Volume 9 • 2022 • Number transnational corporations investment and development

4.1. ETR channel
Consider the implementation of a minimum tax rate t
∗
applied to the foreign affiliates 
of large MNEs on a jurisdictional basis. We abstract, for the moment, from profit 
shifting and the carve-out. Assuming 
γ
ch
= 0 for all h in (1), the FDI-level ETR is just 
equal to the ETR. The FDI-level ETR after Pillar Two is then given by:
4 An impact framework based on FDI-level ETRs
ETR

FDI
c
=
ETR

c
=
max
(
ETR
c
,
t
∗
)
(2)
∆
ETR
FDI
lrg
,
c
=
∆
ETR
lrg
,
c
=
ETR

c
−
ETR
c
=



t
∗
−
ETR
c
if
ETR
c
<
t
∗
0
if
ETR
c
≥
t
∗
(3)
∆
ETR
FDI
lrg
,
c
=
ETR

c
−
ETR
c
(4)
+
h
,
h

=
c
γ
ch
(
ETR
c
−
ETR
h
)
−
h
,
h

=
c
γ

ch
(
ETR

c
−
ETR

h
)
ETR

h
=
max
(
ETR
h
,
t
∗
)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


ETR

c
−
ETR
c
(5)
+
h
,
h

=
c
γ
ch
−
γ

ch
ETR

c
−
ETR
h
+
h
,
h

=
c
γ

ch
ETR

h
−
ETR
h
γ

ch
−
γ
ch
=
β
1
(
ETR

c
−
ETR
c
) +
β
2
(
ETR

h
−
ETR
h
)
(6)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


(
ETR

c
−
ETR
c
) +
h
,
h

=
c
γ
ch
(
ETR

c
−
ETR
h
)
2
(2)

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TRANSNATIONAL CORPORATIONS 
Volume 29, 2022, Number 2
106
Throughout the paper, the prime symbol ’ denotes the underlying metrics post-Pillar 
Two. Changes in FDI-level ETRs of the foreign affiliates of large MNEs in c are then:
4 An impact framework based on FDI-level ETRs
ETR

FDI
c
=
ETR

c
=
max
(
ETR
c
,
t
∗
)
(2)
∆
ETR
FDI
lrg
,
c
=
∆
ETR
lrg
,
c
=
ETR

c
−
ETR
c
=



t
∗
−
ETR
c
if
ETR
c
<
t
∗
0
if
ETR
c
≥
t
∗
(3)
∆
ETR
FDI
lrg
,
c
=
ETR

c
−
ETR
c
(4)
+
h
,
h

=
c
γ
ch
(
ETR
c
−
ETR
h
)
−
h
,
h

=
c
γ

ch
(
ETR

c
−
ETR

h
)
ETR

h
=
max
(
ETR
h
,
t
∗
)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


ETR

c
−
ETR
c
(5)
+
h
,
h

=
c
γ
ch
−
γ

ch
ETR

c
−
ETR
h
+
h
,
h

=
c
γ

ch
ETR

h
−
ETR
h
γ

ch
−
γ
ch
=
β
1
(
ETR

c
−
ETR
c
) +
β
2
(
ETR

h
−
ETR
h
)
(6)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


(
ETR

c
−
ETR
c
) +
h
,
h

=
c
γ
ch
(
ETR

c
−
ETR
h
)
2
(3)
In other words, ETRs faced by large MNEs increase in countries where the average 
ETR is below the minimum. We refer to this effect as the ETR channel.
4.2. Incorporating profit shifting
From (1), taking the full difference in FDI-level ETRs between post- and pre-Pillar 
Two yields the expression:
4 An impact framework based on FDI-level ETRs
ETR

FDI
c
=
ETR

c
=
max
(
ETR
c
,
t
∗
)
(2)
∆
ETR
FDI
lrg
,
c
=
∆
ETR
lrg
,
c
=
ETR

c
−
ETR
c
=



t
∗
−
ETR
c
if
ETR
c
<
t
∗
0
if
ETR
c
≥
t
∗
(3)
∆
ETR
FDI
lrg
,
c
=
ETR

c
−
ETR
c
(4)
+
h
,
h

=
c
γ
ch
(
ETR
c
−
ETR
h
)
−
h
,
h

=
c
γ

ch
(
ETR

c
−
ETR

h
)
ETR

h
=
max
(
ETR
h
,
t
∗
)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


ETR

c
−
ETR
c
(5)
+
h
,
h

=
c
γ
ch
−
γ

ch
ETR

c
−
ETR
h
+
h
,
h

=
c
γ

ch
ETR

h
−
ETR
h
γ

ch
−
γ
ch
=
β
1
(
ETR

c
−
ETR
c
) +
β
2
(
ETR

h
−
ETR
h
)
(6)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


(
ETR

c
−
ETR
c
) +
h
,
h

=
c
γ
ch
(
ETR

c
−
ETR
h
)
2
(4)
where 
γ
′
ch
denotes bilateral profit shifting shares of foreign affiliates of large MNEs 
after the
reform,
ETR
′
c
is
defined
by
(2),
and
:
4 An impact framework based on FDI-level ETRs
ETR

FDI
c
=
ETR

c
=
max
(
ETR
c
,
t
∗
)
(2)
∆
ETR
FDI
lrg
,
c
=
∆
ETR
lrg
,
c
=
ETR

c
−
ETR
c
=



t
∗
−
ETR
c
if
ETR
c
<
t
∗
0
if
ETR
c
≥
t
∗
(3)
∆
ETR
FDI
lrg
,
c
=
ETR

c
−
ETR
c
(4)
+
h
,
h

=
c
γ
ch
(
ETR
c
−
ETR
h
)
−
h
,
h

=
c
γ

ch
(
ETR

c
−
ETR

h
)
ETR

h
=
max
(
ETR
h
,
t
∗
)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


ETR

c
−
ETR
c
(5)
+
h
,
h

=
c
γ
ch
−
γ

ch
ETR

c
−
ETR
h
+
h
,
h

=
c
γ

ch
ETR

h
−
ETR
h
γ

ch
−
γ
ch
=
β
1
(
ETR

c
−
ETR
c
) +
β
2
(
ETR

h
−
ETR
h
)
(6)
∆
ETR
FDI
lrg
,
c
=


1
−
h
,
h

=
c
γ
ch


(
ETR

c
−
ETR
c
) +
h
,
h

=
c
γ
ch
(
ETR

c
−
ETR
h
)
2
The first term in (4) reflects the ETR channel. With profit shifting, a supplementary 
term – a profit shifting channel – enters the equation. It captures the variation in the 
FDI-level ETR in c caused by the rise in taxes levied on profits reported in OFCs 
and by the reduction of profit shifting from c to OFCs.
An alternative expression for (4) is: