Volume 9 • 2022 • Number transnational corporations investment and development

Figure 1. Distribution of standard ETRs and FDI-level ETRs pre-Pillar Two
Source
: Authors’ elaboration.
Note
: Distributions plotted for illustrative purposes.
Tax rate
De
nsi
ty
FDI-level ETR
(with profit shifting)
ETR
(without profit shifting) 
Figure 2. Effect of a minimum tax rate t* on the distribution of FDI-level ETRs
Source
: Authors’ elaboration.
Note
: Distributions plotted for illustrative purposes.
Distribution
pre-reform
Distribution
post-reform
FDI-level ETR
De
nsi
ty
Profit shifting
channel
t*
ETR
channel

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TRANSNATIONAL CORPORATIONS 
Volume 29, 2022, Number 2
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generating higher tax rate differentials in the right tail of the distribution.
5
The net 
effect will still be a reduction in FDI-level ETR differentials,
6
but will be smaller than 
expected based solely on the changes in host countries’ ETRs. More accurately, 
the stronger the reduction in profit shifting by large MNEs following Pillar Two, the 
smaller the decrease in the tax rate differentials produced by the reform.
Hence, interestingly, profit shifting adds to the direct impact of Pillar Two on the 
level of FDI-level ETRs (equation (5)) but partially mitigates its impact on their 
differentials at the same time. It is worth emphasizing that since it is the FDI-level 
ETR and not the ETR that drives the investment decisions of MNEs, the effects of 
Pillar Two on tax-related competitive dynamics and economic efficiency should be 
assessed against changes in the former, and seen through this lens, they may be 
lower than expected.