Tax Havens Race to Lure Companies as 15% Global Levy Looms

The 15% global minimum tax, part of the 2021 global tax pact agreed to by more than 140 countries, seeks to end the “race to the bottom” that has nations competing to offer the lowest corporate tax rates to draw big business investment to their shores.

Now, a new race has begun. For many of the countries traditionally thought of as “havens”—especially tiny islands in the Caribbean—corporate investment is their economic lifeblood. With the minimum tax on big companies eliminating their ability to offer low taxes, countries are scrambling to overhaul their tax systems and create new incentive programs to maintain their appeal in a changing global landscape.

Several countries, including Bermuda, Switzerland, Ireland, and the Netherlands, are mulling tax relief such as qualified refundable tax credits, which are treated more favorably as grants under the minimum tax rules, and non-tax incentives including an expedited immigration process for company employees and even expanded subsidized child care.

Ireland, Switzerland and the Netherlands have stable tax environments, making them less likely to worry about losing foreign investment compared to smaller countries that have relied on tax rate competition to sustain their economies, like Bermuda. But even the bigger countries are struggling to figure out how to maintain their attractiveness to companies under the new global rules.

“Traditionally, we were a very low-tax jurisdiction, and that’s our competitive advantage,” said Christian Frey, deputy head of finances and taxes at the Swiss industry group Economiesuisse. “Policies like grants—that’s not something we’re good at, so this puts us in a difficult spot. We are forced to switch policies.”

Progressive tax justice advocates say that the most popular incentive under consideration, qualified refundable tax credits, takes the teeth out of the global minimum tax and negates its main goal: to stanch tax competition—an assertion that the Organization for Economic Cooperation and Development, which issued the new rules, vigorously contests.

And these kinds of credits aren’t without their risks. For many smaller countries, these incentive programs require a sophisticated tax administration. In addition, providing large sums of money in the form of refundable credits to companies could spell financial trouble for a government in the event of a global economic downturn.

Capping Competition

The global minimum tax is part of the international tax pact consisting of two main parts: a reallocation of large companies’ residual profits, known as Pillar One, and the 15% global minimum tax, known as Pillar Two.

Pascal Saint-Amans, partner at the Brunswick Group in Paris and former director for the OECD’s Center for Tax Policy and Administration, said the goal of the global minimum tax, which applies to companies making more than 750 million euros ($802 million) per year, is to “put a cap” on tax competition.

Before the new rules, companies moved their money to low-tax countries to avoid paying taxes in the places where they generated income. The OECD estimates that these kinds of practices cost countries $100 billion-$240 billion in lost revenue each year.

All 27 of the EU member states agreed at the end of last year to adopt the global minimum tax into their local legislations by the end of 2023. EU countries must start applying the minimum tax’s income inclusion rule on Jan. 1, 2024, which allows a country where a multinational entity is headquartered to “top-up” a related company’s tax when it falls below 15% in another jurisdiction. Efforts to apply the new rules are also underway in the UK, South Korea, Japan, and Switzerland, among others.

If countries fail to implement at least a top-up tax on companies in scope of the Pillar Two rules on time, they risk having other countries collect money given through local tax incentives too. This makes the incentive less effective if not entirely redundant.

Switzerland, Bermuda Plans

Global minimum tax rules released by the OECD in July do accommodate some tax incentives. For example, they largely treat “marketable transferable tax credits” as refundable, meaning the incentive is counted as a grant, or an addition to income, rather than a reduction in tax liability. Tax practitioners say this treatment is favorable because the credits will have less of an effect on a company’s effective tax rate.

Switzerland is made up of cantons, or member states, that are actively discussing with stakeholders what would be most helpful to maintain investment in their states. Frey said the most “obvious” incentive regime the cantons are considering is the qualified refundable tax credit accepted under the global minimum tax rules. Subsidies could be offered for decarbonization investment, research and development, and ESG projects.

Cantonal governments are also looking at subsidies for companies that further education, training, and the promotion of start-ups, according to a report from the Swiss Finance Ministry released in the summer.

“Many of the cantons evaluate potential measures in benefiting the economy. The answers are not very detailed on what the measures will look like in practice, and I think the reason is that they are at the beginning of thinking about these measures,” said Peter Schwarz, economist at the Swiss Federal Tax Administration.

Bermuda is weighing an even bigger change: For the first time in its history, the island nation is considering imposing a corporate income tax. The island’s government has released several consultations on the tax. The third consultation is on a piece of draft legislation that would impose a 15% statutory rate with a qualified refundable tax credit program. Both the tax and the credit program would comply with OECD rules.

Bermuda’s Ministry of Finance made it clear the country seeks to remain competitive in the global economy.

The consultation outlines a qualified refundable tax credit program that would comply with the minimum tax rules. The credits would go toward “substance-based” investments such as payroll costs, training, career development, education, investment in Bermuda infrastructure, and green energy projects.

But introducing a brand-new credit regime, especially in small jurisdictions with tiny tax administrations, may be harder than it sounds.

The very nature of a refundable tax credit—in that its money refunded to a company from the government—makes the incentive a “high fiscal risk” for smaller jurisdictions, said Saint-Amans.

“If you have a financial crisis or an economic downturn, because the tax credit is refundable, you may end up bringing hundreds of millions to companies, which could bankrupt you,” he said.

A senior official from the tax office of a European investment hub said refundable tax credits are keenly desired by many taxpayers but there is complexity in administering such regimes. The official, who requested anonymity to speak candidly, noted the design of incentives into Pillar Two regimes has to be approached carefully as changes in corporate behaviors could leave certain jurisdictions with payable obligations even if tax revenue collection diminishes.

“The recent proposal put forth by Bermuda with a robust refundable credit regime puts pressure on other low-tax jurisdictions looking to retain a base of Pillar Two taxpayers and remain an attractive place to do business, as it heightens the expectation of companies around incentives being offered,” the official said.

The Bermuda government declined to comment when asked about the risks of refundable tax credit programs.

Ireland, Netherlands Plans

Other low-tax countries with existing tax credit programs are working at a breakneck pace to overhaul their regimes so that their incentives don’t expose companies to a top-up tax under the new rules.

Ireland is changing the way companies can claim relief under its R&D credit and film tax credit programs so that they qualify as refundable tax credits. The country first changed its R&D tax credit program to qualify as a refundable tax credit last year, but Finance Minister Michael McGrath proposed increasing the tax credit rate from 25% to 30% in the latest budget in October to continue attracting quality employment and corporate investment under the global minimum tax.

“This will maintain the net value of the existing credit for those businesses subject to the new 15% minimum effective tax rate, while also delivering a real increase in the credit to those smaller companies who will not be in scope of Pillar Two,” McGrath said in his budget speech in October.

Ireland’s Finance Ministry is aiming to revise the country’s tax reliefs for digital games and films to qualify as refundable tax credits too, which are designed to be paid as a cash equivalent to a company within four years. McGrath said that the government is looking at other incentives that can also be revised for favorable treatment under the minimum tax.

The Netherlands, for its part, hasn’t yet changed any of its tax incentives for beneficial treatment under the global minimum tax. However, Dutch policymakers and advisers told Bloomberg Tax that the government is still talking about how to move forward on incentives.

Charlotte Kies, tax partner at Loyens and Loeff in Amsterdam and member of the Dutch Association of Tax Advisers, said the association had asked the government whether it is considering refundable tax credits and marketable transferable tax credits. “The answer to this question is still pending,” Kies said.

Marnix Van Rij, Dutch state secretary for tax affairs and the tax administration, has put several tax measures under review this year, a move that complements the need to amend tax reliefs to remain effective under the minimum tax framework. The Netherlands is going through a political transition since the Dutch cabinet resigned this summer, so it is unlikely that any changes will be formally adopted before the minimum tax starts to apply in January.

“Minister Van Rij recently has confirmed to the Dutch senate that the next Dutch cabinet should decide about tax incentives which fit within the Pillar Two framework, " a spokesperson for the Dutch Ministry of Finance told Bloomberg Tax.

The spokesperson confirmed that there is a committee to work on proposals for new Dutch tax rules, including tax incentives that fit within the Pillar Two framework.

Beyond Credits

But tax incentives aren’t the only way countries can draw interest from companies.

A member of the insurance industry in Bermuda who has direct knowledge of the consultation discussions said business enjoys an “open” relationship with regulators on the island.

“I think as long as Bermuda can retain a good, effective regulatory environment, that’s a huge plus,” said the insurance expert, who asked to remain anonymous given that changes are at a consultation stage and no firm decision has been made.

The Bermuda government could offer a streamlined immigration process for company employees, the expert said: “The ability for companies to get the people they wanted to the island and have them feel like they can invest there for long term is important as well.”

The Bermuda government declined to comment on whether it intended on making adjustments to its immigration process. However, in a press release announcing its corporate income tax bill in November, the government said it aimed “to reduce costs and enhance Bermuda’s attractiveness as a place to work and live.”

In Switzerland, local officials are considering “social policy” measures that would have “indirect positive effects” on the labor market. For example, the canton of Zug is considering the expansion of child care for better work-life balance, according to its August report.

The Big Picture

Discussions about alternative tax incentives have led to a larger debate over the strength and effectiveness of the global minimum tax in truly ending the “race to the bottom.”

Tax justice advocates have been intensely critical of the guidance released by the OECD detailing the treatment of refundable tax credits. At the time of the guidance’s release in July, the treatment was viewed as a major win for the Biden administration and its green energy credit regime.

A report released by the EU Tax Observatory on global tax evasion in October slammed the global minimum tax, arguing it’s been rendered “largely toothless” by a series of “loopholes” like the qualified refundable tax credit.

“By structuring their tax policy slightly differently than in the past—offering generous tax credits as opposed to generous statutory tax rates—the governments of tax havens will be able to keep providing multinationals with very low effective tax rates while avoiding the global minimum tax,” the report reads.

“This loophole risks fueling international tax competition on tax credits, a mere variant over the international tax competition on statutory tax rates observed since the 1980s,” it concluded.

Manal Corwin, director of the OECD’s Center for Tax Policy and Administration, pushed back against the description of a number of features in the global minimum tax rules as “loopholes.”

Corwin said by email that the treatment of qualified refundable tax credits is “designed to treat monetizable tax credits the same way as subsidies (as income rather than a reduction of taxes) in accordance with their economic substance.”

She said the OECD fully expects that the Inclusive Framework, a group of delegates from countries taking part in the international tax pact negotiations, will scrutinize countries’ proposed qualified tax credits to make sure they are in compliance with OECD rules.

Alexander Klemm, division chief of tax policy at the International Monetary Fund, said in an interview that some countries might avoid the minimum tax impact temporarily by catering to multinational companies below the global tax regime’s 750-million-euro threshold.

“However, I would be very careful because the threshold will likely decline over time, either because it’s reduced or eroded by inflation, but it will come down,” Klemm warned, noting that island nations will need to address the impact of a global minimum tax on companies in their territory sooner or later.