Profit Shifting and International Tax Coordination: Italian Firms at the Test of the Global Minimum Taxation

The persistent erosion of corporate tax bases through profit shifting by MNEs has long represented a key challenge in international tax policy. Evidence of profit shifting by large companies operating in international markets has been well documented in the economic literature, but tackling the problem at the international level requires strong coordination between countries, which has always seemed utopian. The 2021 OECD/G20 agreement on a Global Minimum Tax (GMT) under the BEPS Pillar Two framework has marked an unprecedented step toward coordinated international taxation. At the same time, the design of the OECD BEPS Plan may not have provided the necessary incentives to eliminate profit shifting. Yet the effectiveness of this reform in curbing profit shifting and harmful tax competition remains uncertain. Moreover, the evolution of the original OECD agreement has been marked by significant fragmentation. A large number of signatory countries have yet to legislate the GloBE rules. Above all, together with the position of China, the recent G7 agreement and the OECD implementation of a ‘side-by-side’ approach and the exclusion of US MNE from the application of the minimum taxation cast serious doubt on the GMT’s global reach and effectiveness.

This paper makes two main contributions. First, it provides a critical assessment of the GMT framework under Pillar Two, examining key structural limitations — including the role of the Substance-Based Income Exclusion (SBIE), the treatment of tax incentives, and the fragmented pattern of international adoption — that may substantially constrain its capacity to reduce profit shifting and tax avoidance by MNE. Particular attention is devoted to the positions of China and the United States, whose non-compliance significantly undermines the scope of the agreement. Second, drawing on the MEDITA microsimulation model developed at the Italian Parliamentary Budget Office, the paper provides the first empirical assessment of the GMT’s impact on MNE groups located in Italy. Using firm-level data matched with tax return information, the analysis documents systematic differences in effective tax rates (ETRs) between single domestic firms, domestic groups, and MNE groups — consistent with widespread profit shifting behavior. Results show that, in 2022, 25.49% of MNE groups located in Italy have an ETR below the 15% GloBE threshold and would thus be liable for the Qualified Domestic Minimum Top-up Tax (QDMTT). However, after applying for the SBIE, only 24.14% of potentially liable groups face a positive GMT payment, indicating that substance carve-out provisions reduce GMT liability to zero in approximately 70% of eligible cases. These findings suggest that, together with the recent side-by-side approach for US MNE, the design of the GMT leaves substantial room for large MNE groups to continue reducing their effective tax burden, and that the additional taxation generated is insufficient to equalize the tax load between multinational and purely domestic firms.