EU continues to wrangle over global minimum tax’s carve-outs, rate

By Doug Connolly, MNE Tax

A July 21 study from the EU Tax Observatory predicts that a substance carve-out under the agreement for a proposed global minimum tax could exacerbate tax competition and would reduce by 15% to 30% the tax revenues that the EU would otherwise gain under the proposed minimum tax.

Meanwhile, EU opponents of the global minimum tax – Hungary and Ireland – continue to stake out their positions, with Hungarian officials reiterating their case in favor of tax competition, while Ireland faces calls from the business community to confront the reality of the momentum behind the agreement.

The July 1 statement on a proposed global minimum tax has now been endorsed by the G20 and 132 countries, while negotiations with remaining countries continue. The agreement proposes a global minimum corporate tax rate of at least 15%, with a substance carve-out exclusion that would reduce the tax base to which the minimum tax applies. Under the agreement, the carve-out would apply for “an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll.”

The study from the EU Tax Observatory – an independent, EU-funded research group – found that the 7.5% initial transition carve-out exclusion on a minimum tax rate of 15% would reduce the tax revenue gains that the EU would see without the carve-out by 23%. A 5% carve-out would reduce revenues by 15%. Revenue losses would be higher if the minimum tax lands at a rate higher than 15%. The study follows a report last month from the EU Tax Observatory on anticipated revenue gains under the minimum tax.

In addition, the study suggests that this carve-out would increase tax competition by incentivizing companies to move real activity to tax havens. Similar arguments have been made in the US against the qualified business asset income (QBAI) exclusion from the minimum tax under the global intangible low-taxed income (GILTI) provisions.

Under this argument, minimum taxes with substance carve-outs may work to reduce profit shifting to tax havens where no economic substance exists, but they fail to combat the so-called “race to the bottom” in corporate tax rates.

Ireland’s Finance Minister Paschal Donohoe has for months argued small countries should be able to use tax competition as a lever to attract investment that would otherwise go to larger countries that benefit from certain economies of scale.

However, there are signs Ireland might be coming to terms with the broader consensus. Ireland on July 20 opened a consultation on the impact on the country’s tax policy of the proposed agreement. The opening of the consultation followed reports in the Irish Examiner of government officials suggesting the country would give up its 12.5% corporate tax rate later this year.

The Irish Times reported today that the Irish SME Association, a small-business lobbying group, has called on the government to reevaluate its high capital gains tax rate in light of the “inevitable” increase in the corporate tax rate.

Hungarian officials have also criticized the minimum tax proposal in defense of Hungary’s 9% corporate tax rate. Today, Norbert Izer, Hungarian state secretary for tax affairs at the ministry of finance, penned an op-ed in EUobserver, arguing that “the fight against harmful tax competition should not become a fight against the competitiveness of tax systems.”

With this in mind, Izer contends that the proposed 5% substance carve-out rate is “very low,” adding that “legislation should only cover highly mobile profits that are disproportionately high compared to the underlying level of real economic activity.” Hungary remains engaged in the talks, Izer suggests, but will not sign onto the agreement before the final details are clear.

Along with Ireland and Hungary, EU’s support for the agreement hinges on one other holdout that has not signed onto the statement – Estonia. Estonia’s president has similarly expressed, earlier this month, that the country is waiting for further details to be worked out before signing on. Estonia’s corporate tax rate is already above the proposed minimum.