The global deal to impose a 15% minimum effective tax rate on multinational businesses could result in a substantial tax windfall for Luxembourg. National statistics office STATEC estimates €5.1bn of new tax revenue could result, equating to 38.5% of the country’s total tax take.
New corporate tax rules agreed by 137 countries in October (now 141) could result in a major increase in revenue for the Luxembourg state, says a study published in the latest Note de Conjoncture publication. Using data made available by the OECD’s “country-by-country reporting” system for 2017, STATEC estimates that the Luxembourg state could have collected €5.1bn more in corporate taxation if the new minimum tax level had been in operation. This figure is equal to 38.5% of the €13.2bn revenue taken in tax that year in the Grand Duchy. Total corporate taxation paid in Luxembourg that year was €2.9bn.
Pillar two impact
The OECD proposal features two pillars. Pillar one would give jurisdictions the right to receive tax revenue from large multinational companies on the basis of sales made in their territory. STATEC estimates that this could have resulted in a €15m tax loss for Luxembourg in 2017. However, it is the pillar two rules that could see Luxembourg reaping a tax bounty.
Under pillar two, non-financial companies with global revenue in excess of €750m would be required to pay an effective minimum corporate tax rate of 15%. It is the word “effective” that is key in this instance. The headline rate for a large business based in Luxembourg City features 17% corporate income tax, 1.19% solidarity tax, and 6.75% municipal business tax: a total of 24.94%. However, with low withholding taxes on intra-group dividends and write offs for interest payments, intellectual property use, royalties etc the figure effectively paid can be reduced substantially.
Where country-by-country data is available, it appears that many multinationals based in Luxembourg pay considerable rates of corporate taxation. STATEC noted that multinational firms paying an effective tax rate in excess of 20% employ about 27,000 people and are mostly involved in “substantial” business activity selling goods and services. However, the firms paying less than an 10% effective tax rate employ about 15,000, with half of these businesses operating as holding companies for their groups. It is applying a 15% tax rate to this latter category of firms which would result in the lion’s share of the income jump.
Results supported
If these results might appear surprising, they are in line with previous attempts to estimate the fiscal impact of such changes. An IMF working paper from 2020 estimated that Luxembourg’s tax base related to multinationals could double, adding that Luxembourg would not be alone. “Many investment hubs may gain a substantial amount of tax revenues from Pillar Two,” said the report. A further study by the EU Tax Observatory, a largely EU funded think-tank, made a similar forecast, estimating that there could be a €4.5bn corporate tax boost for the Grand Duchy.
However, these figures assume that businesses do not change their behaviour in the face of increased taxation. “If MNEs [multinational enterprises] become less inclined to minimize their foreign tax bill through channelling income via SPEs [special purpose entities], tax revenue in Luxembourg can even fall,” warned the IMF report.
What outcomes?
This would then be a test for the claims made by advocates of the Luxembourg business model that companies base themselves here due to the richness of the ecosystem: multilingualism, listening government, central location, efficient infrastructure and so on.
Policy changes are moving forward, as on 22 December the European Commission proposed a directive which would enact the OECD agreement in the EU. It then remains to be seen if a new regime would have the results hoped for by advocates, or produce unintended consequences. A recent report by KPMG suggests governments could switch to offering overt or covert subsidies to business.