tax. So if you're if you're a source country, then you pretty much want to apply this qualified domestic minimum top up tax. There's a very kind of clear policy prescription that comes out of this. What about suppose you say again, suppose you're a say we're developing country. And we say, well, actually, I don't really like this minimum thing at all. I'm just going to stay out of it. Well, unfortunately, in a way, you can't because if you stay outside. Well, the residence parent country is still going to impose their income inclusion rule. That's that's their role. That's nothing. It's not your role. They can they can do what they want on their entities. So basically, if you stay outside, either you're going to be conceding revenue to the participating capital exporters. Or well, maybe you're going to say, well, no, what I'll do is I'll set my tax rate high enough that the minimum top up tax won't or won't apply. I'll get my money that way. Well, actually, if you work through the algebra, and I don't have time to do it now, if you work through the algebra, that actually means a higher average rate for investors than if you impose the if then if you were in the deal, in impose the qualified domestic minimum top up tax. So it's an it's a horrible acronym QDMTT, but it's a very important one, I think for for low income countries, and particularly for for source countries in general. There is in the model rules for perhaps proven for your pillar two also provisioned as something called an under text payments rule, which again would give money to the host country when the is not applied and then this is subject to tax rule. But I'm going to leave those aside in this talk because I think a lot of the work in all this is going to be done by the QDM TT. So I hope that makes sense. And we'll we'll come back to that. So yes, that's going to be quite important when we think about, for example, things like tax competition and the revenue impact of the reform. So let's then turn to what we think if that makes sense. I know it's difficult for you to ask questions at the moment, but if there are any, that's kind of the mechanics of the thing. If there are any burning questions, I'm sure we can find a way to get them to me. Otherwise, I'll just carry on. So as I said, going to be fairly brief on these three dimensions of impact profit shifting revenue investment. So first of all, maybe before we come to that, who is going to be affected by the pillar by pillar two? And the answer is basically everyone assuming it happens and assuming critically that it's agreed by the major capital exporting countries, basically by the by the big countries in the G7 G20, then pretty much everybody is going to be affected. Why is that? Well, suppose you're a low, suppose you're a low tax country, you wanted to have a rate below 15 percent. Well, as we just discussed, if pillar two is adopted by the major capital exporters, there's no real, there's no real meaningful opportunity to opt out. If you just say, well, I'm not doing it, I'm keeping my rate below 15 percent. Well, the resident, the big capital exporters under the current as currently visited, we'll just say, oh, thank you very much. In that case, we'll impose the top up tax ourselves, we'll get all the revenue. Thank you very much. So they'll just apply their, their IIR, sorry, I keep getting IIR and IIR confused, but they'll apply the income inclusion role. So what is that? So let's introduce a few numbers here. So how many countries actually have effective tax rates below 15 percent? These are the effective, not statutory, these are the effective tax rates below 15 percent. And these numbers are from a recent UNTED study that I was involved in and references are at the end of the presentation, which I'm sure you'll get at some point. So actually about 33, about a third of all countries are below that level, which is kind of quite, quite a lot actually. Though again, that probably actually understates the importance of the rules because as we were saying, it's not the kind of overall effective rate at national level that matters. It's the rate entity by entity. And it could be that an entity in a high tax country has an effective rate below 15 percent because it has some tax incentive or something. So again, important to bear in mind that we often speak of countries being affected, being constrained by the minimum, but everything really operates at the entity level. Of course, if you think about investment hubs, that is countries that are largely used as the tax reasons, as conduits for investment, that is for treaty shopping or other reasons, investment is passed through these countries on its way to an ultimate destination. Well, a lot of those, 80 percent of those have effective rates below 15 percent. And they are clearly, I think, the target, largely the target of this reform. And about 30 percent of all developing countries would be in this category. And maybe a bit higher for reasons I'll come back to. So a lot of countries on the low tax side being affected. But what about higher tax countries? Say countries that aren't don't have national level effective rates below 15 percent. Well, they may be affected too. And for example, some of what UNTAD do is they look at, well, there's a lot of investment in developing countries where the effective tax rate is more than 15 percent. But a lot of those investments, it seems the profits get shifted to other jurisdictions, to other jurisdictions where the rates are less than 15 percent. So when you think on the basis of where does this investment located in a particular country, what is the effective rate on that investment, given the profits may be shifted to all other jurisdictions? Well, that may well turn out to be less than 15 percent. And clearly, then you can see that the minimum is going to be have an effect on those countries, because the rates on the profits that are shifted elsewhere is going to go up higher than 15 percent. And then even where that's not the case. I mean, even if you're in a 45 percent country, nothing strange going on, you're going to find that essentially profits are going to be less likely to be shifted abroad. And that makes investment in your country less attractive, because to some extent, investment in high tax countries is made more attractive by the possibility of shifting profits to lower tax countries. So even in those countries, there's going to be some effect. They're not directly constrained, but there's going to be some effect through the profit shifting channel. So it's going to be pretty hard to find examples of countries that are not going to be affected in one way or another by the minimum. So what do we think is going to happen to profit shifting? That is the artificial, the kind of artificial transactions that are intended to shift taxable profits from places where the rate is high to where the rate is low. Well, now what's going to happen is that if you want to shift profits to one of these investment hubs, for example, where the rate was previously below 15 percent, well, it's now going to be 15 percent. So there's going to be less gain from profit shifting. If you're in a 25 percent country, you're no longer able to shift it to a 10 percent country, because the 10 percent countries have to raise its rate from 10 to 15. Profit shifting is going to be less attractive, but clearly it's not going to end because if you're in a 25 percent country, okay, shifting to a 15 percent country isn't as good as shifting to a 10 percent country, but it's still good. So there's still an incentive to shift profit to lower tax jurisdictions. It's just that the profit shifting, the incentive is smaller. Profit shifting won't end, but it's clearly going to fall under these arrangements. So how much might it fall? Well, here's just a kind of a back of envelope calculation. I mean, people, when people model these things, they kind of often develop models in which it turns out that the amount of profit shifted, denoted P.S. here, is convex in the tax differential, that is kind of increases at an increasing rate with the tax differential between the two countries concerned that the high tax country, big T, low tax country, little t. So as a simple example of that, suppose the profit shifting is proportional to the square of that difference. It's some constant A, and it turns out A is not going to matter just as long as it's positive, times the tax difference squared. Well, then you can just run some kind of little back of envelope calculations to figure out how much profit shifting will fall. So for example, if the low tax rate, maybe imagine the little t is initially 8%, then profit shifting from a country with a rate of 25% is going to fall by 65% when that low tax country is forced to raise its rate from 8 to 15. So that actually seems kind of quite a bigger shift. So profit shifting doesn't disappear, but it falls by about 65%. And you can see by looking at it, you can see what essentially shapes how much profit shifting falls. So profit shifting will fall by more. The lower is the initial tax rate, initial low tax rate, because then it has to kind of move up more. And the closer is the high tax rate to 15%. So we can say, I think this is all back of envelope, but what they suggest to me at least is that these aren't, they're not small numbers. But they do nonetheless ignore the fact that, well, maybe some profit shifting may occur to higher than 15% countries. And maybe that will actually increase, maybe profit shifting to, if you're in a 25% country, maybe you're probably shifting profits to a 20% country. And maybe you'll shift more to a 20% country when you make the appropriate balance between shifting there and shifting to lower jurisdictions. Sorry, did I hear a possible question? Sorry. Well, I think it's some noise from outside. Oh, okay. Okay. Okay. So that's my take on, my very back of envelope take on profit shifting. What about revenue? So here there has been a fair bit of work done in those references you'll see at the bottom of the slide. Not surprisingly, total revenue tends to go up. And notice that revenue is going up here for two rather different reasons. It kind of goes up directly in countries that are forced to raise their effective rate. So kind of mechanically, assuming there's kind of no, assuming for the moment there's no response, revenue is going to go up because some country has to raise its rate from 8% to 15%. So there's a kind of a direct effect from where the constraint actually bites. But there's also going to be an indirect effect through this reduced profit shifting. So even in countries, as I was just trying to convince you, even in countries where the constraint isn't going to really bind at all directly because their rate is well above 25%, effectively profit shifting is going to go down. So there's going to be more profits remaining in higher tax countries. And that's going to mean a revenue increase. How big are these increases? Well, estimates range a fair bit, but from something like a bit under two to a bit under 6% of corporate tax revenue. For the EU, there's an increase of 15% for the affected multinationals. And that's a something I'll come back to. That's assuming that some of that revenue comes from the EU countries applying the top up tax elsewhere in the world. That is assuming that what I've got correct for once the IRR, IIR is applied by EU members. So that was we've seen, we might expect on the other hand that it would actually be the source countries would imply the QDNTT themselves. And for developing countries, this recent UNTED paper finds kind of at the high end, maybe a 15% increase in revenue from far related to foreign direct investment. So not total corporate tax, but revenue related to foreign direct investments. So, you know, the kind of noticeable revenue increases are not sort of transformative, but they're certainly noticeable. One thing that is quite striking is really the following. So that first bullet is all about the total increase in revenue, doesn't distinguish it in who gets it. But if we also question who actually gets this money, we might think that it's going to be important whether this QDNTT is in place. So how much developing countries are going to gain, we might think is going to depend on whether they impose the top up tax themselves or whether the top up tax is imposed by the residents country. But one of the striking findings in UNTED, still slightly mysterious, I think, is that actually that matters less than you might think. And that's because a lot of the effect comes not from this direct revenue impact of whether minimum constraint bites, but from the impact on profit shifting. So the story here is that a large part of the gain for developing countries comes from the fact that less profits are shifted out of developing countries to say investment hubs. And that that effect is about as important for developing countries as a whole as the kind of more direct effect from raising rates to 15%. So I think that's quite a striking finding, particularly given, as I say, all the political importance that was attached to this rule order issue before, whether it's the residents or the source country that tops up. It turns out, at least in the UNTED results, that that still matters, but it matters less than you might think. What about investment? What happens to investment? Well, let's think it through. So average effective rates, we would think certainly would go up, and they go up directly, work in countries that raise the minimum tax rate, and they go up indirectly in countries where this profit shifting channel is at work. They also are likely to become more compressed. That is, the bottom rates go up, the idea is the bottom rates go up, the top rates, let's say, remain the same. So things become more compressed. There's less dispersion among effective tax rates. What does that do? Well, that does two things. One, it's actually good for the high tax country. So the high tax country is kind of benefiting because it's kind of comparative disadvantage or competitive disadvantage has gone down. So for high tax countries, we might expect to gain through that route. And that, you might think, the second impact is while the reduced compression was likely to compression of rates likely means that taxes matter less for the choice of where to allocate investment. So that kind of cross country allocation of investment distortion, you might think, what we would think of in general, is likely to go down. There is a counter argument to that. There's a paper by Mike Devereux, which kind of argues a little bit the opposite. But the sort of the conventional wisdom, let me put it that way, is that this compression effect will be good for high tax countries and will likely improve the allocation of investment. Whether that's an improvement in allocation is a really big deal or not. Mike, you were cut off because we had an electricity issue here. I thought you just closed the lights up so you could have a good see. So luckily you're now back. So where do you want me to go back to? So that's where we're going to be here. So this is fine. But the investment you just started to explain and then you were cut off. Okay, I'll start again. And then roughly 15 minutes left will that be okay? Yeah. So in the first one, what are we things going to happen to investment? Well, I think we think that average effective rates are going to go up because total tax payments are going to go up. They're going to go up for these two reasons. They go up directly where countries are obliged or where the top up tax applies. They go up indirectly because even where the top up tax, even in jurisdiction countries where the top up tax doesn't apply, profit shifting will go down and therefore we'd expect rims go up. So average rates go up. They probably also become more compressed in the sense that you have the low tax rate country here, you have the high tax country here. You force the low tax country to raise its rate and that the gap between the two rates goes down. That's probably good for high tax countries wanting to attract investment because their competitive disadvantage has gone down. It may likely also means an improved allocation of investment across countries because tax is going to matter less for where to in the tax differences are much going to be less important in choosing where to where to invest. So an efficiency gain, although how large that is, we don't want to question. What about marginal rates? Well, we certainly think those will go up in all countries basically because opportunities for profit shifting go down. So essentially, investment everywhere becomes less attractive because profit shifting opportunities go down. The effects in directly affected countries are complex. Maybe I'm starting to run out of time, so let me not go into that. Let me just say that in principle, it's ambiguous as to where the marginal affected tax rates go up or down. Generally, I think people expect them to go up in which case we might expect investment to go down for that reason. So there is a sense, I think, that investment will go down and in aggregate may go up in some countries, may go up in higher tax countries and down in lower tax countries. A lot of the estimates put this as something like two to three percent change in investment as a consequence of the minimum. So again, not necessarily huge. But let me, I just wanted to say a little bit more about what happens with tax competition. As I mentioned, one of the objectives of the minimum tax has been to kind of put a bit of a slowdown on tax competition. So let's go through, go back to think about it from basic. So if you recall, this is exactly the same equation we had above, which is the total tax paid by an entity that is subject to the top-up tax. Remember those two terms, the TOP, the effective rate times carve out times 15 percent of excess profit. Now, so that's the tax paid total tax of an effect directly affected entity. Now, that if a country has a QDMTT in place so that it's applying the top-up, then that expression equation two is also the revenue that that country is getting. So imagine you're the low tax country. So that is the revenue you're getting in equation two. So what are you going to do? So you've already put a QDMTT in place. What are you going to do? Well, suppose, let's suppose it may not be a great idea, but suppose you want to compete in the intact terms to attract investment. Well, the best you can do is really set T, big T to zero. You can't go below 15 percent. That fifth, as I was saying, that 15 percent of excess profit, there's nothing you can do about that. With one footnote, I'll come back to it this time. So there is a floor, there's clearly a floor below which you can do, but you can still make your country more attractive by cutting T. There's still scope to attract to, if that's the game you want to play, attract investors by reducing tax payments T. Now, what you'll notice because the T over P multiplies C is that, well, now if you cut taxes by a dollar, that only benefits them. So T goes down by a dollar. That only benefits the investor by the ratio of the carvel to financial profits just through the mechanics of this thing. So a dollar cut in tax revenue benefits the investor less than it did when there was none of this top-up tax stuff. However, it now only costs you C over P. So cutting your taxes by a dollar is also less costly because you get some of it back through the QDNT. So arguably, you could say that the incentive to compete through tax reductions is unchanged. There's a floor, but it's still the case that through that first term, you can arrange more attractive terms for the investor than otherwise. But there are I think two further issues we should think about. So my first story is that really the incentive to compete on taxes doesn't really change much. There is just a floor and you only hit the floor by setting your domestic taxes to zero, but that's still true now. You only set the floor now by setting your domestic taxes to zero. But two further issues to think about. One, tax incentives and strategic responses. So what about tax incentives? We know that many developing countries and not just developing countries, but particularly developing countries, have all kinds of special provisions, tax holidays, very generous deductions, special economic zones that may have direct tax authorities, so on and so forth. Very remarkably broad provision for tax incentives. Well, the remarkable thing about the minimum tax rule is it makes no exceptions for those things. There's no grandfathering of tax holidays. There's no special provisions to allow countries to carry on with special economic zones. All that kind of goes, which is another big deal. Again, I think many tax people like me would see that as a big plus of the minimum, because experience suggests these incentives aren't really terribly effective. Of course, investment policy people see things differently. I think they can see, well, hang on, what's going on? You're kind of destroying our investment policy in one sweep. So the caveat to that, if I go back to the other slide, is that it's not quite the case that these things have no effect. Because of that first term, they still have an effect through that T-term. So they don't kind of completely go away, but they become less effective. You can see, for example, if you took a company that had no carve out, then you gave it a holiday. Well, the holiday would just get completely wiped out by the minimum tax. So there's a big issue here for countries thinking about what they're going to do about their incentive policy. Of course, as I say, everything I've said, again, only applies to the large multinationals. Many incentives are going to be benefit smaller companies, but nonetheless, this is kind of a bit of a wake-up call for thinking about what our incentive policies, tax incentives policies are doing and what they should be trying to do. I'll be very brief just on this last bullet. It's probably easier to kind of, if you're interested, take it away and look at it later. There are, as I mentioned at the outset, special provisions for things like accelerated depreciation, which operate through timing differences. They give you a lower tax burden, lower tax bill now, but a bigger tax bill in the future by bringing depreciation forward. Things like that that are kind of more or less standard and that operate through timing differences. The minimum tax rules essentially provide a way of kind of evening out that timing difference, removing the timing difference, which means that those measures do still have some effect. Things like accelerated depreciation do still have some effect and that's what the algebra there is trying to convince you of. There is one way in which you can go below what I call the absolute minimum and the reason I call it the absolute minimum ish and that's by offering something called a qualified refundable tax credit. Refundable meaning that it has to be a tax credit that you will, if necessary, give back to the investor if their entitlement exceeds their tax liability. Basically, these are things that are like cash grants. They're treated in exactly the same way as a cash grant. Basically, they're added to your accounting profit and taxed that way. That can technically get you below the absolute minimum, but really there's nothing to do with taxes here. This is just like giving a straight cash subsidy to the company. We should note too, the other thing, of course, on incentives is that, well, if countries are less able to compete by offering corporate tax incentives, they're going to look for other ways to compete. They could be other tax ways to compete. You could, for example, try to slightly restructure taxes that are not covered by the agreement so that they are covered by the agreement, which basically reduces the amount of top-up tax you'll face. But I think more obvious is that we can expect countries to compete more on spending measures of various kinds, on providing roads and business training opportunities, which are all the things that may be subject to all the same difficulties that we've seen with tax incentives. They may have governance issues. They may be redundant. That is, they're not actually necessary for the investment to take place. But I think potentially one way in which we will see things moving is towards more provision of spending incentives. The final thing I just wanted to say something about is, well, we've seen a little bit about what we think that the low tax countries might do in terms of, for example, imposing this QDMTT, reviewing tax incentives and so on. Well, what about the high tax countries? How will they respond? And this is a concern that I think a number of observers have expressed that, well, okay, we understand that the minimum is going to set a floor. But is that floor going to become a ceiling? That is, are all countries somehow going to feel that we can't offer a rate above 15%? We're going to have to cut a rate towards 15%. Well, of course, nobody knows what the answer that will be. My sense is that if you look at the literature, such as it is, it tends to suggest that when other countries increase their tax rates, I increase my tax rate. I don't reduce it. That is, there's strategic complementarity in strategy rates. So that suggests that when low tax countries are forced to raise their rates, excuse me, the high tax countries are going to raise their rates in response, or at least not a set higher rates than they otherwise would have. And that becomes important, because it also means, and this is something I've been doing some work on, also means that even the low tax countries that are kind of forced away from their preferred tax policy by being obliged to raise their tax rates, even they might gain from the imposition of a minimum tax. Why is that? Well, essentially, if you think it through, imagine this is a kind of an equilibrium, a national equilibrium where countries are setting tax raises to, essentially, their best possible tax rate, given the rate the other country sets. Well, what happens then if we force a low tax country to raise its rate, just to kind of have a little bit? Well, that really has no impact on the welfare of the low tax country, because it's choosing its tax rate, ultimately to begin with, then essentially as an envelope result, being forced to raise its tax rate a little bit more has no first order effect on welfare. So if you're, I don't know, Ireland, you've set a 12.5 percentage rate, being forced to raise that rate to 12.6 percent really has no impact on you, doesn't really matter. However, suppose that when Ireland raises its rate, other countries raise their rates in response. Well, that increase abroad does convey a first order benefit to Ireland, because it essentially pushes profit shifting back in honest direction. So you have no effect from the own change in tax rates, but a positive effect from the change in other countries. That means that even the low tax countries can benefit from imposing a minimum tax. Eventually, of course, that gain is going to disappear, because essentially, although you're taxing the low tax countries, taxing shifted profits at a higher rate, the amount of profits shifted is going to eventually go down. So you have the kind of pattern here. So this shows, for example, this is the welfare of the low tax country. Along the bottom, mu is the minimum tax rate. So TN is the initial Nash Equilibrium tax rate. So you can see that as you raise the minimum from zero, initially nothing happens. Then once you have a small minimum rate, slightly above TN, high tax, welfare in that low tax country goes up. It keeps going up until at some point, the reduction in profits shifted to low tax country becomes dominant. And now welfare starts to fall in the low tax country. And eventually, it ends up worse off, as you see at that point, mu star star. It ends up worse off than it was initially before the introduction of the minimum. You can see there's this whole range between TN and mu double star where the low tax country actually benefits from the minimum tax, which might be kind of slightly surprising that being forced to do something you didn't want to do, the low tax country is gaining. Nonetheless, that's what the analysis suggests. And the question then becomes, well, how big might these effects be? So for example, what is the minimum tax rate that the low tax country would most like? Which going back to this picture, that's at this level mu star, mu with a single star, the peak of the curve. That's the minimum tax that gives the highest welfare to the low tax country. So we might ask how high is that? And then we might also ask how high is mu double star, because that's the highest minimum rate that still leaves the low tax country better off. And essentially what some of the work I've been doing with the colleague called Shafiq Habus suggests, is those numbers maybe quite high? Again, just running through this, it suggests, for example, that the most preferred guys start with an initial rate of 12.5%, calibrate the model a little bit, then the most preferred rate, that kind of peak point for the low tax country, comes at something like 15% to 19%. And that's quite a, in terms of the policy debate, the difference between 12.5% and 15% to 19% is quite big in terms of numbers people are arguing about. And if you ask what that mu double star is, so mu double star, remember, was the mu double star is the point at which the low tax country starts to become worse off than it was before the minimum, that may be like 17% to 25%. So you're saying that even if you're a low tax country on 12.5%, you may benefit from sending a minimum tax up to 17% or more. And this also, by the way, matters for revenue. So the recent IMF paper in something called the fiscal monitor, they basically say, well, suppose we take those revenue estimates that I was talking about above, and now let's add to that a strategic response in the form of higher tax rates in the high tax countries of the order that the empirical literature suggests. Well, actually that doubles the revenue gain. So the total amount of revenue gain doubles and becomes quite significant if this strategic response works out. So I'm going to, to Yuka's relief, I'm going to just wind up now concluding. If you think about, well, what are the kind of policy prescriptions that come out of this? Well, the one that I think is very clear is that there's a strong case for countries to adopt a QDMTT. In some sense, of course, there's a lot of politics involved in that. We have to think about the attractions of pillar one. But in the context, just to think about pillar two, there's clearly an incentive to just a kind of a national self-interest suggests signing up to the agreement and adopting a QDMTT. There's clearly a case, I think, too, for countries to start reviewing their tax incentive strategy, because this really is a new world for thinking about tax incentives, as I say, initially for the big multinationals. Clearly, I should say in all this, there's a sense that, well, this is applying for the moment to large multinationals. But if it works out, it's clearly, many would clearly like to see it applied much more widely. Another lesson is, you know, begin to prepare suit, because the expectation of the deal, as I say, it's not yet agreed, is implementation really starts towards the end of next year. And this is a big deal, and it's not a simplification, because all the changes I've been describing, pillar one and pillar two, they actually come not as simply as entire replacements for the current regime, but on top of substantial elements of the current regime that will remain. So I think with that, there are some, some open issues. But I think for that, and just to see if there are any questions I cannot with, let me leave it there and hand things back to Yooka. Thank you. Thank you very much. Thanks so much for walking us through on what is quite complicated, but very very tiny set of issues. We still have some, some opportunity for precedent and comment. Do you think this will be easy to implement in your country? So are there, can you think about the implementation challenges? There was one person from the back here, Silvia please. I don't like this question. More of a question like the differences in countries, the main reason why they're not national, engaging in both issues. But when you look at the developing countries, there are all these risks, including, you know, the lack of economic stability, the political risks, that also, you know, impact the decisions of the national issues. So I know this is probably going to help in any way, but I think there are so many economic things in developing countries that are kind of disadvantageous. So I feel like over and above the tax rate, the amount of tax money we shoot their profits are probably because they've deceived the wealthy countries to produce a lot of money. So that's my concern for this. And then related to that, there's an issue of developing countries, African countries, dependent on fiscal incentives, we're not quite happy with that. So even though there's some, you know, probably there's some evidence that that's open up in this one, I still think it's going to boost their option for the African countries to use taxes, essentially. Thank you. Yeah. Make it a question. No, I think I got the second one. On the first one, I think it was, that really there are a lot of other non-tax things that are going to matter. Yeah, exactly. Okay. No, they're both good points. I think on the, yeah, I think it's certainly true. Non-tax things kind of always matter a lot. I suppose the question is what is how, for example, this, the minimum tax can affect, can change the risks, whether it can change the risks that investors perceive. Because, you know, those kind of risks are always going to be there. So the question is, well, how does the minimum affect it? And I think you could say, well, it's going to be really important for countries to signal early on what they intend to, what they intend to do. What they intend to do, for example, leading into your second point about tax incentives, what they intend to do about their basic corporate tax rate, whether they intend to basically sign up to the inclusive framework agreement or not. So I think at one level, you know, the mechanics of the deal might not affect those risk considerations very much. But I think there are additional uncertainties are created that can be created, which I think will not, maybe to your point, won't work in the direction of helping developing countries. But I think it makes it important for tax administrations and so on to be talking to multinationals and laying out a policy. Because multinationals also don't really quite know how all this is going to play out. So I think it's going to be very important for them to know, as soon as they can, how the host countries plan to respond. Even to show that they know what's going on, even to show that they are thinking about it, I think can be important. On the tax incentives, I guess I just have a slightly different perspective. I suppose two points. I have a slightly different perspective. I think there's a lot of evidence that, you know, tax and, you know, one can always find a point anecdotal cases where tax incentives appear to work. But then there's a lot of experience suggests that, you know, there's a lot of surveys show a lot of redundancy incentives being offered when they weren't really necessary. And so on and so forth. But so I even on kind of the existing kind of world, I may be more doubtful about the advantages of tax incentives than you are. But I think also to bear in mind that this will affect everybody. So it's not just, you know, the case that says, I need tax incentives because my neighbouring country has tax incentives. In a way that argument goes away if the neighbouring country is also subject to the minimum. So it is a kind of a coordination device on the tax incentive kind of thing. So I'm I do see that as a more as a more positive elements of the agreement than than you do now. And as we saw as we were saying, you know, just so I just on it, it's, you know, going back again to the algebra, it's not the tax incentives don't have any effect. They still have some effect to the extent of that carve out, which you can argue, okay, that's fine, because the carve out is saying it only has some effect to the extent that there's some real activity going on here. So I wouldn't be as I wouldn't be as depressed about it as as as you I think. So the policy advice is to adopt this QD and whatever it was. Yeah. How difficult it will be to implement the developing country context. This is I'm just looking at thoughts on that. So, or is it the case that the rich countries will find it easier to do and then then then they cut the revenue? I think it's going to be true that I'm sure that they clearly the higher income countries will find it easier, easier to do. I mean, on the, well, anything to do with anything to do with multinationalism is inherently complicated. But you know, on the face of it, it doesn't seem, I mean, a lot of the, well, let me step back. I suspect a lot of the issues may be accounting issues. Because remember, in all, we know one thing that becomes very important here is the accounting is the definition of that P, which depends on the accounting standards being used and details of accounting that are certainly far beyond me. So I think a lot of the gameplay may well be on the accounting side of thing. And I think, for example, the OECD has been hiring accountants lately, because they see that that's going to be where a lot of the work is. So, you know, I think in some sense, you know, it's not that hard, but the C is the C is pretty mechanical. If you know tangible assets and you know payroll, T is relatively straightforward. All the issues become accounting ones. It's how you account for the third taxes with accelerated appreciation, that adjustment I mentioned. I'm sure, you know, defining what tangible assets are, figuring out what how you're going to measure payroll, all those kind of things. So I don't think it's, I think it's probably easier than a bunch of the transfer pricing cases that developed in countries that are asked to deal with that, which they will still be asked to deal with. So it is, it's going to be, it's going to be a challenge. Yeah. Anything else? Yeah. Ezekiel, please. Thank you. Despite the good idea that the noise is in terms of the country that signed that framework still agreed. So I'm wondering whether you are in, but there are some options for you not to implement what you have signed. I missed, sorry, I missed the very last, I missed the punchline options. Is it still possible to not to implement what you have agreed to? I mean, in a sense, game the system? Is that what you're saying? Yes, because there are some countries that are being, to be, always being from it, but they do practice a whole lot of implementing the, in particular, in another country. I think, well, you can always, I think you can always, you can always say you want to stay out, but I think the, you know, a feature of the way that Pillar 2 is designed is that really, the pair of the capital exporting countries could just do this without anyone's, they don't need anybody to agree in other countries. They can all just apply. But really, really what's going on is, is the idea, it really comes from the 2017 tax reform, this guilty, which is the, which was the US tax proposal that, which was really imposing a minimum tax in effect on US multinational earnings abroad. And it's something if all capital, if all the big capital exporting countries do this, which they can simply do in their domestic law, they don't need an agreement for this. Then it's very hard to stay outside, because they will just do the topping up for you. So, I mean, there are, there are various kind of games that, that companies I think may be able to play. But I think that, as I say, it's really, it's called an agreement. But in a way, these are just things that the, the capital exporting countries have got in one interpretation, they've just got to get, can just get together and do in their domestic law. And then, you know, everybody else has to think, how do they best respond to that? And the best response to that may be basically to, to play the same game and apply the QDM TT, which the, which will basically neutralize the impact of the, of the capital exporting countries. I don't know if that's what you were getting at, but I think it's, it's kind of cunningly or evenly one or the other designed to, to, to make it very hard, meaningfully to opt out. If, you know, assuming that, you know, what's important I think is that you get this critical mass or what's important for the argument I just gave is that there is this critical mass of, of the major, basically the big G7, G20 countries applying in. Okay. I think we need to stop now because the other problem is the investing. So thank you so much, Mick. That was marvelous. Well, thank you. Thanks to your patients. Thanks very much. Cheerio. Bye-bye.