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


Authors: Mona Barake, Paul-Emmanuel Chouc, Theresa Neef, and Gabriel Zucman

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.