Luxembourg: Potential impacts of the global minimum tax | Goodwin


CONTEXT

On June 4 and 5, 2021, G7 finance ministers and central bank governors, joined by heads of the International Monetary Fund, the World Bank Group, the Organization for Economic Co-operation and Development, and the Eurogroup, met in London to address the fiscal challenges that arise. globalization and the digitization of the economy. In this regard, a press release was published on June 5, 2021 detailing concrete actions.

MINIMUM OVERALL TAX

In recent years, countries have struggled to discourage multinationals, especially in the tech industry, from shifting their profits and tax revenues to low-tax countries, regardless of where the business takes place. and value creation.

As a result, the G7 decided to commit to reaching a fair solution on the distribution of taxing rights among countries whose market countries have granted taxing rights on at least 20% of profits exceeding a margin. 10% for the largest and most profitable multinational companies.

In addition, the G7 decided to set an overall minimum tax of at least 15% country by country and to remove taxes on digital services.

As German Finance Minister Olaf Scholz said, this is “bad news for tax havens around the world”.

What to expect from a Luxembourg point of view?

OUTSTANDING ISSUES FOR LUXEMBOURG

The Grand Duchy is a launching pad for global investments and these new rules could have a significant impact on financial activity in the country. Indeed, a large number of investment funds have their head office in Luxembourg and benefit from a favorable tax environment.

The situation in Luxembourg will essentially depend on the scope of this minimum tax. In terms of effective tax rate, some investment funds face very limited tax liability in the country. But still, it is not clear whether investment funds would be included in the definition of this new global minimum tax.

Over the past two years, taxes on digital services have been seen as a response to an unfair share of taxes paid by some multinational tech companies, but appear to be controversial from a pure economic perspective. The locus of value creation is difficult to determine and an international response must be addressed to avoid irrational unilateral responses from countries.

If investment funds are subject to the minimum tax, the question of the tax base should be asked. The tax burden of investment funds is quite low due to a favorable tax regime or high debt reducing profits. Would we consider the only benefits? Or would we look at gross revenues as it does with taxes on digital services? If this were the case, one could already expect heavy financial consequences.

Technically, it will be really difficult, even for regulators, to see where value creation takes place, where revenue is generated, what taxes are paid and what the profit shift is. These questions will need to be resolved before deciding on any new tax treatment and to avoid serious economic damage.

Many countries might disapprove of this so-called tax reform because their economy is essentially based on a very attractive tax system. Ireland, for example, is expected to significantly increase its corporate tax rate but may react before adopting such a measure. Luxembourg could also fight if the consequences for investments inside the country are strongly affected by new tax measures imposed at the international level.

NEXT STEPS

A total of 139 countries will try to reach an agreement at the July G20 meeting, pursuing these fiscal targets. Intensive negotiations have started and it remains to be seen what mechanisms and criteria will be included in any agreement between stakeholders and the legal means used to adopt new tax provisions.

Yann Ricard contributed to this reflection.


About Norma Wade

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