The European Tax Observatory has examined the impact of substance exemptions (called ‘carve-outs’) from a global minimum tax on business. In a note published on Wednesday 21 July, it expressed concern about the significant reduction in revenue that these carve-outs would generate, but also about the fact that they would allow some companies to avoid paying tax.
The Joint Declaration on international tax reform, signed by 132 countries (see EUROPE 12753/1), provides for a minimum tax rate of at least 15% on the profits of multinational companies. Nevertheless, it allows multinationals to reduce profits subject to minimum tax by an amount equal to 7.5% for the first five years, and then by 5%, of the value of their assets and payroll in each country. These carve-outs are justified by the will to combat artificial profit shifting.
However, according to the Observatory, in the European Union, a 7.5% carve-out would reduce revenues by 23% for a 15% minimum tax, from €48 billion to around €37 billion.
A 5% carve-out would reduce revenues of a 15% minimum tax by 15% from €48 billion to about €41 billion.
Beyond the significant reduction in tax revenues, these carve-outs do not address the race to the bottom in corporate taxation, the Observatory stresses.
For example, with such a tax, a company that owns €1 billion in assets in a country with a 0% corporate tax rate, and makes €50 million in profit there, would still be subject to no tax at all. In other words, any tax rate (even 0%) is acceptable as long as firms book profits in the countries where they operate, it explains.
Worse still, these carve-outs could even, according to the Observatory, give incentives to companies to move capital and employment to places where tax rates are very low.
See the note: https://bit.ly/3xZPWf3 (Original version in French by Marion Fontana)