The cook-off organised by the City of Luxembourg is a subtle reminder that when life gives you lemons, you make lemonade… well maybe this time something more special to celebrate National day followin...
Atoz CEO Keith O'Donnell says Luxembourg will remain competitive even under a global minimum corporate tax. Library photo: Matic Zorman
A deal to introduce a global minimum corporate income tax for multinationals won’t put the Luxembourg financial centre in jeopardy, says Keith O’Donnell, CEO of tax advisory Atoz.
G7 countries over the weekend reached an agreement paving the way to introduce a 15% minimum corporate tax rate, making it harder for companies to shift profits to lower-tax jurisdictions.
While the deal is historic, it’s not, however, a revolution, says O’Donnell. “The Beps system has already eliminated many of the anomalies in the international tax system,” he says of the OECD’s base erosion and profit shifting action plan, launched in 2013.
“Today, we are in the process of refining the corporate tax system even more fairly, but also increasingly at the margins, because most of the work has been done upstream. So, I fear that this tax reform won’t necessarily generate more tax revenues for countries,” he says.
While some forecasts says Luxembourg could be a winner of the reform in the short-term by gaining tax revenue, O’Donnell refutes these claims. “To say that the tax revenue is going to be monstrous is a naïve approach that is based on a very simplistic analysis of taking the profits and the tax rate to provide additional revenue for the country. I don’t think that Luxembourg will find new financial windfall in this. Quite simply because, very often, the profits that arrive in Luxembourg have already been taxed and will not be taxed a second time.”
On the other hand, the reform shouldn’t negatively impact Luxembourg either, O’Donnell believes. “I don't think any companies are going to leave Luxembourg either; that would mean they are just here because of an effective tax rate. And conversely, I don't think that if countries like Cyprus, Malta, Ireland become less attractive, it could make companies migrate to Luxembourg. If companies are located in countries, it’s not just for tax reasons,” the tax expert says.
“The interesting question for Luxembourg, but it will arise in five to ten years, will be the following: will Luxembourg one day seek to align its effective rate with the world rate of 15%? There would be logic to that, but then again, I don't think it's on the agenda,” O’Donnell says.
At the international level, he is also not convinced about new revenues for third countries by taxing international companies, like Google, Apple, Facebook and Amazon (Gafa).
“You have to understand the general context. Revenues from the taxation of corporate profits in Europe amount to between 7-8% of the total tax bill. So even if this new reform manages to boost tax revenues on the hundred or so companies that fall within the criteria of international reform, we will arrive at 7.5% or 8.5% of the total tax bill. I'm not sure that makes a fundamental difference,” says the CEO of Atoz.
However, the reform risks increasing the fiscal and administrative burden. "This is the concern that emanates for the moment from our customers who are wondering how to concretely prepare for this new reform. But in no case is there a desire to leave Luxembourg because of this. Luxembourg will remain attractive not because of its taxation, but because of its ecosystem. Here, companies find everything they need, in addition to an outward and international oriented regulatory framework. Luxembourg's specificity is what makes the country unique in Europe. In other countries, regulation is mostly done with a national focus. The country is also in good economic health compared to the rest of Europe and enjoys a stable political environment,” says O’Donnell.
Nonetheless, housing and administrative red tape could be drawbacks for businesses to attract newcomers to the country.
Luxembourg’s finance minister Pierre Gramegna (DP) told RTL that the agreement didn’t come as a surprise. “Those who still live in an imaginary world and think that Luxembourg is a fiscal haven are wrong. They don’t want to see and haven’t understood the changes that have taken place over the last seven years.”
He also said the 15% could not have a “dramatic effect”, explaining: “In Luxembourg, we have a nominal 17% tax rate on profits. If we then add the municipal commercial tax, the corporate tax in Luxembourg is 25%. We are therefore well above 15%.”
And the minister said he believes taxation will play a lesser role in future in corporate decision-making, citing Luxembourg’s other advantages--such as its triple A rating, productivity and multilingualism.
The G7 proposal has yet to become more concrete, too, and O’Donnell doesn’t expect the matter to proceed at great speed. The G7 deal must be approved by the OECD, the US Congress and the EU.
“I recently spoke with an American expert on the subject. There is much doubt about the passage of reform in the US Congress. You should know that to pass such a law, you need a two-thirds majority in the Senate. And at the moment, it doesn't seem very cooperative,” says O’Donnell.
“The current US administration has a very slim majority, and you don't just have to convince one or two members of the opposition to vote in favour of this law, but a minimum of ten. There is a possibility of dispensing with the Congress vote, but politically that’s very risky.”
This begs the question what Europe will do if the US fails to approve the global minimum tax rate. “Several European countries have already positioned themselves on a local digital tax that is not in line with the American tax system,” says O’Donnell, warning of a new trade war between Europe and the US.
This story was first published in French on Paperjam. It has been translated and edited for Delano.