Taxing the Digital Financial system: What’s within the Pipeline? -Tax

Our insight at a glance

  • In the past few weeks, the G7, G20 and the OECD Comprehensive Framework for Tax Source Erosion and Profit Transfer have successfully completed the tax challenges arising from the globalization and digitization of the economy.
  • As a result, a joint declaration was issued outlining the revised OECD proposal. The key points of this statement are summarized in the first and second pillars.
  • The aim of the Inclusive Framework is to conclude the agreement with the implementation plan by October 2021 in order to implement it worldwide in 2023.
  • Given their current form, the proposals for the first and second pillars are likely to have a very limited impact in Luxembourg.

At the end of 2020, the OECD wanted to successfully tackle the tax challenges arising from globalization and digitization of the economy, in particular the world’s lowest tax by mid-2021. This task has been accomplished. Everything accelerated in the G7 at the beginning of June and ended in the G20 in mid-July. But that doesn’t mean they’re still there. There are many steps and obstacles to overcome.

Let’s return to the various important steps that have been taken so far.

G7 summit

Among them communiqué On June 5, 2021, the G7 finance ministers and central bank governors (Canada, France, Germany, Italy, Japan, Great Britain and the USA) presented an OECD proposal to tackle the tax challenges of digitization. Announced support for. And globalization is based on two pillars. Pillar One aims to reallocate tax laws between jurisdictions in order to give specific rights to the jurisdictions of the market. The second pillar (also known as global tax source erosion prevention. “gloves“) Aims to introduce a global minimum tax for large multinational corporations (“)TO ME“) To avoid the transfer of profits to countries that are subject to tax exemption or very low taxes.

The G7 ministers have committed themselves to two points: (1) The market countries grant tax rights at least 20% of profits that exceed the 10% margin of the largest and most profitable multinational corporations and arrive at a just solution for the allocation of tax rights. Make. (2) Up to a worldwide minimum tax of at least 15% per country. Meanwhile, the United States originally proposed a world minimum tax of 21%. The G7 ministers agreed on the importance of reaching agreements on both pillars in parallel.

Integrated Declaration of the OECD / G20 of July 1, 2021

July 1, 2021, OECD / G20 Comprehensive Framework for Tax Source Erosion and Profit Transfer Statement Overview of the revised OECD proposals on Pillar 1 and Pillar 2. On July 9, 2021, we officially participated in this declaration. Members of 132 jurisdictions including framework (including Luxembourg, USA, China). Few European countries (Estonia, Ireland, Hungary) have not signed this declaration. The positions of these three countries could undermine the implementation of these agreements in the future.

Pillar 1: Redistribution of tax rights to market jurisdictions

In short, Pillar One deals with reallocating tax rights on the profits of MNEs from automated digital services or “consumer businesses”. Pillar One deals with the issues of business and non-physical activities, where and how taxes are to be paid, and profit-sharing that can or should be taxed in the jurisdiction in which customers and users are located. I’ll try. Was located.

The key points of the declaration of the OECD / G20 Comprehensive Framework on Tax Source Erosion and the Transfer of Profit in the First Pillar are summarized below.

Services: The new framework will reduce the size of multinationals with global sales in excess of € 20 billion and profitability in excess of 10% (ie profit / pre-tax sales). The mining industry and regulated financial services are excluded.

Nexus Amount A Allocation: A new earmarking rule is introduced. This new nexus enables the allocation of a certain profit share (“Amount A“) In a market jurisdiction only if an MNE within the reach of this jurisdiction earns at least € 1 million. For smaller jurisdictions with a GDP of less than € 40 billion, the nexus threshold is € 250,000. Is set to.

Establishing tax standards: Relevant profit or loss evaluations of the respective multinational group are determined with a few adjustments in relation to the income from the financial accounting. In addition, the loss is carried forward.

Procurement and sales volume: The proceeds are delivered to the jurisdiction of the end market in which the goods or services are used or consumed. The allocation of profits to the jurisdiction of the end market in which the Nexus is located is based on 20-30% of residual profits, which are defined as profits over 10% of revenues, using sales-based allocation keys. ..

Safe haven: If the residual profits of a multinational group in the area are already taxed in the end market state, the profitable port marketing and distribution limits the residual profits attributable to the end market state by the amount A. To do.

Tax security and elimination of double taxation: Multinational companies within the scope will benefit from conflict prevention and resolution mechanisms that avoid double taxation of amount A in a binding and binding manner. Double taxation of profits allocated to the jurisdictions of the end market is avoided either through tax exemption or credit methods.

Amount B: The application of the Independent Business Principles to domestic basic marketing and sales activities will be simplified and streamlined, with a particular focus on the needs of less performing countries.

Unilateral measures: The coordination between the application of the new international tax law and the elimination of all domestic digital service taxes and other related similar measures will be streamlined.

Second pillar: Global Minimum Tax GloBE

Put simply, the OECD proposal for the GloBE regulation defines the global minimum tax amount as follows: The global interests of multinational corporations that are subject to the GloBE regulations are distributed across different countries after various complex adjustments. It is run by the group. Next, the effective tax rate (“”ETR“) The calculations for the allocated Adjusted Profits must be done at the level of each jurisdiction (not per company).

If the ETR of the state of a multinational corporation is lower than the agreed minimum tax rate, the multinational corporation is required to pay additional taxes in order to raise the total tax burden on excess profits to the minimum tax rate. Therefore, the ETR calculation serves both as a tax trigger and as a determinant for additional tax payments. The difference between the adjusted ETR and the minimum tax rate in these countries represents an additional tax that can generally be levied by the country of domicile of the ultimate parent company when applying the income-related GloBE rules. Inclusion rules (“”IIR“). Otherwise, the tax law will be cascaded on the basis of the standard rules to the other GloBE jurisdictions in which the group company is located.UTPR“) Also aims to refuse deductions or to demand equivalent adjustments, provided that the low taxable income of the constituent companies is not subject to IIR taxation.

Contract-based regulations, i.e. taxable regulations (“”STTR“), And the source state to which the tax law has been transferred under a double taxation treaty allows the application of additional taxes to the agreed minimum tax rate for the payment of certain relevant parties who have no income in order to benefit from the contract protection. The minimum tax rate for STTR purposes is between 7.5% and 9%.

The most important points of the declaration of the OECD / G20 Comprehensive Framework on Tax Source Erosion and Second Pillar Profit Transfer are summarized below.

Services: This rule applies to multinational corporations that meet the € 750 million standard based on national reporting requirements. However, countries are free to apply IIR to multinational companies based in their territory, even if they do not meet this threshold.

Minimum fee: The minimum tax rate for calculating the ETR based on IIR and UTPR is at least 15%.

Calculation of the effective tax rate: The GloBE rules impose additional taxes using ETR tests calculated based on jurisdiction. This test uses the general definition of chargeable taxes and the tax base determined from financial accounting revenue.

Outsourcing and exclusion: The GloBE Regulation provides formal material spin-off rules that exclude amounts of income that are at least 5% of the book value of property, plant and equipment and salaries.
De minimis exclusion. International shipping sales are also excluded from the scope of the GloBE provisions.

What’s next?

Now that most of the OECD countries have agreed to the framework, the remaining technical work on the first and second pillars needs to be carried out and agreed. In this context, the intention of the Comprehensive Framework is to finalize the agreement with the Implementation Plan by October 2021, in order to implement it globally in 2023. However, this is as ambitious as many political, technical and ideational issues. Not resolved yet. Meanwhile, the EU Commission has announced that it will postpone its proposal to introduce a digital service tax to October 2021.

What is at stake for Luxembourg?

Taking this range into account, the impact of the first pillar on Luxembourg is likely to be very limited. With regard to the second pillar, some projections suggest that Luxembourg will benefit from the application of the GloBE rules, at least initially. Keeping in mind that tax revenue matters, however, is a naive approach based on a simple analysis of profits and tax rates to calculate the country’s additional income. Luxembourg should not find a new economic slump in this. On the one hand, the inclusion rule gives the state in which the ultimate parent of the multinational corporation is resident the right to levy an additional tax if the multinational corporation’s shares are not fully taxable. Luxembourg doesn’t have many of them. And very often profits arriving in Luxembourg are already taxed and are not taxed a second time. On the other hand, the nominal tax rate on corporate income in Luxembourg is currently 25% and, due to various BEPS reforms in recent years, not many companies have an effective tax rate. Less than 15%.

In reality, companies rarely want to leave Luxembourg because of the first and second pillars. Luxembourg will continue to be attractive to the ecosystem, not the tax system. Companies will find everything they need here, in addition to the external international regulatory framework. That is why Luxembourg is unique in Europe. Luxembourg has non-tax advantages that are less important in future investment decisions.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought in certain situations.