Abstract
This paper shows that OECD’s Pillar Two may increase employment and investment in low-tax countries due to the Substance-based Income Exclusion (SBIE). The SBIE allows to tax-deduct payroll costs and user costs of tangible assets twice from the tax base of the top-up tax owed by subsidiaries in low-tax countries. Consequently, it implies that a 15% minimum corporate tax for low-taxed subsidiaries is not achieved if the SBIE is positive. We show that Pillar Two dampens tax-motivated transfer pricing, but changes the employment, investment and import incentives, and that for a sufficiently large cost share of labor and/or capital, the SBIE is equivalent to a production subsidy.
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