Luxembourg: Potential Impacts of the Global Minimum Tax

Background

On 4 and 5 June 2021, the Finance Ministers and Central Bank Governors of the G7, joined by the Heads of the International Monetary Fund, World Bank Group, Organisation for Economic Cooperation and Development, and Eurogroup, met in London to address tax challenges arising from globalization and the digitalization of the economy. In this regard, a communiqué was issued on 5 June 2021 detailing concrete actions.

Global Minimum Tax

For the past few years, countries have been fighting to discourage multinationals, especially within the tech industry, from shifting profits and tax revenues to low-tax countries regardless of where activity occurs and value is created.

As a result, G7 decided to commit to reaching an equitable solution on the allocation of taxing rights between countries with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.

Additionally, G7 decided to set a global minimum tax of at least 15% on a country-by-country basis and remove the Digital Services Taxes.

As the German finance minister Olaf Scholz said, this is “bad news for tax havens around the world”.

What is to expect from a Luxembourg perspective?

Pending Issues for Luxembourg

The Grand Duchy is a launchpad for worldwide investments and those new rules could have a significant impact on financial activity within the country. In fact, a large number of investment funds are headquartered in Luxembourg benefiting from a favorable tax environment.

The situation in Luxembourg will essentially depend on what is the scope of this minimum tax. In terms of effective tax rate, some investment funds do face very limited tax liability in the country. But yet, it is not clear if investments funds would be included within the definition of this new minimum global tax.

During the past two years, the Digital Services Taxes were seen as an answer to an unfair share of taxes paid by some multinationals in the tech industry but seem to be controversial from a pure economic perspective. The location of creation of value is difficult to determine and an international answer has to be addressed to avoid irrational unilateral answers by the countries.

If the investment funds are targeted by the minimum tax, the question of the tax basis would need to be raised. Investment funds’ tax burden is quite low because of favorable tax regime or because of a large amount of debt lowering the profits. Would we consider the only profits? Or would we consider the gross revenues as it is the case for the Digital Services Taxes? If so, we could already expect heavy financial consequences.

Technically, it will be really difficult, even for regulators, to see where the creation of value takes place, where the revenues are being earned, what taxes are being paid, and how much profit shifting is taking place. Those issues will need to be addressed before deciding any new tax treatment and to avoid serious economic damages.

Many countries might disapprove this so-called tax reform as their economy is essentially based on a very attractive tax regime. Ireland for instance would have to raise significantly its corporate tax rate but might react before adopting such measure. Luxembourg might fight as well if the consequences for the investments within the country are heavily affected by new tax measures imposed at an international level.

Next Steps

In total, 139 countries will try to reach an agreement at the July meeting of the G20, pursuing these tax objectives. Intensive negotiations have started and it remains to be seen what mechanisms and criteria will be included in any agreement among stakeholders and the legal means used to adopt new tax provisions.

Yann Ricard was a contributing author to this insight.