With the proposed introduction of a global minimum tax and the taxation of large international digital corporations, the OECD is close to putting into place the final piece of the vast plan to overhaul international taxation. The aim is to create a global level playing field on taxation.
Following years of work, the OECD published a plan in July that aims to address the tax challenges that have emerged as economies have become increasingly interlinked. These challenges have become particularly pronounced following the rise of large multinationals that have built their business model based on the internet, meaning there is no longer a requirement to establish subsidiaries to ensure international growth.
The two-pillar plan, endorsed by both the G7 and G20 earlier in 2021, aims to ensure that these multinationals will now pay tax in the countries in which their customers are based. It also aims to reduce tax competition through the introduction of a minimum corporate tax rate as part of the wider Base Erosion and Profit Shifting (BEPS) framework. It was widely endorsed by OECD members and the G20 with 136 members agreeing to the new plan.
Today, I consider the financial centre to be more attractive and successful than it was five years ago.
Pierre Gramegna, Luxembourg’s Minister of Finance, highlights that Luxembourg has been proactive in the negotiations regarding the plan. Looking back at the last five years, he believes that the country has already gained significantly from its adoption of the BEPS rules, despite initial fears that the country would lose out. “Today, I consider the financial centre to be more attractive and successful than it was five years ago,” he notes. Therefore, continuing to make progress with the OECD is critical.
Pillar 1, from which companies in the financial sector are excluded, aims for a better distribution of the profits of large multinational corporations – specifically those with a turnover of more than €20 billion and a profitability of more than 10%. For firms that fall under this pillar, 25% of their residual profit (above the 10% minimum) will be redistributed to the countries in which the consumers and users are located.
No country will therefore have an interest in setting up a more attractive taxation system, insofar as what will not be paid in one country will be paid in another.
Pillar 2 tackles the country-by-country minimum tax rate, which was officially set at 15% at the OECD meeting on 8 October 2021. This will apply to multinationals with a turnover of at least €750 million. Should a participating state choose to apply a lower rate the difference can be claimed by the country in which the ultimate parent company of the group is located.
“No country will therefore have an interest in setting up a more attractive taxation system, insofar as what will not be paid in one country will be paid in another”, pointed out Gramegna. “This measure ensures that this minimum taxation rate will be imposed everywhere. For the G20 and the OECD, the objective is to put an end to tax havens that attract multinationals with very low tax rates.”
While some have remarked that the size of the country, as well as the small domestic market, will mean these new rules will work against Luxembourg, Gramegna is of the opposite opinion, “because the most important sector for Luxembourg is financial services and as this sector is exempt from the measures relating to pillar 1, it will not be subject to the redistribution criteria.”
The finance minister also believes that having a common, and fairer, global taxation legislation will ensure a level playing field, something for which Luxembourg has always advocated. And since the tax rate will no longer be a strategic element in the choice of set up location by companies, other factors will come into play.
Under the new framework, Luxembourg will continue to appeal to international financial companies for the same reasons it always has; its AAA rating, stable political and social environment, established ecosystem, and its role as an international financial hub, with English as a common business language, in the heart of Europe.
This is what has made us so successful in the context of Brexit, in the field of funds or in investor services.
Financial services actors have benefitted from the multijurisdictional expertise that exists within the Grand Duchy, with cross-border finance being at the heart of Luxembourg’s ecosystem. Being able to find a wide range of specialists, be it consultants, lawyers, or accountants, as well as investment vehicles and the right legislation to support their international finance ambitions.
Luxembourg will continue to rely on the tools it has available, rather than participate in the race to the bottom. In this new environment, “transparency has become essential and we’ve been able to anticipate this change,” observes Gramegna. “This is what has made us so successful in the context of Brexit, in the field of funds or in investor services.”