Under the leadership of the OECD, an agreement has been reached with 137 countries, including Curaçao, on the design and revision of international tax rules, known as the Inclusive Framework. These rules are aimed at combating global tax evasion and curbing the race to the bottom in terms of profit tax rates. The Inclusive Framework consists of two pillars. Pillar 1 focuses on the requirement for large multinational corporations, often targeting major tech companies, to pay a portion of their profit taxes in the countries where their customers and users are located. Pillar 2 deals with a minimum profit tax of 15% for large multinational corporations. The development of Pillar 1 appears to be at a standstill due to political debates. In contrast, Pillar 2 is gaining momentum, especially within the European Union. In late December 2022, the European Union reached an agreement on the implementation of the minimum profit tax (Pillar 2) by EU member states in 2023. Many other countries are also moving forward with implementing rules related to the minimum profit tax rate. Additionally, the introduction of Pillar 2 is included in the tax plan for 2024 for the BES Islands. Therefore, the question arises: what will be the implications of this for tax collection in Curaçao? Is Curaçao prepared for this, or is there a possibility that, based on the current tax legislation in Curaçao, too little tax will be collected, resulting in another country imposing additional taxes?
In the following paragraphs, I will explain the potential issues that may arise for Curaçao with the global implementation of Pillar 2, considering the content of Pillar 2 and the special tax regimes currently in place in Curaçao.
Contents of OECD Pillar 2
In a nutshell, Pillar 2 entails a globally effective minimum profit tax of 15% for multinationals with consolidated revenue of at least 750 million euros per year. It is essential to note that the effective tax rate (ETR) is expressed in the same way worldwide. The calculation of ETR used by the OECD closely aligns with the financial reporting of companies, as they are largely harmonized. ETR is determined for each jurisdiction. Therefore, Pillar 2 aims to establish a minimum tax for each separate jurisdiction. This means that if one jurisdiction has an ETR of less than 15%, additional taxes will be imposed, even if the group's average ETR worldwide is higher than 15%. The loss of not collecting enough tax (less than 15%) in the low-tax jurisdiction becomes a gain for the jurisdiction of the ultimate parent entity. This, in turn, acts as an economic incentive for low-tax jurisdictions to increase their ETR to at least 15%, thereby preventing the "giving away" of tax to another jurisdiction.
There is an exception regarding Pillar 2 for pension funds, investment funds, or real estate funds. These are exempted from the above-mentioned rules as long as they qualify as the ultimate parent entity.
Profit Tax and Special Tax Regimes in Curaçao
At first glance, Curaçao appears to meet the requirement of an effective rate of 15% based on Pillar 2 with a general profit tax rate of 22%. However, Curaçao has several regimes and arrangements where the profit tax rate is lower than 15%. For example, the Private Foundation (in Dutch: ‘Stichting Particulier Fonds’ or ‘SPF’) benefits from an exemption in profit tax, effectively resulting in a profit tax rate of 0%. Qualifying construction companies and call, service, data centers, and investment institutions have a profit tax rate of 3%. The purpose company (in Dutch: ‘Doelvermogen’) has a profit tax rate of 10%, and the innovation box/ intellectual property and the Curaçao Investment Institution (CBI) have a profit tax rate of 0%.
In practice, multinational corporations with revenue exceeding 750 million euros do not typically make use of the purpose company, SPF, or the innovation box. Therefore, these three regimes or arrangements generally do not lead to additional profit tax in other jurisdictions. However, the 3% regimes and the CBI are utilized by large multinational corporations and can potentially lead to additional taxes imposed in another jurisdiction. Concerning the CBI, it essentially qualifies for the exemption for investment funds under Pillar 2 legislation as long as the CBI is the ultimate parent entity of the structure or group. In other cases, the CBI may also result in additional taxes in another jurisdiction.
Additionally, based on Curaçao's territorial regime implemented in profit tax reform in 2020, an effective rate lower than 15% may arise. Under the territorial regime, entities located in Curaçao with significant direct foreign expenses may exclude a large portion of their profits from the tax base. Since Pillar 2 does not use this methodology for calculating the ETR and generally applies a broader base for Curaçao than what is assessed under the Curaçao territorial regime, there may be situations where entities in Curaçao with substantial direct foreign expenses have an ETR lower than 15% and, as a result, may be subject to additional taxes in another jurisdiction.
Challenges for Curaçao
If, according to the standards of Pillar 2 regulations, Curaçao does not have an ETR of 15%, additional taxes will be imposed in another jurisdiction, as described earlier. Consider a multinational corporation with revenue exceeding 750 million euros, with its ultimate parent entity located in the Netherlands and a subsidiary in Curaçao. If Curaçao applies an effective profit tax rate of 5% to the subsidiary based on the territorial regime, the Pillar 2 legislation will require the Netherlands to impose an additional 10% profit tax on the profits attributed to Curaçao. This results in a total profit tax of 15% on the subsidiary's profits, of which Curaçao collects only 5%. In this way, Curaçao misses out on collecting 10%, which, through the application of Pillar 2, is ultimately collected by another jurisdiction, in this case, the Netherlands. It's clear that it's in Curaçao's best interest that if the 15% tax on the profits generated in Curaçao is imposed, the entire 15% should benefit Curaçao rather than another jurisdiction.
Considering the speed at which many countries are implementing Pillar 2, such as the Netherlands, which plans to have the legislation in place by early 2024, and in order to prevent the situations mentioned above, it is advisable for the Curaçao legislature to carefully examine the possibilities of making the special tax regimes of the CBI, the 3% regimes, and the territorial regime Pillar 2 compliant. This way, in the mentioned scenarios, Curaçao can ensure that the full 15% benefits Curaçao and not another jurisdiction. Ultimately, this will have no adverse effects on Curaçao's (tax) business environment. After all, international corporations will still have to meet the minimum profit tax rate of 15%, and they will generally not be concerned about which jurisdiction collects it. In conclusion, there are compelling reasons for the Curaçao legislature to ensure that the current tax legislation is Pillar 2-proof, thereby avoiding the potential situation where Curaçao robs itself of its own financial resources.
mr. drs. Tobias van het Nederend is a tax advisor at Deloitte Dutch Caribbean.