Volume 9 • 2022 • Number transnational corporations investment and development

Table 8. Simulation of the impact of Pillar Two on FDI-level ETRs under assumptions 
made in the OECD economic impact assessment 
(Percentage point)
Assumption
Increase in FDI-level ETRs 
Global average
Baseline (11)
2.0
Baseline (11) with reduced sample
2.1
—— + constant profit shifting (11.i)
1.9
—— + no ETR channel (11.ii)
1.3
—— + 40 per cent carve-out on shifted profits (11.iii)
0.8
7.6. Tax rate differentials
Before concluding, we examine the evolution of tax differentials for large MNEs, 
assuming profit shifting elimination and no carve-out for ease of exposition (table 9). 
Without profit shifting considerations, the reduction in (standard) ETR differentials 
across countries generated by Pillar Two is particularly sizable. The post-Pillar Two 
distribution of the average ETR is “truncated” at the minimum tax rate (section 5), 
resulting in a 30 per cent decrease in the standard deviation of ETRs. In contrast, 
differentials in FDI-level ETRs decrease to a lesser degree because of the profit 
shifting channel extensively discussed in section 5. The decline is more moderate 
at 15 per cent, i.e. it represents half of the reduction observed for standard ETRs. 
The baseline scenario with partial reduction of profit shifting shows a stronger 
decrease in FDI-level ETRs differentials but is still smaller than for standard ETRs.
Source
: Authors’ calculations.
Note
: Assuming elimination of profit shifting, no carve-out, and including only large MNEs. All countries included.
Table 9. Standard deviation of ETRs and FDI-level ETRs across host countries 
(Percentage)
Tax rate
Standard deviation 
pre-Pillar Two
Standard deviation 
post-Pillar Two