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

Author

Listed:
  • Mona Barake

    (EU Tax Observatory)

  • Paul-Emmanuel Chouc

    (EU Tax Observatory)

  • Theresa Neef

    (EU Tax Observatory)

  • Gabriel Zucman

    (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.

Suggested Citation

Handle: RePEc:dbp:plnote:001
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File URL: https://www.taxobservatory.eu//www-site/uploads/2021/07/EU-Tax-Observatory-Note-n.1-Substance-carve-outs-2.pdf
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More about this item

Keywords

Global minimum tax; tax carve-out; substance-based carve-out; corporate tax revenue; tax avoidance; tax competition; multinational companies; EU tax policy;
All these keywords.

JEL classification:

  • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
  • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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