Representatives of Luxembourg business think the OECD’s Inclusive Framework Pillar One and Two tax proposals contain risks of excessive complexity, could put state tax authorities under pressure, increase the likelihood of litigation and could put competitiveness at risk. All in the name of reducing a relatively little corporate tax evasion.
“Pillar two will be extremely complex. For me, it’s one of the most complex pieces of legislation I’ve ever seen,” Georg Geberth, BusinessEurope’s tax policy working group member told the “New international tax landscape and its impact in Luxembourg” panel discussion hosted online by the Union des Entreprises Luxembourgoises on 11 January.
Multiple concerns
Loan Sabau, Tax Manager EMEA, Goodyear Dunlop Tires, Luxembourg said he was “worried because we will depend on third parties to react quickly.” In the fund sector, although there is a carve-out for most vehicles, Keith O’Donnell, Chair of the ALFI tax commission said it could cost “thousands per entity” to prove that each is out of scope.
The rules would see “an increased burden placed on the shoulders of tax authorities” said Bernard David, Chairman of the American Chamber of Commerce Luxembourg’s tax committee. This would be a particular challenge for small countries like the Grand Duchy. Everyone in the panel mentioned the threat to economic competitiveness.
The Inclusive Framework
The OECD Inclusive Framework proposals have received the political backing of 141 countries and are set to be fleshed out this year, with implementation scheduled for 2023 or 2024. Pillar One of these proposals would see multi-national enterprises with global turnover in excess of €20bn and a pre-tax profit margin above 10% be required to pay corporate taxation in the markets in which they operate, not just where they are headquartered.
Pillar Two would seek to enforce a global minimum corporate income tax at an effective rate of 15% for multinationals with more than €750m turnover. It is important to note that the “effective tax rate” referred to here is the amount paid in tax, not the headline rate which can be massaged downwards by tax planners. Calculating this figure is not straightforward, both in terms of the methodology and processing the data.
New complexity
The panel mentioned the difficulty of collecting the data in a timely fashion from the various parts of a multinational organisation and third parties. There are also concerns about how the notion of effective tax rates and the methods used to calculate these will be judged by businesses, tax administrations, the courts, NGOs, the press and so on.
Sabau pointed to questions that arise with current procedures that appear to be caused by tax returns not taking account of the growing complexity of tax rules. He fears a multiplication of these concerns, particularly regarding Pillar Two. “This leads to uncertainty, it leads to disputes, it leads to resources being allocated to solving this kind of thing,” he said.
He fears unintended consequences. “Tax departments are always consulted on the long-term tax impact whenever investment decisions are made. And the worst answer we can give to our business stakeholders is ‘I don’t know’,” Sabu said. These problems would multiply if “the practice of the tax authorities might not always be aligned with what we believe the rules should be.” David added: “this comes in a world where tax expertise is scarce, both for companies and for tax authorities.”
New cost for what?
For the fund industry, O’Donnell also has concerns about Pillar Two. “Right now, I could probably say 98% of funds won’t be concerned with the tax measures. However, we can broadly say it’ll cost thousands per legal entity to arrive at that conclusion, which is millions across the European economy, as well as slowing slow down the whole process,” he said. He reminded the audience of one of the roles of funds to channel money from investors into the real economy. He questioned whether governments want to restrict or slow this process.
O’Donnell added that it is ironic that all this effort is chasing relatively little tax. “We are beating the life out of corporate income tax, but it’s 8% of the tax base generally within the OECD,” he said. Prior to the panel discussion was a presentation by Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD. “He said that a chapter is closing,” regarding tax, noted O’Donnell and that “now we’re moving on to much more important things, notably green tax, and I wholeheartedly agree with him with this…I see a beginning of moving on from corporate tax, which I think would be healthy.”