The Impact Assessment of Implementing a Global Minimum Tax for MNEs in Sweden¹

Even though the minimum taxation directive typically stipulate that it is the jurisdiction where the UPE is located that collect the top-up tax, the jurisdiction where the undertaxed entity is located can choose to collect this tax revenue itself through a QDMTT. Considering that the top-up tax will be collected regardless of whether a country implements a QDMTT, the implementation of a QDMTT will not affect economic behavior. The QDMTT primarily dictates who it is that collects the tax, not for example the tax cost. Who it is that collects the tax is typically not central in business decisions. But even if the rule has little impact on how much top-up tax that is collected it is assumed to have strong effect on who collects the tax revenue. If universally implemented, Sweden would only collect top-up tax from Swedish entities. And, as we will discuss further below, top-up tax from Swedish entities is marginal.

Although analysis of data from CbCR suggest that there are undertaxed groups in Sweden, a detailed analysis using income declarations reveals that this is not correct. This implies that tax revenue from a Swedish QDMTT will be small. Three main factors drive this result. First, certain companies still include intra-group dividends in their profit before income tax. Second, some groups have other book income or the disposal of partial ownership rights that are not reflected in their profit before income tax. These items are exempt under the directive and do not result in top-up tax. The third factor leading to a low effective tax rate, according to CbCR data, is carried forward losses from previous years, which in some cases were not included in the CbCR. This also does not cause the entity to be undertaxed. Our analysis does not identify any significant sources for top-up taxation of entities in Sweden. But it does not rule out the possibility that there are deductions permitted under current Swedish law that are not exempted under the directive. We have not been able to do an exhaustive analysis of this. However, our assessment suggests that undertaxed entities in Sweden are exceptional cases.

Given that there is no obvious economic downside to a QDMTT, we assume that countries implementing the directive will also introduce a QDMTT, especially if they perceive potential undertaxation within their jurisdiction. It is unlikely that Sweden will levy top-up tax on entities in EU countries, as they are expected to adopt the directive. Many other countries have announced their intention to implement a minimum tax. Therefore, any additional tax according to the IIR would arise from countries that choose not to implement such rules, typically countries with limited resources.

The tax revenue Sweden can expect to collect from a top-up tax is strongly affected by which countries that implement a QDMTT. As described earlier, our starting point is a hypothetical where a top-up tax was implemented in 2016. Table 3 presents the hypothetical top-up tax in billions of SEK per year if the rules were implemented in those years without considering any behavioral impact and without adjusting for outliers.

The analysis shows that the top-up tax drops sharply in 2019, 2020, and 2021. An important factor may be the problems with CbCR described in the section on data and descriptive statistics, not least problems relating to the report being new and inclusion of tax-free dividends, which seems to be resolved during last years. Excluding a few outliers and with minor adjustments for possible errors, the estimated additional tax is around SEK 10 billion for all years except 2020. The low value for 2020 likely reflects the impact of the Covid pandemic on the global economy. Results may also reflect the implementation of the Anti-Tax Avoidance Directive from 2019 onward.

The previous section describes tax revenue due to activities of subsidiaries where the UPE is located in Sweden. But, as discussed above, Swedish tax revenue will be heavily affected if other jurisdictions implement a QDMTT. In terms of geographical distribution, a significant portion of the estimated tax revenues, ranging from 60 to 80 percent, come from EU countries. In practice, these EU countries are obliged to implement the directive and will likely also implement a QDMTT. In addition to EU countries, we also exclude subsidiaries located in countries where we are certain that QDMTT will be applied, or where minimum taxation is effective. As for the rest of the countries, we cannot be certain that QDMTT will be applied. We have, therefore, adopted the OECD hypothesis that 70 percent of countries will apply it. Based on these adjustments, we project that Sweden’s tax revenue from top-up tax based on the IIR will be around SEK 500 million in the year of implementation. This relatively low estimate is strongly dependent on our assumptions regarding QDMTTs, and higher revenues are possible if fewer countries opt for a QDMTT.

The undertaxed profit rule (UTPR) is a set of rules that exist to ensure that it is not easy to circumvent the IIR, for example, by moving the parent company to low-tax jurisdictions. Its aim is, therefore, not primarily to provide additional tax revenue besides the IIR. One reason why there is a need to ensure that the system is not easily circumvented is that companies that can circumvent the rules have a competitive advantage. In our assessment, the UTPR fulfills that purpose.

There are very few analyses done regarding the effect of the UTPR. One reason may be that it is a complicated rule that requires a lot of data to estimate and is expected to have relatively little effect. We estimate that there are 8,000 entities in foreign MNEs in Sweden, but in most of these groups, the parent company is located in a country that has indicated that it intends to introduce a minimum tax. We do not know which countries will introduce a minimum tax, and we also lack information on the activities of foreign corporations abroad. From a static analysis based on Swedish companies, we estimate that the revenue impact will be SEK 2 million. However, this figure is highly uncertain. Swedish revenues from the UTPR can be higher if fewer countries choose to introduce a QDMTT.

The revenue impact calculated in this paper is uncertain and based on a static calculation where the largest part of the tax revenue from the minimum tax is absorbed by other countries through QDMTTs. The tax revenue attributed to Sweden is between one-tenth and one-twentieth of the total tax revenue collected from Swedish multinational groups. Considering the purpose of the minimum tax, it is important to extend the static calculation of the revenue impact with a description of the behavioral changes and associated dynamic effects that the minimum tax directive may bring. The following sections discusses such implications.

The proposed measure is expected to act as a deterrent for companies considering aggressive tax planning strategies. It does so by increases the tax costs for companies currently utilizing such schemes, ultimately leveling the playing field for firms that do not employ such practices.

In theory, all companies can structure their operations to minimize tax costs. However, taking advantage of differences in effective tax rates can be costly. It is, therefore, primarily large multinational groups that have the capacity to pursue such strategies. The introduction of a global minimum tax reduces the opportunities for multinational groups to lower their tax costs, thus altering the competitive dynamics between larger and smaller groups.⁵ This change in the competitive landscape can have potential efficiency gains. More equitable conditions can imply that capital allocation is increasingly based on companies’ productivity, leading to an overall increase in productivity.

Administrative burdens can also affect competition. Our analysis of the administrative costs is described below, but the estimates are substantial—particularly for groups with extensive operations in multiple countries and entities. Typically, these costs are proportional to the size of the groups. While the effect on competition is limited when the largest groups primarily compete with each other, there may be instances where administrative costs distort competition. However, the introduction of well-designed safe harbor rules can significantly mitigate these effects.

It is assumed that only a few smaller Swedish groups currently engage in profit shifting, and most smaller groups have activities in only a few other countries. Consequently, in most cases, the administrative costs associated with the proposal should not be sufficient to significantly impact how companies grow. Nevertheless, the rules might introduce a threshold effect and that could influence how groups act. Groups near the thresholds may choose to restructure and grow in ways that allow them to avoid being subject to minimum tax rules, even though the actual costs involved are not in them self-sufficient to induce such behavior. The administrative cost, to some extent, depends on the number of subsidiaries. Groups may, therefore, opt to have fewer subsidiaries than they would if the rules did not exist, or limit their activities to fewer countries.

According to our assessment, the UTPR is effective. This implies that groups that have operations in any country that has implemented minimum taxation will have to pay top-up taxes on all activities, also activities in jurisdictions that have not implemented minimum taxation. MNEs, therefore, face the choice of either paying the minimum tax on all operations or, more or less, completely avoid being active in countries that have implemented pillar 2. The balance between increased tax costs, administrative burdens, and the profits derived from activities in countries implementing pillar 2 depends on the nature of the groups’ operations and the countries choosing to adopt the rules. If all G20 countries implement the rules, it is likely that very few MNEs within the scope would opt to refrain from activities in these countries due to top-up taxes. However, if only EU countries implement the rules, some multinational groups may consider withdrawing from the EU. We have not simulated this specific scenario with the available data, but existing information suggests that several major countries will introduce regulations on GloBE minimum taxation.

If MNEs choose to forego activity in jurisdictions with minimum taxation, they gain a competitive advantage in other markets by avoiding administrative costs and having lower tax burdens. Additionally, competition in markets where the rules have been implemented may decrease if certain groups opt out of operations. Overall, these dynamics distort competition and reduce efficiency.

The German finance department outlines a scenario where the EU implement a minimum tax first (Wissenschaftlicher Beirat 2022). In the scenario, low-tax countries respond by introducing QDMTTs or equivalent rules. As a result, there are no longer any low-tax countries, which removes the incentive for countries outside the EU to implement minimum taxation rules. As implementation introduces administrative costs, other countries refrain from introducing the rules, which distorts competition and adversely affect EU countries. This scenario underscores the importance of coordinated implementation of the regulations. However, it appears unlikely that all low-tax countries would introduce a QDMTT after the EU countries have implemented the directive.

According to the OECD (2020), the proposed rules are expected to have a negligible effect on global growth and investment. The estimates suggest that the rules would increase effective marginal tax rates by 1.2 percentage points and effective average tax rates by 0.3 percentage points. Additionally, global GDP is projected to decrease by less than 0.07 percent, while global employment is expected to experience a marginal increase.

From a Swedish perspective, since entities in Sweden are generally not considered undertaxed, the top-up tax can be viewed as a tax increase abroad on the profits of affected MNEs. When low-tax countries refrain from implementing a QDMTT, Sweden would admittedly collect a portion of the revenue using the IIR. Nevertheless, our view is that MNEs response to tax rate increases is typically related to the costs and not who it is that collects the revenue. The view that the top-up tax is a tax increase abroad is, therefore, motivated also in cases where IIR is used to collect top-up tax.

According to our static results, the tax costs for groups where the parent company is based in Sweden will rise by approximately SEK 5 billion–10 billion globally. This increase corresponds to about 5 to 10 percent of the total corporate tax costs for Swedish groups within the scope. It is important to note that, as mentioned earlier, only a fraction of this increase is expected to be paid in Sweden in a static calculation. The majority is anticipated to be paid as QDMTT abroad. The increase in tax costs is not symmetrical, and certain groups will bear a larger share of the burden than others. As a result, these groups’ investments may decrease due to higher tax costs, potentially impacting employment on a global scale.

Recent findings suggest that a significant portion of the effect of tax increases on investments comes from the relocation of investments rather than their cancellation. According to a study by Millot et al. (2020), which is also utilized in the OECD’s impact analysis, the effect of a 1 percentage point increase in corporate tax on global investments varies between 0.15 and 0.05 percent, depending on the profitability of the studied group. By applying the relevant semi-elasticity (based on the profitability of each Swedish multinational group) to investments and considering the magnitude of the tax rate increase for each group under the global minimum tax, we estimate that global investments in Swedish multinational groups would decrease by approximately 0.15 percent.

How this decrease in investment will impact investments in Sweden depends on the role that profit shifting and aggressive tax planning currently play in the effected Swedish groups. If profits generated in Sweden are currently shifted to jurisdictions with lower taxes, the avoided tax wedge would theoretically imply that investments in Sweden are presently higher than they would be if groups did not shift profits. The tax-wedge introduced by the top-up tax would then affect these groups’ investments in Sweden. In this hypothetical, these groups’ investments in Sweden could decrease by up to 1 percent. If profit shifting is less prevalent today, the top-up tax would increase the tax rate on operations abroad, but not in Sweden. This could then instead lead to increased investments by the affected groups in Sweden. This result can be extended to other, foreign, affected groups where a potential global decrease in investments is counterbalanced by improved Swedish competitiveness. A formal model describing these counterbalancing factors can be found in Johannesen (2022).

The impact of changes in corporation tax on employment is a topic of ongoing debate, with relatively few studies exploring this relationship. However, it is plausible that a negative effect on investment could induce a negative effect on employment. On the other hand, higher tax revenues can contribute to increased public consumption, which can influence employment— as highlighted by the OECD (2020). Factors such as substitution between production factors and wage effects further suggest that the impact on employment is smaller than the effect on investments. At the very least, the effect on employment should not surpass the effect on investments. Considering that the effect of a top-up tax on investment in Sweden is arguably, small the impact on employment will likely be negligible in a static setting.

The calculations presented so far assume that all factors other than the ones being studied remains unchanged. However, it may be a strong assumption that a global minimum tax would not influence the behavior of actors. A more forward-looking economic analysis would need to consider how the minimum tax affects behavior and expectations. The OECD (2020) discusses such aspects in its impact analysis.

According to our calculations, Sweden’s tax revenue from the IIR would amount to SEK 0.5 billion. The tax payments of Swedish groups would, on the other hand, increase by around ten to twenty times that amount. The calculation assumes that the jurisdiction that is currently a low-tax jurisdiction collects the additional tax. However, as the difference between tax rates narrows, the value of profit shifting decreases. This may lead groups to choose to relocate their profits and operations to Sweden.

Another aspect discussed by the OECD (2020) is the potential efficiency gains from making investment decisions based on factors other than the tax rate. According to this line of thought, the minimum tax does not eliminate intergovernmental competition for investment, but instead partially shifts the competition from corporate tax rates to factors such as labor income taxes and public services. Assuming that tax competition has led to imbalances, where taxes on labor income have increased and public spending has decreased to suboptimal levels, these shifts could result in efficiency gains. The fact that Sweden is not a low-tax jurisdiction also suggests that such changes to competition could benefit Sweden.

The SBIE allows for tax rates below 15 percent if there is substantial physical activity in a country. This means that it is possible to combine competition for real investments with tax rates below 15 percent (Schjelderup and Stahler 2023). However, this strategy is only available to countries that can compete in terms of real investments. Moving operations is significantly more costly than moving profits, which could make the strategy less effective. The scientific committee of the German finance department points out that EU rules on state aid can make it more challenging for EU countries to compete when the competition is shifted (Wissenschaftlicher Beirat beim Bundesministerium der Finanzen 2022). However, it is generally easier to gain societal acceptance for reforms in income taxes or public services than it is for reductions in the effective tax rate for multinational corporations.

The proposal will initially lead to significant expenses for building systems and acquiring the necessary skills to compile and submit the required reports. The extent of information to be compiled and reported depends on the number of entities within the group and the countries where the group operates. Swedish groups have approximately 9,000 entities abroad, resulting in a total of around 13,000 entities in Swedish groups when including the 4,000 entities located in Sweden.

Since many calculations and some GloBE information return are based on the groups’ total activity per country, it is important to know how many countries each group is active in. A group’s total activity aggregated at the country level is referred to below as a subgroup. In total for all Swedish groups, there are 3,000 such subgroups.

Our starting point is that the UPE bears the entire group’s costs for compiling and preparing the additional tax report. This is because the cost must primarily be borne by the entity that files the GloBE information return. We disregard the cases where several GloBE information return must be submitted, as we assess that this will only be relevant in exceptional cases or during a transition period. We also disregard the cases where the UPE is located in a country that does not apply the rules on minimum tax, even though in exceptional cases this may lead to additional entities in Sweden being required to submit the GloBE information return report.

An alternative assumption could be that the administrative costs are borne by each entity. Since the number of subsidiaries abroad in Swedish groups (9,000) is so close to the number of Swedish entities in foreign groups (8,000), the choice of starting point does not play a major role in the results of the analysis.

The premise that the UPE bears the cost presumes that there are agreements on information exchange and that the companies state that the UPE submits the report. If there are no such agreements, some, or all the 12,000 affected entities in Sweden may be forced to submit the report, thus including the 8,000 entities that are in foreign groups. These would then have to report for all entities in the group they are a part of. If this were to happen, it would clearly increase the administrative cost significantly.

To estimate the administrative costs according to the Swedish model on impact assessment, the so-called rules calculator is used. The rule calculator is based on multiplying an estimated hourly wage for the data provider by an estimated time consumption. According to Statistics Sweden’s statistics on average monthly salary in 2021, the average monthly salary for a business and corporate lawyer amount to SEK 63,400. The corresponding hourly wage is obtained by dividing the monthly wage by 160 hours. According to the Agency for Growth, the average monthly salary must be multiplied by the standard value of 1.84, which includes holiday compensation, employer contributions, and an overhead cost.

Based on our assessment, the regulations will require that a Swedish group reports an average of 15,000–20,000 data points. It is very difficult to determine in advance the time required per data point, not least because the data must be shared between companies in different countries. Much of the data to be submitted is also deemed to be new in relation to the companies’ accounting. We assume here that the time required to collect, share, and report data—after the system is fully implemented in each group—is 6 minutes per data point. This is our own assumption based on similar calculation for declaration forms. One can argue that this can be too low or too high for certain information points, but on average would be a good approximation. Based on the time costs stated above, this gives recurring costs of SEK 136 million (≈ 15000×(63.400/160)×(6/60)×1.84×124) to SEK 181 million (≈ 20000 × (63.400/160) × (6/60) × 1.84 × 124).

The cost depends to a very high degree on how many countries and entities the group needs to collect information from. In addition to the number of data points, the time required can also be affected by whether the calculation needs to be done for fewer jurisdictions. The administrative costs can be significantly reduced if rules on safe harbors are introduced, which means that the groups do not need to collect information in jurisdictions where they are clearly not undertaxed. This will reduce the compliance obligation in low-risk countries. At least in a transitional period, there will be safe harbor rules based on CbCR. The groups covered by the directive could then use the available data to calculate their effective tax rate. On the assumption that the GloBE information return report is only provided by the entities that are undertaxed according to CbCR, around 400 subgroups are affected. That is about one-sixth of the total number of subgroups. If we assume that this also represents one-sixth of the number of entities, the number of data points and thus the administrative cost would also be reduced to approximately one-sixth in such a scenario. This would mean a cost of SEK 23– 30 million according to the standard rule calculator’s method. Since Swedish MNEs often have relatively large operations in Sweden, the reduction can be even greater for them.

Around a quarter of the companies in Sweden state that both turnover and tax paid are zero. This is significantly more common in entities in Swedish MNEs than in foreign MNEs. It is probably relatively easy to report for these companies, which should also affect the administrative cost. If we assume that the foreign subsidiaries of Swedish MNEs are similar to the subsidiaries of foreign MNEs in Sweden, there are approximately 3,000 data points that are affected for a medium-sized group. If we assume that the time consumption for these companies is 1 minute per data point instead of 6 minutes, the administrative cost of the proposal will be between SEK 113 and 158 million.

Since there are many parts of the regulations that are unusual in a Swedish context, and there are still no established forms, it is difficult to use the rules calculator. We also see several reasons to believe that the cost for the companies will be higher than that which the rule calculator’s standardized method gives, especially initial costs. The GloBE information return reporting will require a high degree of coordination within groups—a coordination that does not always exist today. The fact that information from several countries must be compiled is also a complicating factor. Since many data points are deemed to be new in relation to group accounting, significant investments in IT systems and to train personnel will also be required.

Due to these factors and the large amount of data that needs to be collected, we have held a dialogue with representatives of the businesses to get their view of what the administration costs might be. Based on these contacts, we have made some rough estimates. They are based on the hypothetical that if the task of compiling the report was outsourced to a consultant, this would cost an average of over 30,000 SEK per unit and year. Due to the uncertainty, we count on an interval between SEK 30,000 and 50,000. In addition, according to the information we received, a work effort of from 20 to 40 hours per entity and year would be required from the group itself to provide consultants with documentation and support.

If it is assumed that the time for the ongoing handling varies between 20 and 40 hours for all companies, the cost corresponds to between 20/160 and 40/160 of an average monthly salary. The cost can thus be calculated at between SEK 14,600 (≈ 63, 400 × 1.84 × 20/160) and SEK 29,200 (≈ 63, 400×1.84×40/160) per entity and year.

With the uncertainty that prevails in this estimate, the total ongoing administrative costs for the Swedish UPEs that must submit the additional tax report can be calculated at between SEK 580 million (≈ (30 000 + 14, 600) × 13 000) and SEK 1 billion (≈ (50 000 + 29, 200) × 13 000). The higher value is well adjusted to keep the cost within the range.

If we instead again consider that some group units have very limited operations and assume as a standard that the cost for 3,000 units is instead 5 hours of work per unit, it leads to an estimated cost of between 450 million and 800 million SEK per year.

In addition to these costs, there are significant initial costs for training staff and building an IT structure. There may also be ongoing costs for maintaining the IT structure.

As with the rule calculator, the cost of this method is highly dependent on how many entities need to report. A safe harbors rule based on CbCR would reduce the cost to approximately one-sixth, that is, SEK 94 million to SEK 167 million per year.

Information from large national groups indicates that the regulatory burden is estimated to be significantly lower for these than for groups with activities in several countries. This is in line with the assumptions we have made here.