Minimizing the Minimum Tax? The Critical Effect of Substance Carve-Outs

Mona Barake, Paul-Emmanuel Chouc, Theresa Neef and Gabriel Zucman
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Mona Barake: EU Tax Observatory
Paul-Emmanuel Chouc: EU Tax Observatory
Theresa Neef: EU Tax Observatory
Gabriel Zucman: EU Tax Observatory

No 1, Notes from EU Tax Observatory

Abstract: In July 2021, 132 countries agreed to a minimum tax rate of at least 15% on their multinationals’ profits. However, the joint statement includes a provision that could substantially reduce the effectiveness of this policy. Specifically, the proposed agreement allows multinationals to reduce profits subject to the minimum tax by an amount equal to 5% of the value of their assets and payroll in each country. This carve-out would allow companies to escape taxation as long as they have sufficient operations (assets and employees) in tax havens. In this note, we model how this carve-out would affect the revenues of a global minimum tax. We also discuss the economic issues raised by this type of exemption.

Keywords: Global minimum tax; tax carve-out; substance-based carve-out; corporate tax revenue; tax avoidance; tax competition; multinational companies; EU tax policy (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2021-07
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