This is a further step towards the global economy and the fight against tax dumping. After lengthy negotiations, the agreement setting out the framework for international tax reform for very large companies, presented on 1 July, was signed by 136 countries of the Organisation for Economic Co-operation and Development (OECD), including the United States, China and India, on 8 October.
Ireland, whose 12.5% tax rate was one of the lowest in Europe, finally joined the signatories at the last minute. Only Kenya, Nigeria, Pakistan and Sri Lanka refused to sign. For the countries hosting the activities or subsidiaries of very large companies that include the Gafa (Google, Apple, Facebook and Amazon), tax revenues could amount to around €129bn per year thanks to this agreement. According to one of the eligibility pillars mentioned by the negotiators, the OECD agreement imposes a minimum tax rate of 15% on multinationals with a turnover of more than €750m, to avoid fraud or so-called "tax haven" situations.
Sometimes Luxembourg is attacked as a low-tax country, but by supporting this agreement we are making it clear that this is not the case.
Luxembourg is also one of the signatories. Gerard Cops, tax services leader at PwC Luxembourg, sees this as a form of solidarity between the grand duchy and other countries, removing any stigma: “We support this anti-abuse rule because it is remarkable that all countries sign a global tax agreement, with a cross-territory scope, and that we are all on an equal footing. Sometimes Luxembourg is attacked as a low-tax country, but by supporting this agreement we are making it clear that this is not the case.”
A risk of loss of attractiveness
Currently, every company established in Luxembourg is subject to grand ducal tax law. The corporate tax and the municipal tax put the tax amount at around 24%--a higher rate than the 15% minimum in the agreement. This raises the question of the risk of relocation of head offices to countries where the rate is lower.
Bart Van Droogenbroek, tax leader at EY, does not believe in this: “The risk exists, but is it realistic? It's more complicated than that. Some of the companies that are here today will do their impact calculations. Most of them have already started to de-risk their structure for years, because this agreement was anticipated by many of them. The risk of relocation seems to me to be relatively limited. However, the risk of loss of attractiveness is real and could be unfavourable for new companies.”
Limited revenue for Luxembourg
The other pillar of the agreement provides for a redistribution of part of the excess profits (if greater than 10% of the turnover, only for groups with an annual turnover of more than €20bn) in favour of the market countries. These are states where multinationals have customers without having a physical presence there, and therefore without being taxed there. This may be the case of Luxembourg. Can it, in this case, glean some tax revenue, like France, which is expected to recover €4-5bn in this way?
Cops says: “It is difficult to estimate. In Luxembourg, the impact of this pillar on state revenues will be limited, as it is a small market. The groups concerned are mainly American groups. The other groups have a limited presence in Luxembourg, as a local market. Of course, some are active in Luxembourg. Amazon can be included in the criteria of this pillar taxing excess profits, but its pre-tax profit must exceed 10% of its turnover. ArcelorMittal escapes this, because its margin remains lower. So there is no hope that this new agreement will wipe out the tax debts accumulated after two years of the health crisis. France, Spain, Italy, Germany and the UK have a larger local market, many of these players are present there, and will gain. Ireland, on the other hand, will lose out, as its tax rate is reduced from 12.5% to 15%.”
Van Droogenbroek adds: “To my knowledge, there has not yet been a public study on the possible costs/benefits of this agreement in Luxembourg.”
Reputation: a bulwark against tax evasion
Tax leaders are unanimous: everyone wants to remain legal, because the reputational risk in case of penalties would be too great.
“However, Luxembourg is very careful about this type of risk, as these large groups can be,” says Cops of PwC. The rules are defined at international level by experts, and those who would like to break them expose themselves to a media scandal that could cost them much more than a tax adjustment.
Tax audits have already been stepped up around the world for several years. There are also double taxation treaties for subsidiaries and parent companies abroad. Finally, companies are subject to European taxation governed by the Atad1 and Atad2 directives currently in force.
“I am confident that the OECD will create an update to ensure that any attempts to circumvent them are identified and addressed,” adds the PwC tax leader.
Europe wants to go well beyond this agreement, notably with the Atad3 directive.
The greatest difficulty lies more in the application of these rules, which are due to come into force in 2023.
"Everything has to be done, and it's going to be very complex for the tax administrations who will have to create new forms in 14 months.” According to Van Droogenbroek, “the OECD is an agreement between countries. Now it will have to be translated into law. Everything is becoming more transparent from now on. Europe wants to go far beyond this agreement, notably with the Atad3 directive, which targets mailbox companies. It wants to create a directive on the publication of the effective tax rate, introduce new rules on the European taxation of multinationals and create a new environment where debt financing will be favoured over equity financing. The risk of reputational damage will therefore increase further.”
The choice for a company is quickly made: if it wants to avoid being taxed under the multinational regime, it had better not exceed €749.9m in turnover at all costs, just as some banks prefer to remain non-systemic. Van Droogenbroek concludes with a warning: “What is clear is that the OECD is not targeting regulated companies, but for the European Commission, which will implement this agreement in an operational way, it is not always so clear.”
New restrictions and control tools are therefore expected by 2023.
This story was first published in French on . It has been translated and edited for Delano.