OECD agreement: what will change in Luxembourg
It is one more step towards the globalized economy and the fight against fiscal dumping. After long negotiations, the agreement which sets the framework for the reform of the international taxation of very large companies, presented on 1uh last July, was signed by 136 countries of the Organization for Economic Co-operation and Development (OECD), including the United States, China and India, on October 8.
Ireland, whose 12.5% tax rate was one of the lowest in Europe, finally rallied the signatories in extremis. Only Kenya, Nigeria, Pakistan and Sri Lanka refused to sign. For countries hosting the activities or subsidiaries of very large companies including Gafa (including the United States), tax revenue could amount to around 129 billion euros through this agreement. According to one of the eligibility pillars mentioned by the negotiators, the OECD agreement imposes a minimum amount of 15% tax on multinationals with turnover exceeding 750 million euros, to avoid fraud or fraud. so-called “tax haven” situations.
Sometimes Luxembourg is attacked as a low tax country, but by supporting this deal we are making it clear that this is not the case.
Luxembourg is also one of the signatories. Gerard Cops, tax services leader at PwC Luxembourg, wants to see in it a form of solidarity between the Grand Duchy and other countries, which would distance it from any stigmatization: “We support this anti-abuse rule because it is remarkable that all payroll sign a global tax agreement, with interjurisdictional scope, and that we are all equal. Sometimes Luxembourg is attacked as a low tax country, but by supporting this agreement we are making it clear that this is not the case. ”
A risk of loss of attractiveness
Currently, each company established in Luxembourg is subject to Grand-Ducal tax law. Corporate tax and municipal tax put the amount of tax at around 24% – a rate higher than the minimum 15% in the agreement. We can therefore ask ourselves the question of the risk of relocation of head offices to countries where the rate is lower. Bart Van Droogenbroek, fiscal leader at EY, doesn’t believe it: “The risk exists, but is it realistic? It is more complicated than that. Some companies who are here today will do their impact calculations. Most have already started to derisk their structure for years, because this agreement was anticipated by many of them. The risk of relocation seems relatively limited to me. However, the risk of loss of attractiveness is real and could be for new businesses. ”
Limited revenues for the Luxembourg state
The other pillar of the agreement provides for a redistribution of part of the profits (if greater than 10% of turnover, only for groups with more than 20 euros in annual turnover) in favor of countries of markets. These are states where multinationals have clients without having a physical presence there, and therefore without being taxed there. This may be the case for Luxembourg. Can he, in this case, glean some tax revenue there, like France, which should recover four to five billion euros through this?
Gerard Cops nuance: “It’s difficult to estimate. In Luxembourg, the impact of this pillar on State revenue will be limited, as it is a small market. The groups concerned are mainly American groups. The other groups have a limited presence in Luxembourg, as a local market. Of course, a few are active in Luxembourg. Amazon can meet the criteria of this pillar taxing surplus profits, but must its profit exceed 10% of its turnover? ArcelorMittal escapes this because its margin remains lower. ” No need therefore to hope to wipe out, with this new agreement, the tax debts accumulated after two years of health crisis. France, Spain, Italy, Germany and the United Kingdom have a larger local market, many of these players are present there, and will gain from it. Ireland, on the other hand, will lose because its taxation becomes less advantageous by dropping from 12.5 to 15%. Bart Van Droogenbroek adds: “To my knowledge, there has not yet been a public study on the possible costs / benefits of this agreement in Luxembourg”.
Reputation: a bulwark against tax fraud
Tax officials are unanimous here: everyone wants to stay within the law, because the reputational risk in the event of penalties would be too great. “However, Luxembourg is very careful about this type of risk, as can be these large groups”, warns Gerard Cops of PwC. The rules are defined at the international level by experts, and those who would like to transgress them expose themselves to a media scandal which could cost them much more than a tax adjustment. Tax controls have already been stepped up for several years all over the world. There are also conventions on the double taxation of subsidiaries and parent companies abroad. Finally, companies are subject to European taxation governed by the Atas1 and Atas2 directives currently in force.
“I am convinced that the OECD will create an update to ensure that any circumvention attempt is identified and communicated,” adds the tax leader of PwC.
Europe wants to go well beyond this agreement, in particular with the Atad3 directive.
The greatest difficulty lies more in the application of these rules, which must come into force in 2023. “Everything has to be done, and it will be very complex for the tax administrations which will have to create new forms in 14 month.” Bart Van Droogenbroek at EY goes even further: “The OECD is an agreement between countries. Now, we will have to translate all of this into laws. Everything becomes more transparent now. Europe wants to go well beyond this agreement, in particular with the Atad3 directive, which targets letterbox companies. She wants to create a directive on the publication of the effective tax rate, introduce new rules on the European taxation of multinationals and create a new environment where debt financing will be at a disadvantage compared to equity financing. The risk of damages will therefore increase further. ”
The choice for a company is quickly made: if it wants to avoid being taxed under the multinationals regime, it has every interest in not exceeding 749.9 million euros in turnover at all costs, just like some banks prefer to remain non-systemic. Bart Van Droogenbroek summed up with a warning: “What is clear is that the OECD does not target regulated companies, but for the European Commission, which will apply this agreement in an operational manner, it is not always so clear.” New restrictions and control tools are therefore expected by 2023.