Against the backdrop of the newly introduced 15% global minimum corporate tax under Pillar 2, this article explores whether—and how—the contribution of individual states to multinational profits could be more transparently reflected in transfer pricing outcomes. It proposes a conceptual shift: viewing the state not merely as a tax authority, but as a form of minority economic participant in corporate value creation.
Public goods, profit, and the role of the state
As early as 1954, the American economist Paul Samuelson demonstrated—mathematically as well as conceptually—that the benefits provided by the state to its citizens, including legal protection and social and economic order, cannot be supplied on a commercial basis and must instead be financed through taxation [1].
One of the most fundamental public goods provided by any state is the institutional framework that allows individuals to exchange the results of their labour, thereby determining value through price, expressed in the currency of that jurisdiction. It is therefore no coincidence that the tax base for most taxes is tied either to the receipt of income or to the moment of economic exchange—whether by individuals or by their collective vehicles, companies.
Taxes levied on individuals typically use income as their base and, in form, resemble payment for “state services”. From the twentieth century onwards, however, taxation of corporate entities evolved differently. In modern tax systems, corporate income tax is not imposed on gross revenue, but on net profit. Unlike turnover taxes, this avoids cascading “tax-on-tax” effects and encourages economic activity, both in volume and value. In this sense, corporate tax embodies a partnership logic: it tolerates inefficiency but claims significant returns when a business is successful.
Corporate tax as a form of minority participation
This logic closely mirrors the behaviour of shareholders. Investors expect dividends only when a company generates net profit. A state imposing a 25% corporate tax rate and a shareholder holding a 25% equity stake ultimately receive comparable shares of the same profit pool with the some difference in an additional taxation at the shareholder level.
Seen from this perspective, the state resembles a holder of preferred minority shares: it has no right to manage the company, yet it holds a legally enforceable claim on its profits.
This analogy is not new. Tax scholars such as Reuven S. Avi-Yonah and John K. McNulty explored conceptual parallels between corporate income tax and dividend income received by minority shareholders [2]. In the transfer pricing context, this comparison offers an additional lens through which to examine the arm’s length principle—particularly in light of the 15% minimum effective tax rate under Pillar 2 and the emerging rules of Pillar 1 (Amount A).
Profit motivates investment while dividends reward investors for correctly assessing risk and opportunity. If each state is viewed as a minority preferred shareholder in all companies incorporated within its jurisdiction, an obvious question arises: what, precisely, is each state investing when it claims a share of corporate profit ranging from 0% to nearly 30%? And how does this logic change once a global minimum effective tax rate of 15% is imposed?
Transfer pricing and the invisibility of the state
When two companies within the same country allocate joint profits, allocation keys are of secondary importance: ultimately, all profits flow into the same national budget. In cross-border group structures, however, profit allocation becomes a zero-sum exercise between jurisdictions. Each country acts as a separate claimant, expecting what it considers its “fair” share.
The mechanisms for allocating profit between associated enterprises are well documented in the OECD Transfer Pricing Guidelines and domestic law. In practice, this allocation relies primarily on methods such as the TNMM and the Profit Split Method (PSM). Under PSM in particular, profit is allocated based on the functions performed, assets used, and risks assumed by the companies involved.
What is striking, however, is what this framework does not consider: the contribution of the countries in which those companies operate.
The underlying assumption remains classical: the more functions a company performs, the more assets it deploys, and the more risks it bears, the greater its entitlement to profit.
When corporate tax becomes something else
From a tax perspective, functions, assets, and risks already constitute tax bases elsewhere – in another taxes. Functions are performed by people, whose wages are taxed under personal income tax regimes. Assets such as real estate or natural resources are subject to property or extraction taxes. Financial risks are compensated through interest or investment returns, often subject to withholding tax.
If corporate tax allocation in cross-border settings relies on factors that are already taxed elsewhere, corporate income tax begins to look less like a standalone levy on profit and more like an incremental surcharge on other taxes. Allocating profit based on headcount or payroll costs, for example, effectively turns corporate tax into a variable extension of personal income tax. In such cases, corporate tax drifts structurally toward turnover-style taxation, rather than remaining a tax on profit [3].
From the perspective of a single country’s budget, this may not change the final revenue outcome. It becomes economically significant, however, when states invest separately in business development and in social welfare. In cross-border contexts, profit allocation is no longer a technical compliance issue but a determinant of overall business efficiency and of the incentives states create—or fail to create—for value creation.
The state’s unrecorded asset
Corporate profit arises partly from factors within a company’s control and partly from those beyond it—market conditions, competition, and, crucially, the state environment. Legal certainty, contract enforcement, infrastructure, and institutional stability materially affect profitability.
In this sense, the state functions as a minority economic participant, investing through reforms, institutions, and governance. This “asset” does not appear on corporate balance sheets, yet it undeniably contributes to profit generation.
When taxation shifts away from profit toward turnover-like bases or differentiated surcharges on other taxes, the link between the state’s contribution and its share of profit weakens. Only in limited cases—such as direct investment in workforce skills—does functional allocation adequately reflect the state’s role. In most cases, allocation based solely on corporate functions, assets, and risks fails to capture what the state has actually contributed.
Toward a partnership-based allocation logic
If states are to be treated as minority shareholders in the international tax order, their contribution must be assessed accordingly. One possible approach is the quantitative and qualitative evaluation of each country’s investment climate and business environment, using internationally recognised indicators and rankings [4]. These could inform upward or downward allocation coefficients between jurisdictions.
Tax rates already reflect how much a state expects to receive relative to domestic business activity. Under a global minimum tax of 15%, however, rates increasingly answer only how much a country claims—not why it is entitled to that share.
Profit itself can be understood as arising from three broad sources: zero-sum redistribution (win-lose), genuine value creation (win-win), and socially destructive outcomes (lose-lose). Encouraging the second category requires a stronger partnership between state and business. Aligning profit allocation with the actual contribution of states to value creation can reinforce this partnership, deepen dialogue, and, over time, enhance both tax efficiency and economic performance.
In the Pillar 2 era, the question is no longer whether states should tax multinational profits, but whether they are prepared to recognise—and be recognised for—the role they play in creating them.
References (selected)
[1] Samuelson, Paul A. (1954). The Pure Theory of Public Expenditure. The Review of Economics and Statistics, 36(4), 387–389.
[2a] Avi-Yonah, Reuven S. (2004). The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Taxation. Delaware Journal of Corporate Law, 29, 767–818.
[2b] McNulty, John K. (2002). Fundamental Principles of Corporate Income Taxation. Hofstra Law Review, 31, 1–67.
[3] Musgrave, Richard A., & Musgrave, Peggy B. (1989). Public Finance in Theory and Practice. McGraw-Hill.
[4] OECD (2024). OECD FDI Regulatory Restrictiveness Index: Key Findings and Trends. OECD Business and Finance Policy Papers No. 72, OECD Publishing, Paris.
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