The Impact of the Global Minimum Tax Reform on China and Its Countermeasures

1 Introduction

The global minimum tax (GMT) is a concept of “two pillars” published by the Organization for Economic Cooperation and Development (OECD) in October 2019. The plan proposal aroused strong reactions from various countries. In December 2021, the European Commission will publish the Global Minimum Corporate Tax Implementation Guidelines to ensure the smooth implementation of the world minimum tax within the European Union. Currently, 138 countries support the GMT policy as part of the Base Erosion and Profit Shifting (BEPS) Action Plan. The World Minimum Tax Reform Package breaks traditional international tax rules and allows the country of residence to tax intangible income and low tax rates in the source country, sharing the negative income. This scheme protects the tax base and promotes international tax equity, but most of the additional tax revenue is lost. Most flows go to the countries where the TNCs are located rather than those that generate profits. According to The Economist, the G7 receives more than 60% of fiscal revenue from the minimum tax rate. Through the discussion of the world’s minimum tax reform and the erosion of China’s tax base, this article reveals the positive role of the minimum tax reform in solving the problem of tax base erosion in China and provides useful enlightenment for improving China’s tax system.

The world’s minimum tax focuses on large multinational corporations with high-profit margins. In the Pillar 1 and Pillar 2 schemes published by the OECD in 2009, the 100 largest multinational corporations in the world, or multinational corporations with a group of more than 750 million euros, are taxed. Apple and others are eye-catching. According to Beer et al., (2020) such multinational digital enterprises have taken advantage of the loopholes between tax havens and the tax systems of various countries through related-party transactions and transfer pricing of intangible assets and have adopted various models to achieve amazing tax haven effects. For example, from 2009 to 2011, Apple earned $38 billion in pre-tax profits worldwide. In 2017, Google’s annual revenue reached £7.6 billion, and it paid only £49 million in taxes that year, or 0.6%, when it paid only $21 million. Amazon’s annual revenue is £8.7 billion, with taxes of just £4.5 million and a tax burden of 0.1%. These figures show that multinational tech giants have achieved extremely low or even zero tax rates through complex tax planning and have made huge profits on a global scale.

International tax reform is at crossroads, and China, with its growing economy and big role in trade and investment, is at the crossroads. The OECD’s planned GMT has the potential to have far-reaching effects on economies throughout the globe by changing the way multinational corporations are taxed, and knowing how China’s tax policy, system, and possible reactions to the reform work in this context is crucial. All sorts of taxes, including value-added tax (VAT), corporate income tax, individual income tax, and municipal taxes are a part of China’s complex tax system. As time has progressed, China has implemented changes to update its tax system, increase compliance, and promote economic development. Moreover, the country’s tax policies have played a crucial role in encouraging economic growth, industrialization, and international investment attraction.

After collating the relevant data of the world’s top 500 companies and the Hong Kong Stock Exchange from Wang et al. (2023), it was found that 236 Chinese companies, such as Alibaba, Noah Fortune, and Midea Real Estate, have set up companies in tax havens. Its “tax haven” investment accounted for 24% of the total foreign investment, amounting to 620.606 billion U.S. dollars. Suppose the Pillar 2 package, which the United States strongly supports, is used as the world’s minimum tax threshold. In that case, it will involve 38 large Chinese enterprises in 13 industries, such as technology services, finance, and real estate. In addition, many multinational companies in China have consolidated revenues of more than 750 million euros, involving 17 categories, 29 subcategories, and 198 enterprises. Under the one-pillar levy scheme, 14 technology service companies such as Alibaba, Tencent, and Baidu will be taxed, accounting for 34% of the total number of enterprises registered in “tax havens” in China. According to Cheng & Zhou (2022) examination, if the second pillar is applied, the subject of taxation will be expanded to 42 scientific and technological service industries, and the subject of taxation will be further expanded. Implementing the GMT scheme means that the tax rate will rise sharply from 0 to 15%, putting huge financial pressure on Chinese companies registered in tax havens, especially in the technology service industry. The biggest impact is that the existing tax avoidance channels will be blocked, and the innovation and development of the technology industry and enterprises will inevitably lag. On July 1, 2021, the OECD (2021) announced the establishment of a comprehensive framework consisting of 130 countries and territories to form “two pillars.” It aims to build a fairer and more sustainable tax system to promote the growth and prosperity of the world economy. Since then, G20 countries have expressed their support for the plan, saying it will be enacted in 2022 and implemented in 2023. So far, 136 countries and territories have supported the plan, but some have not yet joined.

The “two pillars” of the “Two Pillars” approach, the GMT, focus on base erosion and profit shifting. Tandon (2022) illustrated under the program, it was decided to set the effective tax rate (ETR) of large multinational groups at 15%, the lowest level in the world, to address national tax competition. Specifically, Pillar 2 consists of three rules: income inclusion, undertaxed payments, subject to tax.

Income Inclusion Rule (IIR) primarily aim to prevent benefits transfer to the country of residence. According to the provisions, if the ETR applicable to the income of the foreign branch of a resident enterprise or a managed foreign enterprise is lower than the minimum tax rate, the resident is required to pay back tax on the income regardless of whether it remits money domestically or accounts for the distribution of profits.

The Undertaxed Payment Rule (UTPR) is specific to the country of origin. Applicable to cross-border payments, the ETR is lower than the minimum tax rate, and the remitting country should treat the money from the cross-border payer as a pre-tax deduction, or remittance tax collection can be rejected. The UTPR is considered a supplement to the IIR, and only if the country of residence renounces the IIR, does the country of origin exercise the right to tax, which has a priority right of application to the IIR.

The “two pillars” of the world’s lowest corporate tax rate of 15% are Income Inclusion Rule (IIR), the Undertaxed Payments Rule (UTPR), and the Subject to Tax Rule (STTR). These rules are designed to prevent profit shifting and base erosion and to reduce the loss of tax rights and interests of countries. Income Inclusion Rule (IIR) are primarily aimed at the country of residence and stipulate that the ETR of multinational groups shall not be lower than the minimum tax rate. The Undertaxed Payments Rule (UTPR) is mainly for withholding tax countries, and when overseas-related payments occur, when the ETR applicable to the overseas relevant payer is lower than the minimum tax rate, you can refuse to collect the pre-tax deduction or withholding tax of the withholding tax country on the domestic payer.

Residents’ tax rates often decrease at the beginning of the year and rise towards the end as pay accumulates. The comprehensive income tax rate determines non-resident people’s pay based on their monthly pay. There are seven tiers of tax rates, with 45% being the highest and 3% being the lowest, based on the taxable income of an individual’s monthly pay. There will be a five-tiered progressive tax system in place for company income. Any company doing business in China must pay the country’s corporate income tax, which imposes a flat rate of 25%. Several deductions and incentives are implemented to help and encourage enterprises in certain areas, and foreign companies can take advantage of the advantages.

As a complement to the UTPR, it aims to protect the tax base of the source-collecting country with a low collection capacity. In cases where the nominal tax rate in a particular country of origin is lower than the minimum tax rate under the STTR rules, the tax at source or tax at source may be levied at the lowest rate. Now, the minimum tax rate for STTR rules is 9%.

2 Background of the Proposal of the Global Minimum Corporate Tax Scheme

Figure 1 shows the differences and loopholes in the tax systems of different countries, which have led to different companies using the rules to plan for tax purposes; there are currently about 100 tax havens in the world, and the OECD was commissioned by the G20 to publish the BEPS action plan in 2013 and proposed “two pillars” in 2019. Pillar 2 proposes a global approach to preventing base erosion (GloBE). Therefore, the world minimum tax is not a new issue, but it has been included in the BEPS in response to the bottoming out of the tax competition.

Figure 1

Pillar 1 and Pillar 2 tax scheme.

Prettl & von Hagen (2023) introduced that the bottom-out competition in taxation is a concrete manifestation of the conflict of interests in the globalization of the world economy. To gain foreign investment, countries have lowered their corporate tax rates, and in a study of 223 jurisdictions, the global average corporate tax rate fell by 41%, from 40.11% in 1980 to 23.85% in 2020. The GDP-weighted average tax rate fell to 25.85% in 2020, a decrease of 44%. This bottom-buying competition continues, with countries announcing tax cuts, such as reducing France’s corporate tax rate to 25% by 2022. The result is a level playing field.

Harpaz (2021) explained globe refers to the background of the global intangible asset tax decline 2017. It is like the unilateral introduction of the GMT by the United States. Due to the long-standing problem of U.S. companies keeping their profits overseas, the TCJA introduced a new GILTI system. The rule sets a minimum % profit margin of 10% for U.S. companies operating and investing abroad, and taxes must be levied on the United States to prevent cross-border tax avoidance. This approach is adopted in the OECD proposal to address tax encroachment and profit transfers.

3 An Overview of Domestic and International Research on the World’s Minimum Tax

The minimum tax rate is not new and is practised in many countries. In the past, sales tax in Germany, excise tax on gasoline in the European Union, and personal income tax in the United States all had a minimum tax (AMT) system. The OECD’s minimum tax scheme is based on this idea. Regarding the method of minimum tax, it argues that international tax competition reduces the redistributive power of tax revenues of various countries and argues that a minimum tax should be accepted on a global scale. Johannesen (2022) believes these rules can help safeguard the tax interests of various countries, reduce corporate tax avoidance, help the organizational design of multinational companies, and introduce the details of the four rules. Stewart (2023) argues that this can crack down on tax avoidance and reduce the pressure of tax competition, which is an effective supplement to the BEPS program and draws on the rules of the United States. Dourado (2023) pointed out that this plan can only alleviate the tax challenges brought about by the digital economy but cannot fundamentally solve the problem, and the setting of tax rates should consider the global collection management and the actual situation of each country. Regarding the proposal of a minimum tax, Johannesen (2022) suggested that the tax situation of various countries should be coordinated, and the tax rate should be set to meet the needs of most countries, considering not only the corporate income tax rate but also the comprehensive tax burden. Becker and Englisch (2021) believe that it is necessary to adapt measures to local conditions, consider the tax collection capacity of various countries, do a good job in the application procedures and calculation of rules, and consider the impact on the world economy.

The losses suffered by China in the tax avoidance of international intangible assets should not be ignored. A study found that in 2017 alone, 17,999 patents were leaked from China, with a net outflow of 11,390 patents. Most of these patents went to regulated foreign companies in tax havens such as the Cayman Islands, Switzerland, and Hong Kong. The Cayman Islands had the largest outflow from China, with 1,872 outflowing from China alone in 2017. China’s current intangible asset transfers are mainly for tax avoidance, evading Chinese mainland tax jurisdiction through transfer pricing and other means. The world’s minimum tax reform package will bring more than $5 billion in tax revenue, so as one of the solutions to the legacy BEPS, Malaysia, is expected to eliminate the continuous erosion of the tax base.

In addition, the G7 has set a GMT rate of 15%, based on the ETR. However, the corporate tax rate in developing countries is generally higher than 15%, and due to the low level of development of the digital economy, the tax that can be levied in the country is very limited. As digital economy powerhouses, Aslam & Coelho (2021) determined introducing a GMT in the United States and Europe has expanded their international tax jurisdiction and greatly impacted the development of the digital economy in developing countries.

In October 2019, the OECD issued a policy statement on the “two pillars” and “Pillar 2”), which proposed a reform plan for the world’s minimum tax rate, which has aroused strong responses from various countries. In December 2021, the European Commission issued the “Implementation Guidance for the Global Minimum Corporate Tax” to align with implementing the world’s minimum tax. Now, 138 of the 142 BEPS member countries support the minimum tax.

EsmaeilDarjani et al. (2023) discussed that taxpayer judgements based on classical economic models inform the strongest tax policy (Zhang et al., 2023). Analyses reveal that traditional decision-making models, which are essentially economic and lack socio-psychological underpinnings, cannot quantify changes and stakeholders’ functions. In research, behavioural economics and anticipated desirability were compared to compute tax offences using mathematical modelling and scenario-creating tools. With mathematical modelling and a questionnaire to compute tax offences, the analysis research examined behavioural economics and anticipated desirability. The results support selecting the theory of perspective over the theory of anticipated utility, and adding tax ethics reduces the tax penalty in either theory.

Imeni et al. (2021) detailed that the enterprises listed in the Tehran Stock Exchange can possess their management abilities and earnings categorization shifting examined in the research (Imeni et al., 2021). The detrimental impact of earnings management on a company’s future performance may be reduced by competent management. In addition, the agency cost is favourably impacted by managerial skills because of the decrease in earnings management. This study’s findings suggest a favourable correlation between management skills and the capacity to adjust earnings classifications. The paper’s findings help bridge the gap between theory and practice by providing empirical evidence of the relationships between management skills, earnings categorization shifting, and agency cost in a developing nation like Iran.

Devereux et al. (2023) examined the GMT suggested under Pillar 2, which is the focus of the different research, providing empirical data with the programmed (Devereux et al., 2023). As the initial process determining how many nations and groups of nations can be considered a critical mass for the GMT’s effective implementation, if the threshold is reached, subsequent jurisdictions throughout the globe can be compelled to pursue a lawsuit. Then, the situation provides useful information for GMT revenue by assessing the generosity of substance-based income exclusion.

Sinha and Edalatpanah (2023) determined the empirical research employs a network DEA data technique to assess and clarify the fiscal performance of Indian governments (Sinha & Edalatpanah, 2023). Previous research has analysed fiscal and developmental success in India at the subnational level; however, the current report breaks unique ground by evaluating performance from the state level. Before assessing the states’ development expenditure and overall financial performance, people compare nations according to their tax collections. In their peers’ hands, efficiency and the percentage of outstanding liabilities negatively correlate. The outcomes indicate the need for fiscal restraint on the government’s responsibility if people want to prevent the debt crisis from occurring again.

Hebous and Keen (2023) introduced the Global tax arrangements, which are about to undergo a sea shift due to the impending adoption of an international agreement on a minimum effective corporation tax rate. Yet, there has been much debate about what that minimum should be. The legislative goal of a minimum tax is to alter the tax competition game, and this study delves into the strategic reactions to this innovation to evaluate its design and welfare effect. If we compare the coordinated equilibrium to the uncoordinated one, we can see that there is much room for Pareto-improving minima, meaning that both high and low-tax nations stand to gain.

Zhang et al. (2023) illustrated when people began to understand that business decisions have an impact (EsmaeilDarjani et al., 2023). Industries can demonstrate that they care about society by sharing more than just financial data and helping stakeholders make better decisions. A multivariate regression approach based on panel data analysis was used to test the study hypotheses. The results show that operational efficiency is a moderator function that is positively and significantly associated with corporate social responsibility for profit persistence, whereas financing cost is irrelevant. Developing nations are the primary focus of previous studies in the field. Examining sustainability from a global viewpoint is essential, and the research adds to the growing body of evidence supporting that claim.

Fu et al. (2022) developed a global digital tax and countermeasures for the Chinese digital tax. The expansion of the digital economy has raised new issues for international taxes. The implementation of digital tax-collecting policies is supported or opposed by various countries and key international organizations, depending on their stances. Reviewing the current state of digital tax collection supervision policies in key countries and international organizations, this article seeks to analyse the impact of digital tax on China’s digital economy and provide policy recommendations for the development of the tax.

Ma et al. (2023) suggested an analytical framework based on the New-Market Public Finance for Taxation Reform Scheme for the Digital Economy and China’s Response. The first is to shape an idea of a platform marketplace, to innovate the rationale of both the platform entities of the new digital financial system market and the significance of the tax nexus to such entities, and the marketplace mechanism of the brand new virtual economic system platform in addition to its traits of tax legal guidelines and guidelines; the second one is to shape a concept of comparable governments, to explore the rectification of the effective function of governments and the proof of the legitimacy of taxation rights, the recovery of the panorama of the comparability of cross-border transactions, and the calculation of comparable authorities tax bases; the 0.33 is to specify the idea of income control rights, one at a time to examine the tax gain video games between multinational corporations and governments inside the OECD reform plan and the competitions of business patterns between countries and the economic agencies within the virtual financial system.

Implementing the GMT reform plan will impact enterprises in China’s science and technology service industry. First, the GMT stipulates that multinational companies can only tax the profits of subsidiaries in various countries that exceed a certain amount, so the profits of Chinese enterprises abroad may also be taxed, which will affect their profitability in the world. Second, the GMT scheme may affect the overseas investment and M&A activities of Chinese enterprises, leading to tax avoidance by multinational companies. In addition, implementing the GMT scheme may affect the financing activities of Chinese enterprises, and enterprises should provide more information.

4 The Impact of the World Minimum Tax Reform on China’s Pros and Cons Analysis

4.2 Negative Impacts

4.2.1 Increased Tax Costs for International Investment Activities

International investment activities are an important channel for promoting the economic prosperity of countries under global economic integration. In the early days of reform and opening up, China introduced advanced production technology by absorbing foreign capital. Today, foreign investment has become an indispensable part of our economy. Enterprises go out to solve the surplus funds and idle capacity effectively. However, de Wilde (2021) argued implementing Pillar 2 will increase the tax burden on international investment activities and reduce the incentive for capital flows.

Figure 2 shows that fully implementing the GMT reform may greatly reduce China’s space and advantages in attracting overseas investment. Currently, China provides various preferential treatments, such as tax rate reductions and exemptions for multinational companies operating in China. The preferential policies have had an important impact on China’s attraction to foreign investment. However, implementing the Pillar 2 program has almost eliminated the charm of our country in terms of taxation. For example, high-tech enterprises enjoy a 15% discount. If the accounting profit is replaced with taxable profit, the ETR of the enterprise is expected to be less than 15%. This way, multinational enterprises (MNEs) are entitled to back taxes in their home countries. Even if the home country waives the exercise of IIR, China will implement the UTPR under the provisions of Pillar 2, which will also increase the tax burden of foreign-funded enterprises in China. Judging from China’s various preferential tax policies for foreign-funded enterprises, it is not uncommon for foreign investment to increase its tax burden in China.

Figure 2

Impact of tax on economic growth.

The STTR also increases the tax burden on foreign companies in China. Under the STTR, developing countries can levy a withholding tax of 7.5–9% on cross-border interest and royalties paid by multinational corporations. However, looking at China’s foreign tax treaties, it can be found that the withholding tax rate for many countries is lower than this range. In addition, foreign investors who invest in China’s encouraged projects can defer their tax obligations and not pay individual income tax. Therefore, some of China’s foreign-funded enterprises also have to bear the STTR tax obligations levied by China for their external payments, and the investment cost has risen further.

On the other hand, Chen (2024) concluded the entry of Chinese companies will also become sluggish. In recent years, China’s outbound investment momentum has increased significantly. According to the tax law, Chinese enterprises can use the set-off method to offset the overseas tax burden (except for the Hainan Free Trade Port). Chinese companies are liable for at least 25% of their global revenue. However, to encourage foreign investment, China has also signed preferential tax clauses with some countries, and with local preferential tax policies, it has significantly reduced the tax burden of foreign investment funds. For example, the tax holiday for funds invested by China in Vietnam’s coastal and port economic zones is 4 years and 5% for 9 years. Such funds are not subject to additional tax when remitted to the country. If the Pillar 2 scheme is fully implemented, the tax burden below 15% will be subject to retroactive taxation, and the tax cost will increase significantly. The willingness to invest abroad is expected to decline significantly.

4.2.2 Declining Autonomy of Economic Strategy

Riccardi (2021) suggested that the World Minimum Tax case will be presented as an international convention, with consideration given to future changes to domestic law. This means that in addition to the effectiveness of domestic tax laws, the infringement of tax sovereignty also weakens the implementation of China’s independent economic strategy. The most obvious example of this impact is the integration of China’s Guangdong-Hong Kong-Macao Greater Bay Area. For a long time, Hong Kong and Macau have been favoured by international funds for their territorial tax systems and low corporate income tax rates and have become important bases connecting Chinese mainland and foreign countries. Promoting the integration of the Guangdong-Hong Kong-Macao Greater Bay Area is conducive to further strengthening the financial integration between the mainland, Hong Kong, and Macao and building a new pattern of opening up to the outside world. First, Hong Kong and Macao have long implemented a territorial tax system, which exempts foreign income obtained by local enterprises. Therefore, dividends derived from investment in the Mainland by Hong Kong and Macao, investment by overseas capital in the Mainland through Hong Kong and Macao, and income from overseas investment by Mainland capital through overseas investment in Hong Kong and Macao are not subject to Hong Kong tax liability. Second, Hong Kong and Macau have lower corporate income tax rates of 16.5 and 12%, respectively. Moreover, as both sides have signed bilateral agreements with the mainland, the increase in interest and royalty rates has been kept very low. It can be seen that the natural tax advantages of Hong Kong and Macao can effectively support the integration of the Guangdong-Hong Kong-Macao Greater Bay Area and are important policies for the joint development of the three places and the strengthening of domestic and foreign capital exchanges.

However, after implementing the Pillar 2 plan, the tax advantage will no longer exist. First, in Hong Kong and Macao, the preferential tax effect brought by the territorial tax system will be greatly reduced. The ETR must be calculated for the global income and the tax burden of the host country of Hong Kong and Macau enterprises. This figure is expected to be well below 15%. Therefore, the home country of the multinational corporation is entitled to levy a supplementary tax under the IIR. In addition, the STTR levies advance income tax on interest, royalties, and other payments at a rate of 7.5–9%, and the tax burden on the transfer of funds will also increase significantly. This will not only significantly weaken the confidence of the mainland in in-depth communication with Hong Kong and Macao and affect Hong Kong’s status as an international financial centre but also drag down the integration process of the Guangdong-Hong Kong-Macao Greater Bay Area, and drag down China’s regional construction and international investment, which will not be beneficial to itself.

Kurian (2022) introduced the economic strategy of the hinterland will also be affected. In recent years, China has explored reforming the international tax system in inland areas, and the construction of the Hainan Free Trade Port has been one of the pioneering reform pilots. One of the objectives of establishing the Hainan Free Trade Port is to promote the free flow of production factors such as capital and technology, and for the first time, enterprises in specific industries established in Hainan will be exempted from taxation. However, the capital exemption regime and Pillar 2 scheme are inherently contradictory. According to the equity participation exemption system of the Hainan Free Trade Port, when making direct investments in countries or regions with a statutory corporate income tax rate of not less than 5%, there is no need to bear separate tax liability on overseas income. Under the IIR, a subsidy tax is levied on businesses with an ETR of 15% or less. In other words, when Hainan enterprises invest in countries or regions with a statutory corporate income tax rate of more than 5%, the tax exemption provided by the equity participation exemption system will be fully or partially deducted by the IIR. This shows that China’s implementation of the tax exemption policy in Hainan cannot achieve the purpose of equity participation, tax incentives cannot be substantively implemented, and the international tax reform of the Hainan Free Trade Port will be seriously hindered.

5 Suggestions on China’s Response to the World’s Minimum Tax Reform

Tang (2024) concluded China has played an important role in discussing the two-pillar tax reform plan in the past. The legislative template for the two-pillar program has been developed, but countries are still consulting and discussing the key elements. In the future, China will continue to seize the opportunity of the reform of international tax governance, fully participate in discussions, express China’s views, enhance China’s influence in the field of international tax governance, and at the same time conform to the universal, reasonable, and multilateral interests, to contribute to the formulation of international tax plans in line with China’s development direction. This article proposes the following changes (Figure 3).

Figure 3

Pillar 2 tax form.

If the total ETR of all international earnings falls below the minimum tax threshold τ ¯ , the foreign gains are taxed at the minimum rate in the case of global blending (GB). For MNEs subject to taxation on their international profits above the minimum tax level, the ETRs will be unchanged after implementing global blending, regardless of the jurisdiction or entity in question. MNEs will only be subject to the minimum tax rate on their international profits if their blended rate is lower than the threshold. Profits earned outside of the country will, therefore, be subject to the highest rate of taxation possible.

To follow the preceding section’s formulation in equation (1), the weighted average tax rate, which takes into consideration shifting earnings and the effects of global blending, is now provided by τ QT hc = τ IU − λ ( τ IU − τ MU hc . The post-tax economic rent is represented by equation (2).

It should be noted that any deductions and allowances associated with an investment may only be provided in the jurisdiction where the investment occurs, ( q + δ ) ( 1 − τ QT hc ) as the modelling framework views the UPE as an investment. Accounting for depreciation and other tax factors that impact the tax, the total economic gain linked to the investment is HC unaffected by the base’s location. If the foreign profit tax is lower than the average statutory rate across all countries where the gains are redirected, then the minimum tax can increase the foreign profit tax.

The cost of capital, assuming the existence of a minimal tax associated with global blending, is expressed as q ˜ QT − HC , where equation (3) is set to zero.

Regarding Pillar 1, A the expressions generated from this section show how Pillar 2 influences businesses impacted by the recommendations regarding ETRs and the cost of financing. Nevertheless, some businesses may not fall within the purview of Pillar 2’s design. The total effect of Pillar 2 on ETRs can be calculated by subtracting the baseline, or the situation before the implementation, and then dividing it by the percentage of enterprises that will be affected by Pillar 2, ϑ Q 2 . Pillar 2’s impact on capital expenditures, when combined with global blending, may be expressed in equation (4):

If the ETR in a particular jurisdiction is lower than the minimum tax threshold, τ , then the overseas earnings are subject to taxes at the highest rate possible under jurisdictional blending (JB). The tax rate is further applied in the lower-tax jurisdiction, τ MU , may be seen as an average rate across all the countries that get a cut in profits; that is, the jurisdictions where production happens have statutory rates lower than the rate that applies there. The weighted low-tax rate, τ MU , is determined for each jurisdiction ϖ by averaging the tax rates in all jurisdictions i with tax rates τ MU j < τ IU , i.e., O MU , with the profits in each jurisdiction ϖ j serving as weights in equation (5).

The following is the topping-up of the average weighted low-tax rates τ MU kc the following equation (6) shows the implementation of jurisdictional blending:

In the case of a minimal tax with jurisdictional blending, the average weighted tax rate that takes shifting profits into consideration is τ QT kc = τ IU − λ ( τ IU − τ MU kc ) . When jurisdictional blending is used in Pillar 2, equation (7) gives the post-tax economic profit:

Capital expenditures associated with Pillar 2 and the merging of jurisdictions are given a value of zero.

5.3 Prepare for the Implementation of the Two-Column Plan as Soon as Possible

With the publication of the legislative template, the form of implementing the Pillar 2 case through domestic law amendments and bilateral tax treaties has gradually become clear, as shown in Figure 4. How to better integrate the Pillar II program with national law is now a top concern for States. For China, the world minimum tax reform is an opportunity to sort out the relevant domestic tax regulations. China’s tax authorities should focus on successfully implementing the Pillar 2 plan and consider sorting out and updating the previous tax regulations to adapt to the requirements of the new economic situation as soon as possible. The ecology has suffered due to China’s fast urbanization and industrialization. Important problems affecting public health and the economy include soil deterioration, water contamination, and air pollution. Many industries’ faith in government has been eroded due to hazy regulations. Transnational industries face more uncertainty due to the government’s effort for self-sufficiency.

Figure 4

Effective average tax rates.

5.3.1 Establish a Capital-Related Tax System

Parada (2024) argued the solution to the tax problem of cross-border capital flows in China should not rely on implementing the GMT scheme. Taking this international tax governance reform as an opportunity, Li (2023) concluded that is important to fully understand the tax regulatory needs for cross-border investment in the current international tax environment and to improve the capital-related tax system. Currently, China does not have an overseas income tax deferral clause, but China’s capital export tax system also needs tax avoidance. The scale and coverage of China’s outward investment are growing rapidly, and the growth rate is still growing against the trend despite the decline in global outward direct investment and the growth rate is being dulled after 2016 due to the impact of investment and trade protection. At this stage, China’s total capital exports are declining yearly, and the growth rate of China’s foreign investment stock has slowed down and created a large gap between the United States and other Western capital-exporting countries. China’s economy also needs to be driven by capital exports. International tax competition will continue for a long time, and attention should be paid to improving the competitiveness of China’s international tax system in the process of China’s development as a capital-exporting country. The strategy entails constructing a collection of financial measurements by analysing a company’s financial statements and their associated statistics. Evaluation of performance, evaluation of financial instruments, and prediction are all areas that may benefit from quantitative analysis. Several main data measurement forms are included: regression analysis and linear development.

5.3.1.1 Relevance and Reliability and Availability of Tax Reform in China

Comprehensive reforms to the tax system began, and trials with various new levies have continued. Government revenue and the central government’s capacity to lead businesses and local governments without limiting initiative are two significant aspects of China’s tax reform that can be overlooked. After several reforms that have improved China’s economic and fiscal situation, the tax-sharing system structure between the central and provincial governments is still in place today. China’s massive tax reform aimed to create a tax structure that could accommodate the country’s emerging socialist market economy. Securing the revenue base and adapting to international standards are two main issues China’s tax system faces now.

5.3.2 Actively Adjust the Structure of Tax Incentives

Hanappi & Cabral (2022) pointed out that the existing GMT reform plan restricts each country’s tax preferential policies. The effectiveness of the traditional tax preferential policies is greatly weakened. Less than 15% of the actual tax burden will be recognized as tax avoidance, and the tax needs to be paid. In this case, Guo et al. (2022) suggested that China must actively adjust the structure of tax incentives to make them perfectly compatible with the two-pillar scheme. To achieve this goal, China must first sort out the cumbersome preferential policies and simplify the tax system. In China, only the Ministry of Finance and the State Administration of Taxation have issued preferential policies, which have accumulated too many interrelated policy provisions. The government should organize a reasonable organizational structure according to a certain logic and apply the new preferential tax policies at a standard not lower than the minimum tax rate so that enterprises can fully enjoy the reduction of the tax burden brought about by the policy. Second, China could consider transferring corporate income tax benefits to other tax categories. The 15% preferential tax rate enjoyed by high-tech enterprises is not only a symbol of support for advanced technology and industry, but also helps maintain China’s favorable position in global tax competition. Under this framework, by increasing VAT deductions for high-tech enterprises and other measures, the corporate tax burden can be further reduced and innovation and development can be promoted. At the same time, exploring preferential mechanisms for other taxes, such as tax reductions and exemptions for specific industries or fields, will help provide more precise tax support for domestic enterprises and enhance their international competitiveness. In addition, the government can support enterprises’ business activities and reduce the impact of tax incentives. For example, the government bears part of the R&D costs of high-tech enterprises, and the government guides them to expand sales when they engage in specific incentive industries. Finally, tax incentives can be considered for fiscal subsidies. The fiscal incentives in China include financial subsidies, financial interest discounts, and financial allocations. Among them, fiscal subsidies and fiscal allocations are tax-exempt income in tax treatment, and fiscal subsidies must also pay corporate income tax when they do not meet the conditions of the intended use, so fiscal subsidies are not affected by the Pillar 2 scheme. China’s tax authorities can learn from this practice by enriching the forms of fiscal subsidies, increasing the intensity of fiscal subsidies, moving the preferential tax policies greatly affected by the Pillar 2 plan to the preferential fiscal policies, and formulating specific industries to reduce the tax pressure.

6 Conclusion

To protect China’s tax rights and interests, the government will proactively work to establish international standards for digital taxes. The digital tax collecting system directly impacts the growth of the worldwide digital economy and tax equity, which are linked to national sovereignty and tax interests. Due to factors like the complexity of digital taxes, the legitimacy of tax interests, and the unequal development of digital economies around the globe, reaching an agreement on a worldwide digital tax system is challenging. International groups such as the G20, OECD, and the EU are moving quickly to build systems of digital tax rules worldwide. China has to improve its communication and collaboration with different international organizations, raise its profile in international tax affairs, and protect its tax rights and interests if it wants to encourage the growth of its digital economy while protecting its tax interests. Achieving sustainable development objectives is greatly influenced by tax policy. Tax policies and small and micro firms may be seen as important drivers of economic development, which is one of the goals of SDG. The long-term health of an economy is bolstered by tax laws that help successful companies recruit investment. Thus, it is essential to track the development of micro and small firms, especially after any national tax changes or reforms. Proposals for Pillar 1 and Pillar 2 would change the laws of international taxes, which would affect global investment by changing the incentives that governments and MNEs confront. The process is important to establish the immediate impact of the recommendations on investment costs using the strategy provided in the report. Results from the study of ETRs at the MNE group level indicate that Pillars 1 and 2 had a little impact on EATRs and EMTRs at the MNE group level. Pillar 1 and 2 are expected to have a minimal influence on the EATRs, with a worldwide GDP-weighted average shift of 0.4% points. Following these findings, the tax rate differentials would be reduced due to the recommendations, with the benefits of Pillar 2 complementing those of Pillar 1. From the numerical outcomes, the minimum tax with jurisdictional blending was set at 12.5% under Pillar 2; the disparity between the sample’s top and lowest EATRs would decrease by 2.8% points. Reducing the dispersion of ETRs across jurisdictions would make non-tax factors, such as workforce education, skill supply, accessibility of infrastructure, and strength of legal and regulatory systems, more relevant in deciding the size and location of investments and potentially reducing the transfer of profits motivations. Reduced tax rates increase the after-tax return for working, saving, and investing, increasing the economy’s size. Substitution effects cause people to strive harder, save more, and invest more after taxes. Due to the inherent complexity of the measures, persistent tax evaders can continue testing the limits, resulting in the reforms’ elimination of tax problems.