Over two years have passed since more than 140 countries signed the OECD's global tax deal, consisting of two Pillars, in October 2021. Pillar One is focused on expanding source country taxing rights on the income of large multinational enterprises (MNEs). It targets digital companies such as Facebook or Google that can extract profits from a source jurisdiction without a physical presence. The implementation of Pillar One remains uncertain. Nonetheless, the global minimum tax in Pillar Two is expected to be implemented globally soon. A popular narrative about Pillar Two endorsed by many scholars, including myself here, is as follows: Pillar Two and its global minimum tax embrace the ideal of corporate tax harmonization to combat the tax competition that has dominated international taxation since the advent of globalization in the 1980s.
In his recent article, The Mirage of Mobile Capital, Wei Cui (UBC; Google Scholar) emphasizes a factor in this traditional narrative: capital mobility. When capital is mobile, MNEs can shift profits to low-tax countries, so that countries compete to attract investment, creating a race to the bottom. However, implementing the global minimum tax with various corrective measures can address the tax competition problem because it would eliminate the MNEs' incentive for shifting profits or taking advantage of capital mobility.
After singling out capital mobility, Cui challenges such dominant narrative by arguing that mobile capital may be an illusion. First, Cui argues that intangibles, considered to be mobile capital, are not actually mobile. Mobility of capital requires rivalry in use, meaning assets are mobile when they can be in one place as opposed to another. Financial and physical capital exemplify this as they are rivals in use. However, intangibles can be simultaneously deployed in different parts of the world, and thus Cui suggests that intangibles would be immobile. Then why have we considered that intangibles are mobile? Cui explains that legal rights to intangibles may be assigned to legal entities formed anywhere, and that such assignment may determine where the returns to intangibles are taxed. In other words, IP rights are mobile for tax purposes only, although intangibles are not conceptually mobile. Thus, modeling profit shifting in terms of capital mobility generates conceptual confusion and is often factually inaccurate.
Second, Cui provides that empirical evidence for tax competition is very weak. There are good explanations, other than tax competition, of why countries offer tax holidays and reduce tax rates. Third, Cui asserts that capital mobility sheds little light on the central aspects of international income taxation—such as i) exemption or credit methods for relieving double taxation for outbound investments and ii) inbound tax rules that resemble optimal tariffs and other instruments for taxing location-specific rent—and the associated externalities. There are many important ways, beyond capital mobility, where corporate income tax rules impose externalities on foreigners or foreign countries. By accepting prevailing narrative with capital mobility, we might overlook more important ways where countries cooperate, or fail to cooperate, to address the externalities caused by the existing international tax regime.
Cui’s article provides much food for thought to reflect on the prevailing narrative on tax competition and the global minimum tax. I am sympathetic to Cui’s attack on the obsession with mobile capital in the international tax discourse and his recommendation for paying attention to other important political and economic factors. However, requiring rivalry in use to qualify the notion of “mobility” might be counter-intuitive because intangibles can be deployed in multiple jurisdictions at the same time. Semantically, simultaneous use in multiple places may align better with terms like ubiquity or duality, rather than immobility. Furthermore, Cui also acknowledges that IP rights for tax law purposes may be mobile and then criticizes the arbitrary rules for allocating profits from IP rights among MNE entities. Then, it becomes less clear why we need to distinguish the intangibles as a concept from the rights to intangibles as a legal notion, because it seems that both the traditional narrative and Cui embrace the tax-law-endogenous mobility of intangibles. Nonetheless, Cui’s attempt to (re)discover factors other than mobile capital to explain profit shifting and tax competition makes an important contribution to the current international tax discourse, as implementing the 15% global minimum tax is not a simple task at all. Due to the complexity of the rules and many substantial carve-outs, we may end up having a global minimum tax that is far from perfect. It may be time to explore other sources of problems in international tax, such as disguised export subsidies, check-the-box rules, and transfer pricing rules. This paper only implies various sources of problems and does not offer an alternative narrative. But I believe that Cui's article will trigger subsequent studies by many international tax scholars, and when the time is ripe, I would like to hear Cui's version of narrative for international income taxation.