That a global minimum corporate tax rate is being perused by the Biden administration is a revolution. Yet it raises questions about whether this desire can be translated into effective policy. Moreover, it is unclear what would be the impact on the attractiveness of places like Luxembourg as a hub for multinationals.
It was completely unexpected. On 7 April, Janet Yellen the US treasury secretary signalled a new strategy for a global minimum corporate tax rate. A figure of 21% as a global minimum tax was cited and work would start at a global level as a way to raise funds to pay for the virus bail-out plan. Both Barack Obama and Donald Trump stymied efforts at the OECD to work to restrict tax earlier.
Targeted by the US
Questions around corporate tax frequently posted about the Grand Duchy in the court of global public opinion. Indeed, the country was listed by the US Treasury Department as one of seven ‘low tax jurisdictions’ responsible for ‘profit shifting [which] costs the United States $100bn annually.’
Although the headline corporate tax rate is 25% in Luxembourg, businesses work with the tax office to plan how these taxes will be paid. Tax advisors argue that these arrangements are legal and not necessarily about tax avoidance being ‘aggressive’. Often it is about giving. Multinationals operate in ‘a globally integrated economy with complicated supply chains’, Werner Haslehner, professor of international tax law told the Luxemburger Wort. It is a complex business to manage tax in this environment, even before one begins to consider notions of fairness.
A significant earner
It is not known how many companies use the country as a European corporate base. Although of the 340 companies mentioned in the leak of data from PwC in 2014, 40% appear to have left. Tax on corporate profits was equivalent to 5.9% of Luxembourg GDP in 2019, a figure which was about a percentage point higher than the average for the decade, says the OECD. The 2019 average for the rich-country club was about half this. The average for personal income tax was over 8%. To this are added the wider advantages attracting the likes of Amazon’s European corporate HQ to the Grand Duchy, with its around 2,500 workforce. The income taxes, VAT and other taxes this generates directly and indirectly are considerable.
‘The tax rate is only part of the equation,’ says Haslehner. Thus state investment in infrastructure, non-tax red-tape easements, a multilingual/multicultural workforce, training, services by the state-owned airline, and other advantages also add to the attractiveness of being located in a country with a listening government. In the words of Danny McCoy, CEO of the Irish business federation Ibec, a 21% tax rate above the Irish level of ‘12.5%…would be a significant departure for our global tax brand.’ Thus a question of image as well as tax itself.
What Luxembourg-based means
There are also some more philosophical questions about this debate. The thrust of the Biden plan is that that profits should be booked where customers are based or where the intellectual property was developed. Yet why shouldn’t a small country benefit from tax income from a firm based in its territory? For example, ArcelorMittal is the largest steel company in the world based in Luxembourg. It is the inheritor of Luxembourg’s Arbed which used to be one of the largest steel makers in Europe, based on the country’s iron ore deposits.
Amazon – which has its EU base in Luxembourg – is widely cited in the global debate as being particularly adept at exploiting tax loopholes, whilst also harming traditional retail centres. The difficultly with this discussion is that it wasn’t until 2016 that Amazon started to post consistent levels of profit. These figures have jumped since then, particularly during the pandemic. Yet even so, half the group’s total profit last year came from its AWS cloud computing division.
There is also the point that corporate taxes are ultimately funded by consumers and investors. If these were to rise, prices would need to increase, or dividends would be cut, which would affect pension fund policy holders and the like. Moreover, Amazon would argue that by reinvesting profits from its retail activity it was able to invest in its cloud services business which has driven wider business innovation, and in turn tax revenue.
Working with the grain
Yet these arguments are unlikely to make much impact more widely. Governments and voters are increasingly of the opinion that extra revenue is required from multinationals and the countries in which they base themselves. The Luxembourg government’s response appears to suggest they understand they can’t be seen to be obstructive, and they are talking about working with the grain of the global discussion.
“The proposals of the Biden administration go in the right direction, and are in the best interests of both Europe and the United States,’ Finance Minister Pierre Gramegna told Bloomberg TV. He went on: ‘we need more solidarity, we need to break the mould of many multinationals trying to reduce their taxation close to zero…we must avoid a race to the bottom.’ However, he added that: ‘small open economies like the Benelux countries, Scandinavian countries, Ireland, have specific considerations to value and to put forward that need to be taken into consideration.’
This latter sentence appears to be an allusion to the idea that working out the details will be a complex business. ‘Implementation is technically very difficult to make,’ noted Haslehner. Not only do these measures need to be negotiated at OECD and G20 level and converted into practical policy, they then need to be approved by politicians in Washington and Brussels.
Also coming down the pipe in the EU are plans for country-by-country tax reporting. Although this would not directly affect Luxembourg tax rates, requiring the reporting of activities by multinationals would lead to pressure in the public sphere, both on the government and individual companies. The implications for big multinationals, but also financial services business (which were caught in the BEPS process, for example) remain to be seen.