How Large Firms Pay Less Tax: A Global Study on Corporate Tax Inequality

A World Bank-led study finds that the largest 1% of firms pay significantly lower effective tax rates than mid-sized firms, thanks to widespread tax incentives. A simple 15% domestic minimum tax could raise far more revenue for developing countries than the complex global minimum tax framework.

A groundbreaking study conducted by researchers from the World Bank, EU Tax Observatory, University of Antwerp, University of Munich, the ifo Institute, and the Centre for Tax Analysis in Developing Countries (TaxDev) sheds light on the uneven burden of corporate taxation across firm sizes. Using detailed administrative tax return data from 16 countries in Africa, Latin America, and Europe, including Colombia, Mexico, Costa Rica, Ethiopia, and Greece. The study uncovers a striking pattern: while small firms often benefit from simplified regimes and tax relief, and medium-sized firms bear the highest effective tax rates (ETRs), the very largest corporations are frequently taxed at much lower rates. This finding overturns conventional assumptions that the largest firms pay the most in tax and highlights the sophisticated tax planning strategies that allow them to minimize liability, even in countries with relatively high statutory tax rates.

The Humped Curve: Why Mid-Sized Firms Pay the Most

At the heart of the research lies a consistent and surprising trend: ETRs follow a humped-shaped pattern across the firm size distribution. Small firms tend to report lower or negative profits and may benefit from reduced statutory rates or thresholds that exempt them from full taxation. Medium-sized firms, often lacking the capacity to navigate complex incentive structures or negotiate bespoke deals, end up paying the highest share of their profits in taxes. Meanwhile, the largest 1% of firms, particularly multinationals, use a mix of tax credits, income exemptions, and special deductions to reduce their effective tax burdens significantly. On average, these top firms pay 2.2 percentage points less than others in the top decile, with the wealthiest 0.1% enjoying even deeper cuts.

This pattern holds across nearly all countries studied and remains robust when the data is broken down by sector, geography, or alternative firm size measures such as payroll or assets. The findings are particularly stark in countries like Costa Rica, Colombia, and Senegal, where corporate tax incentives are both widespread and generous. Large firms not only benefit more from these incentives but also account for over half of total declared revenues and profits in most countries, making their tax behavior economically consequential and politically relevant.

Incentives for the Few, Burdens for the Many

The study finds that many of the tax breaks utilized by large firms are tied to national policies meant to encourage foreign investment, create jobs, or boost specific industries or regions. These often take the form of tax credits, income exemptions, or preferential treatments within special economic zones (SEZs). While such incentives may be well-intentioned, the data suggests they are disproportionately captured by firms that are already large and profitable. In contrast, smaller firms may lack the administrative capacity or knowledge to claim them, and mid-sized firms are frequently ineligible altogether.

Interestingly, even in countries with statutory corporate tax rates well above 25%, over a quarter of the largest firms pay less than 15% in actual taxes, highlighting the limitations of judging tax fairness by nominal rates alone. The report warns that such gaps between statutory and effective rates erode both equity and efficiency, allowing the largest firms to consolidate market dominance while undercutting public revenue collection. The tax advantage at the top is only partially explained by firm characteristics like location or foreign ownership; tax policy design plays a key role.

A Simple Solution: Domestic Minimum Tax Shows Promise

To address this disparity, the researchers simulate the impact of a straightforward policy: imposing a 15% domestic minimum tax (DMT) on the top 1% of firms within each country. The potential results are striking. In the absence of behavioral responses, this measure could increase corporate income tax revenue by an average of 14.2% across the sample. In countries like Colombia and Costa Rica, the gains could exceed 30%. Importantly, the DMT is relatively simple to administer and targets exactly those firms currently benefiting most from the system’s loopholes.

However, despite its apparent effectiveness, the DMT is not currently recognized under the rules of the emerging international tax framework. The OECD/G20’s Global Minimum Tax (GMT), adopted under Pillar II, takes a more complex approach. It applies only to multinational groups with consolidated revenues above €750 million and includes generous carve-outs for payroll and tangible assets. The GMT’s goal is to limit profit shifting and prevent a "race to the bottom" in global tax competition, but the study finds that its design sharply limits revenue gains for many lower- and middle-income countries.

The Global Minimum Tax Falls Short in Developing Countries

When modeling the GMT in five countries, Costa Rica, Greece, Honduras, Jamaica, and South Africa, the researchers find that potential revenue gains are modest, and far less than what a simple DMT could yield. In Costa Rica, for instance, the GMT would raise corporate tax revenues by about 22.6%, compared to over 60% under a DMT. In other countries, GMT revenues range from just 0.3% to 7% of existing corporate tax income. The key reasons for this shortfall include the limited number of firms in scope, the narrowing of the tax base through deductions and credits, and the ability of firms to consolidate profits across jurisdictions.

Moreover, the GMT rules allow for the conversion of tax credits into refundable credits—a loophole that, if widely used, could further weaken enforcement and reduce revenue. Some governments are already considering such conversions to protect domestic firms while remaining compliant with international rules. But this raises concerns that GMT could inadvertently incentivize new forms of tax avoidance rather than curbing it.

Ultimately, while the GMT marks a significant step in global tax cooperation, the study concludes that it is unlikely to deliver substantial benefits for most developing countries without additional reforms. Domestic policies such as a targeted minimum tax on large firms may offer a more effective, immediate, and politically viable path to strengthening corporate tax equity and rebuilding trust in the tax system.