Our insight at a glance
- In the past few weeks, the G7, G20, and the OECD Comprehensive Framework for Tax Source Erosion and Profit Transfer have successfully concluded on the tax challenges that arise from globalization and the digitization of the economy.
- As a result, a common statement outlining the revised OECD proposal was issued. The key points of this statement are summarized in the first and second pillars.
- The purpose of the Inclusive Framework is to finalize the agreement with the implementation plan by October 2021 with a view to implementing it worldwide in 2023.
- Taking into account the current form, the first and second pillar proposals should have very limited impact in Luxembourg.
At the end of 2020, the OECD sought to tackle the tax challenges arising from globalization and digitalization of the economy, especially the world’s lowest tax by mid-2021, and reach a successful conclusion. That task has been achieved. Everything speeded up in the G7 at the beginning of June and ended in the G20 in mid-July. But that doesn’t mean they’re still there. Many steps and obstacles need to be overcome.
Let’s return to the various important steps that have been achieved so far.
G7 Summit
among them Communiqué On June 5, 2021, the G7 Finance Ministers and Central Bank Governors (Canada, France, Germany, Italy, Japan, United Kingdom and the United States) made an OECD proposal to address the tax challenges posed by digitization. Announced support for. And globalization is built around two pillars. Pillar One aims to redistribute tax rights between jurisdictions in order to give certain rights to the jurisdictions of the market. The second pillar (also known as global tax source erosion prevention. “Gloves“) Aims to introduce a global minimum tax on large multinational corporate groups (“)MNE“) To avoid the transfer of profits to countries subject to tax exemption or very low tax.
G7 ministers have committed to two points: (1) Market countries grant taxation rights to at least 20% of profits, exceeding the 10% margin of the largest and most profitable multinational corporations, and reach a fair solution for the allocation of taxation rights. To do. (2) Up to a world minimum tax of at least 15% per country. Meanwhile, the United States initially proposed a world minimum tax of 21%. G7 ministers agreed on the importance of proceeding with agreements on both pillars in parallel.
OECD / G20 Integrated Statement dated July 1, 2021
July 1, 2021, OECD / G20 Comprehensive Framework for Tax Source Erosion and Profit Transfer statement Outline of the revised OECD Pillar 1 and Pillar 2 proposals. On July 9, 2021, we officially participated in this statement. Members of 132 jurisdictions Inclusive framework (including Luxembourg, USA, China). Few European countries (Estonia, Ireland, Hungary) have not signed this statement. The positions of these three countries could undermine the implementation of these agreements in the future.
Pillar 1: Redistribution of tax rights to market jurisdictions
In a nutshell, Pillar One deals with the reassignment of tax rights to MNE’s profits from automated digital services or “consumer businesses.” Pillar One addresses the issues of business and non-physical activities, where and how to pay taxes, and profit sharing that may or should be taxed in the jurisdiction where customers and users are located. I will try. Was located.
The key points of the statement issued by the OECD / G20 Comprehensive Framework on Tax Source Erosion and the Transfer of Profit in the First Pillar are summarized below.
range: The new framework will reduce the scope of multinationals with global sales of over € 20 billion and profitability of over 10% (ie, pre-tax profit / revenue). Mining industry and regulated financial services are excluded.
Nexus-Amount A Allocation: A new special purpose nexus rule is established. This new nexus allows the allocation of a specific share of profits (“Amount A“) In a market jurisdiction only if an MNE within the range earns at least € 1 million from that jurisdiction. For smaller jurisdictions with a GDP of less than € 40 billion, the nexus threshold is € 250,000. Is set to.
Determining tax standards: Relevant measurements of profits or losses of the multinational corporation in question are determined with reference to financial accounting revenue with a few adjustments. Also, the loss is carried forward.
Procurement and quantity of revenue: Revenue is supplied to the jurisdiction of the final market where the goods or services are used or consumed. Allocation of profits to the jurisdiction of the final market where the nexus is located is based on 20% to 30% of residual profits, which is defined as profits in excess of 10% of revenues, using revenue-based allocation keys. ..
Safe Harbor: If the residual profits of a multinational corporation within the range are already taxed in the final market jurisdiction, profit-safe port marketing and distribution limits the residual profits allocated to the final market jurisdiction through the amount A. To do.
Tax certainty and elimination of double taxation: Multinationals within scope will benefit from conflict prevention and resolution mechanisms that avoid double taxation on Amount A in a mandatory and binding manner. Double taxation on profits assigned to endmarket jurisdictions is avoided using either tax exemption or credit methods.
Amount B: The application of the Independent Enterprise Principles to domestic baseline marketing and distribution activities is simplified and streamlined, with a particular focus on the needs of less capable countries.
One-sided measures: Coordination between the application of new international tax law and the elimination of all domestic digital service taxes and other related similar measures will be streamlined.
Second Pillar: Global Minimum Tax-GloBE
Simply put, the OECD’s proposal for GloBE regulations determines the world’s minimum tax amount as follows: The global interests of multinational corporate groups subject to the GloBE Regulations are allocated to different countries after various complex adjustments. It is run by the group. Next, the effective tax rate (“”ETR“) Calculations must be made at the level of each jurisdiction (not per entity) for the assigned adjusted profits.
If the ETR of the jurisdiction of a multinational corporation is lower than the agreed minimum tax rate, the multinational corporation is obliged to pay additional tax to raise the overall tax burden on excess profits to the minimum tax rate. Therefore, the ETR calculation serves both as a tax trigger and as a determinant of additional tax payments. The difference between the adjusted ETR and the minimum tax rate in these countries constitutes an additional tax that, in principle, can be charged by the country of residence of the group’s ultimate parent company when applying the GloBE rules based on income. Inclusion rules (“”IIR“). Otherwise, the tax right will be cascaded to the other GloBE jurisdictions where the group company is established, based on the default rules.UTPR“) Also aims to refuse deductions or require equivalent adjustments to the extent that the low taxable income of the constituent companies is not subject to IIR taxation.
Treaty-based rules, that is, taxable rules (“”STTR“), And the source jurisdiction to which the tax right has been transferred in the context of a tax treaty permits the application of additional taxes to the agreed minimum tax rate for the payment of certain relevant parties who do not have income to benefit from the treaty protection. The minimum tax rate for STTR purposes ranges from 7.5% to 9%.
The key points of the statement issued by the OECD / G20 Comprehensive Framework on Tax Source Erosion and Second Pillar Profit Transfer are summarized below.
range: This rule applies to multinational corporations that meet the € 750 million standard set based on national reporting rules. Nevertheless, countries are free to apply IIRs to multinational companies headquartered in their jurisdiction, even if they do not meet this threshold.
Minimum charge: The minimum tax rate used to calculate ETR based on IIR and UTPR is at least 15%.
Calculation of effective tax rate: GloBE rules impose additional taxes using ETR tests calculated on a jurisdiction basis. This test uses the general definition of eligible taxes and the tax base determined with reference to financial accounting revenue.
Carve out and exclusion: The GloBE Regulation provides formal material-based carve-out provisions that exclude income amounts that are at least 5% of the book value of tangible assets and salaries.
De minimis Exclusion. International shipping revenue is also excluded from the scope of the GloBE regulations.
What’s next?
Now that the framework has reached the agreement of most OECD countries, it is necessary to carry out and agree on the remaining technical work on the first and second pillars. In this regard, the intent of the Comprehensive Framework is to finalize the agreement with the implementation plan by October 2021 with a view to implementing it globally in 2023. But this is as ambitious as many political, technical and idealistic issues. Not resolved yet. Meanwhile, the EU Commission has announced that its proposal to introduce a digital services tax will be postponed until October 2021.
What is at stake for Luxembourg?
Taking that range into account, the first pillar should have a very limited impact on Luxembourg. With respect to the second pillar, some projections tend to indicate that Luxembourg will benefit from the application of the GloBE rules, at least initially. However, considering that tax revenue is important is a naive approach based on a simple analysis of profits and tax rates to calculate the country’s additional income. Luxembourg should not find a new economic plunge in this. On the one hand, the inclusion rule gives the jurisdiction in which the ultimate parent company of the MNE Group resides the right to impose an additional tax if the interests of the MNE Group are not fully taxable. Luxembourg does not have many of these. And, very often, profits arriving in Luxembourg are already taxed and will not be taxed a second time. On the other hand, the nominal tax rate on corporate income in Luxembourg is currently 25%, and as a result of various BEPS reforms underway in recent years, not many companies have an effective tax rate. Less than 15%.
In reality, companies are rarely desired to leave Luxembourg because of the first and second pillars. Luxembourg will continue to be attractive for the ecosystem, not for the tax system. Companies find everything they need here, in addition to the outward international regulatory framework. This is why Luxembourg is unique in Europe. Luxembourg has non-tax benefits that are less important in future investment decisions.
The content of this article is intended to provide a general guide to the subject. Expert advice should be sought for certain situations.