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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

  • Mona Barake & Paul-Emmanuel Chouc & Theresa Neef & Gabriel Zucman, 2021. "Minimizing the Minimum Tax? The Critical Effect of Substance Carve-Outs," Notes 001, EU Tax Observatory.
    • 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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    References listed on IDEAS

    as
    1. Mona Barake & Paul-Emmanuel Chouc & Theresa Neef & Gabriel Zucman, 2021. "Collecting the Tax Deficit of Multinational Companies: Simulations for the EU," Reports 001, EU Tax Observatory.
    2. Mona Baraké & Theresa Neef & Paul-Emmanuel Chouc & Gabriel Zucman, 2021. "Collecting the tax deficit of multinational companies simulations for the European Union," PSE-Ecole d'économie de Paris (Postprint) halshs-03323095, HAL.
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    Citations

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    Cited by:

    1. Sónia Cabral & Joana Garcia & Raquel Miranda & Susana Peralta & João Pereira dos Santos, 2024. "Treasure Islands, Real Jobs? Workers and Anti-Avoidance Policies in a Tax Paradise," Working Papers w202416, Banco de Portugal, Economics and Research Department.
    2. Sébastien Laffitte & Edoardo Montagner, 2025. "Effective Tax Blacklists: Rethinking Criteria For the 21st Century," Reports 008, EU Tax Observatory.

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    More about this item

    Keywords

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    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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