After the international political agreement to introduce an effective country-by-country minimum tax on multinational firm profits, there are still some open questions on the design and implementation of the tax. Among other elements, the OECD/G20 Inclusive Framework Statement of 8 October 2021 envisages a “formulaic substance carve-out” for deemed routine profits generated through real investments and a local workforce. Profits up to 5 % of the carrying value of tangible assets and payroll will be excluded from the scope of the minimum tax; higher percentages will apply during a transition period. However, the Statement is silent on how the carve-out affects the rules on calculating the local effective tax rate (ETR). Depending on the design, the carve-out will have different effects on the amount of top-up tax in case of a local ETR below the minimum rate. Three models on the interaction between the ETR formula and the carve-out are conceivable, two of which are equivalent with respect to the incentive structure (see Devereux et al. 2021 for a discussion). We therefore discuss only two diverging concepts.

Read the entire article: GloBE Minimum Taxation: Calculating the Local ETR with Carve-outs