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By Doug Connolly, Multinational Corporate Taxation
EU Tax Observatory July 21 study predicts that a substance waiver under the deal for a global minimum tax proposal could exacerbate tax competition and reduce tax revenues by 15-30% that the EU would otherwise gain under the minimum tax proposal.
Meanwhile, the EU’s opponents of the global minimum tax – Hungary and Ireland – continue to defend their positions, with Hungarian officials reiterating their case for tax competition, as Ireland grapples with calls from the business community to deal with the reality of the momentum behind the deal.
The July 1 statement on a global minimum tax proposal has now been approved by the G20 and 132 countries, while negotiations with the remaining countries continue. The agreement proposes an overall minimum corporate tax rate of at least 15%, with a carve-out substance exclusion that would reduce the tax base to which the minimum tax applies. Under the agreement, the exclusion would apply to “an amount of income that represents at least 5% (in the 5-year transition period, at least 7.5%) of the carrying amount of property, plant and equipment and of the wage bill â€.
The study by the EU Tax Observatory – an independent EU-funded research group – found that the initial 7.5% exclusion from the transition carve-out on a minimum tax rate by 15% would reduce the tax revenue gains that the EU would see without the carve – by 23%. A 5% exclusion would reduce income by 15%. The loss of income would be greater if the minimum tax were to land at a rate above 15%. The study follows a report last month from the EU Tax Observatory on anticipated earnings gains under minimum tax.
In addition, the study suggests that this exception would increase tax competition by encouraging companies to move their actual activities to tax havens. Similar arguments have been made in the United States against the exclusion of Qualified Business Asset Income (QBAI) from minimum tax under the Global Low Tax Intangible Income (GILTI) provisions.
According to this argument, minimum taxes with substantive exclusions may help reduce the shift of profits to tax havens where no economic substance exists, but they fail to tackle the so-called ‘race to the bottom’ of taxpayers. corporate tax rate.
Irish Finance Minister Paschal Donohoe has argued for months that small countries should be able to use tax competition as leverage to attract investment that would otherwise go to larger countries that benefit from certain economies of scale.
However, there are signs that Ireland could accept the broader consensus. Ireland opened a consultation on July 20 on the impact on the country’s tax policy of the proposed deal. The opening of the consultation followed reports in the Irish Examiner government officials suggesting the country would drop its 12.5% ​​corporate tax rate later this year.
The Irish time reported today that the Irish SME Association, a lobby group for small businesses, has called on the government to reassess its high capital gains tax rate in light of the ‘inevitable’ increase in corporate tax rate.
Hungarian officials have also criticized the minimum tax proposal to defend Hungary’s 9% corporate tax rate. Today, Norbert Izer, Hungarian State Secretary for Fiscal Affairs at the Ministry of Finance, wrote an editorial in Observe, arguing that “the fight against harmful tax competition must not become a fight against the competitiveness of tax systems”.
Bearing this in mind, Izer argues that the proposed 5% substance exclusion rate is “very low”, adding that “the legislation should only cover highly mobile benefits which are disproportionately high compared to the sub-level. underlying real economic activity â€. Hungary remains engaged in the talks, suggests Izer, but will not sign the deal until the final details are clear.
Along with Ireland and Hungary, EU support for the deal depends on another holdout who did not sign the declaration – Estonia. The Estonian president also said earlier this month that the country is waiting for more details to be worked out before signing. The corporate tax rate in Estonia is already above the proposed minimum.
Doug Connolly is editor-in-chief of MNE Tax. He has over 10 years of experience in tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from the American University Washington College of Law.
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