The OECD’s latest global tax plan is in trouble. Dubbed “BEPS 2.0”, the Inclusive Framework Pillar One and Two proposals – which has the political backing of 137 countries – is facing political difficulties, including within the EU and the US. The «Ecofin» meeting of EU finance ministers on Tuesday in Luxembourg will seek to break the logjam in Europe. How is Luxembourg positioned?
Consensus of all member states is required to implement pan-EU tax reform, but this is proving elusive regarding the OECD proposal. Even though unanimity is required, most countries shy away from going it alone and using a veto. Hungary’s right-populist prime minister Viktor Orbán is less inhibited, however, calling the plans for a minimum 15% effective tax rate “absurd”. His country has a 9% corporate tax rate, a key tool in helping to attract foreign investment.
Mixed views
“Together with the EU as well as the OECD, Luxembourg will strive for a swift implementation of the global tax reform,» finance minister Yuriko Backes said on 11th January, just days after her appointment to the role. Speaking to an online conference on international tax organised by the Luxembourg employers group the UEL, she added: “these global tax rules will help put the spotlight on Luxembourg’s many advantages.” Also addressing the conference was Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, one of the people who was leading this global push.
It is not known if the pair had their Zoom calls open for the subsequent panel discussion at the UEL conference, but the view of experts regarding the proposals was not positive. “Pillar two will be extremely complex. For me, it’s one of the most complex pieces of legislation I’ve ever seen,” said Georg Geberth, BusinessEurope’s tax policy working group member. For the Luxembourg fund sector, the proposals would cost “thousands per entity” to prove that they were out of scope, said Keith O’Donnell, Chair of the ALFI tax commission.
Going it alone
Regardless of these concerns, five EU countries (Germany, France, Italy, Spain and the Netherlands) announced on 9th September that they would introduce the tax reform unilaterally without pan-EU agreement. “Should unanimity not be reached in the next weeks, our governments are fully determined to follow through on our commitment,” the group said in a statement.
It is perhaps notable that The Netherlands was one of the five. As a country which operates a cross border business hub it might be wary of arrangements which would complicate these operations. Luxembourg and Ireland – other member states that specialise in attracting global investors – have been less forthcoming about their enthusiasm for the proposal. “Luxembourg sees implementation at EU level as the goal. Because a patchwork of laws could create more complexity and fragment the single market,» the finance ministry told reporter.lu shortly after the announcement by the five.
Advantageous for Luxembourg?
One can only speculate whether Backes and the Luxembourg government are firm believers in the benefits of the proposals. Much of Luxembourg’s expertise is based on making EU and international business regulations work for business. Thus implementation of a complex global tax deal could be good news for the country’s cross-border business facilitation ecosystem (particularly the tax accountants), even if the global businesses based here might find the changes to be onerous. Alternatively, it is possible that this minimum tax could see companies leaving Luxembourg if it erodes tax advantages of being based in the Grand Duchy.
National statistics office Statec made a quick estimate that the proposals. They reckoned that a 15% minimum effective tax rate on multinational businesses could reap 5.1 billionin tax for state. This would equate to 38.5% of the country’s total tax take. However, even if the economists who made this calculation question its validity, but it does point to the potentially impactful nature of the proposals.
Hungarian defence
It is possible that the Luxembourg government is quietly pleased that the Hungarians are out front blocking the proposals, while taking the criticism for this stance that the Grand Duchy would not be willing to bear. This position might change, however.
Some within the EU are reported to be exploring ways for Hungary’s veto to be by-passed. According to the Financial Times, loopholes are being sought so “other member states could press ahead without Hungary’s approval or participation.” These manoeuvres are part of a wider political battle with Hungary regarding the country’s breaches of EU norms on the rule of law and democracy.
The nature of Pascal Saint-Amans’ views are also not publicly known. Yet, in a surprise move, he recently left the OECD after 15 years with the rich country club, joining a consulting firm.
US non-complaint?
There is also the question of whether the US will comply with the proposals. A form of the 15% tax proposal was included in the Biden administration’s landmark Inflation Reduction Act, but there is concern that this does not meet the spirit of the rules agreed at the global level. Not only would the 15% apply only to “book income” but it would only be levied at group level, rather than country by country. According to the Financial Times, Ross Robertson, international tax partner at accountancy firm BDO such details make it “doubtful” that the act would be deemed compliant with the global minimum tax agreement.
The next G20 heads of state and government summit will take place on 15-16 November 2022, and this tax deal is likely to be on the agenda. What they will have to discuss should become clearer over coming days as EU finance ministers meet in Luxembourg.
Related articles on Investment Officer Luxembourg:
- Luxembourg and the new OECD tax rules
- Impact of OECD ‘structured formal garden’ for tax rules
- Possible massive tax windfall from OECD tax deal