Multinationals dismiss G7 tax assault

If any of the more powerful multinationals have had a bomb subjected to them, you don’t know from their reactions – or those of the investors.

G7 finance ministers last weekend has made a deal on a radical new tax on the world’s 100 largest companies that would be taxed where they make their sales rather than where they are incorporated. A minimum corporate tax rate for a much larger group of companies has also been proposed to end a race to the bottom among countries seeking domestic investment.

By eliminating some of the attractions of routing profits through tax havens, the plan could reinforce some of the most widely used evasion strategies in the corporate world, while also launching a new set of rules for tax planners to enter teeth.

But the stock market response has been a collective yawn, with investors deciding that the threat to profits is not large enough to be part of stock prices. Meanwhile, big technology – whose huge profits and comprehensive tax evasion strategies were a primary goal of the proposal – gave a silent welcome to the plans.

“The market has come to the conclusion that it’s not going to happen,” said Margie Patel, senior portfolio manager at Wells Fargo Asset Management. “It’s a thought desired by some of the larger countries, but it will be a really tough sell-off for some of the smaller economies that will perhaps lose their appeal as a tax haven.”

Part of the package, a minimum tax rate of 15 per cent on corporate profits, will be effective only if enough countries adopt it – otherwise companies can continue to tighten rules by moving to more friendly jurisdictions.

The second part faces an even stronger challenge, which requires global unanimity. This would apply to the 100 largest multinationals with profit margins of more than 10 percent – for profits above that level, 20 percent would be taxed in countries where their customers are based, reducing the scope of relocation. profits in lower tax jurisdictions.

Even if the plan goes ahead, the extra tax collected – estimated at about 4 percent of current global tax revenues – would be little more than a rounding error in most companies ’accounts.

“It’s likely to be a headwind, but honestly, at the general level of earnings, it will be really insignificant,” said Julian Emanuel, BTIG’s capital and derivatives strategist.

The proposal will only reduce companies ’earnings per share on the S&P 500 by 1-2 percent next year, according to an estimate by Goldman Sachs.

The most affected by the minimum rate would be companies with a high proportion of sales abroad and those that rely heavily on intellectual property and channel IP licensing rights into lower tax jurisdictions.

Of about 40 U.S. companies with projected tax rates of less than 15 percent by 2022, 15 are in the chips sector and 10 in the healthcare and pharmaceutical industries, according to the Goldman analysis.

Nvidia, the world’s most valuable chipmaker, reported an effective tax rate of less than 2 percent last year, in part by booking profits in the British Virgin Islands, Israel and Hong Kong. Yet its shares closed at record high on the first day of trading after the G7 announced its plan.

British Chancellor Rishi Sunak and US Treasury Secretary Janet Yellen

G7 chief financial officer, including British Chancellor Rishi Sunak and US Treasury Secretary Janet Yellen, have drawn up a plan to harmonize corporate tax © Stefan Rousseau / Pool / AFP via Getty

The chipmaking boom stoked by the jump in digital activity during the pandemic seems to “unravel the modest … negativity of putting a plan on international corporate tax rates,” Emanuel said.

Among those less affected by the minimum rate would be large technology companies, some of which have become less vulnerable following recent changes to their tax agreements.

Google once held much of its intellectual property in Bermuda and licensed it to other parts of the group – a way to shift profits to a country at low cost. But after Donald Trump’s 2017 U.S. tax reforms he transferred his IP to the United States – a path also followed by Microsoft, putting a much larger slice of profits directly into the U.S. tax network.

As a result, some large technology groups will probably “not end up paying significantly more taxes” because of the G7 minimum, said Seamus Coffey, an economist at University College Cork and a former adviser to the Irish government for tax reform.

The second part of the plan – a tax based on where customers are located – is also unlikely to hurt the larger digital companies as it will largely replace taxes on digital services that are already imposed on them in countries such as and the UK and France. A refusal to reduce these fees until the G7 plan is adopted could become one of the plan’s biggest obstacles.

However, even if the immediate impact is marginal, the changes could herald a turning point in corporate tax revenues.

According to some experts, a tax rate plan could make some countries more confident of being able to raise their rates higher than the minimum without risking an erosion of their national tax base. The Biden administration has pushed for international agreement as a prelude to its own plan to raise the U.S. corporate tax rate to 28 percent from 21 percent.

Among those less affected by the plan would be technology companies like Nvidia. His actions hit a record high the day after the G7 announced its proposal © Tyrone Siu / Reuters

The proposal is also likely to have much more bite than a similar tax on international profits adopted as part of the 2017 U.S. review, known as Gilti. The U.S. tax is applied on a global basis, which means companies pay on average the taxes they pay in high- and low-tax countries. On the contrary, the G7 has agreed to a country-by-country plan, applying the minimum rate of 15 per cent to profits earned at each individual location – a direct challenge to the world’s tax havens.

The proposed changes are already taking place across the world of corporate tax, as companies prepare for a new administrative burden – and with it the possibility of new forms of tax evasion. The fact that “every major company in the world will now have two new taxes that must be respected” will be a blessing for tax advisors, a lawyer said.

Large companies already keep the cost of operating in countries with tax rates below 15 percent and work to see if they “represent the best place to invest,” according to Chris Sanger, head of EY’s fiscal policy. in London.

Estimated impact of the 15% minimum tax rate on S&P 500 companies

Tim Sarson, tax partner for KPMG UK, said that when companies rethought the status of their operations it was likely to “lead to a lot of rebalancing between countries and … to some restructuring of supply chains and supply chains. of value in the technology sector ”.

The proposals also threaten to influence a broader decision. Not applying a portion of the tax plan to companies with a profit margin of less than 10 percent, for example, could encourage emerging firms to keep reinvesting rather than chasing higher margins, according to Christian Hallum, senior tax and mining specialist at Oxfam’s Danish Wing.

The 10 percent threshold could produce other unintended effects. To prevent Amazon’s professional cloud division from being protected under its low-margin trading activity, for example, the OECD is exploring a way to imposes division separately.

That would lead to a game of cat and mouse that tax administrations would find difficult to win, some experts warn. Any attempt to tax individual units in businesses leads them to restructure to circumvent taxes or try to place their most profitable divisions in low-tax countries, said Bob Willens, a U.S. tax analyst.

“If they are to focus on business divisions,” he said, the tax will be “so easy to avoid.”

More information from Chris Giles

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