If some of the most powerful multinationals have had a bomb put under them, you wouldn’t know it from their reactions — or those of investors.
G7 finance ministers last weekend struck a deal on a radical new tax on the world’s 100 biggest companies that would be levied where they make their sales rather than where they are incorporated. A minimum corporate tax rate for a much larger group of companies was also proposed to end a race to the bottom between countries seeking inward investment.
By removing some of the attractions of routing profits through tax havens, the plan could upend some of the corporate world’s most widely used avoidance strategies, while also throwing up a complex new set of rules for tax planners to get their teeth into.
But the stock market’s response has been a collective yawn, as investors decide the threat to profits is not big enough to factor into share prices. Meanwhile, big tech — whose huge profits and complex tax avoidance strategies were a prime target of the proposal — gave a muted welcome to the plans.
“The market has come to the conclusion that it will not come to pass,” said Margie Patel, a senior portfolio manager at Wells Fargo Asset Management. “It’s wishful thinking by some of the larger countries but it’s going to be a really tough sell to some of the smaller economies that have to maybe lose their attractiveness as a tax haven.”
One part of the package, a minimum 15 per cent tax rate on corporate profits, will only be effective if enough countries adopt it — otherwise companies can continue to sidestep the rules by relocating to friendlier jurisdictions.
The second part faces an even steeper challenge, requiring global unanimity. This would apply to the 100 largest multinationals with profit margins of more than 10 per cent — for profits above that level, 20 per cent would be taxed in the countries where their customers are based, reducing the scope to shift profits to lower-tax jurisdictions.
Even if the plan goes ahead, the extra tax raised — estimated at about 4 per cent of current global corporate tax receipts — would be little more than a rounding error in most of the companies’ accounts.
“It’s likely to be a headwind, but honestly, at the overall earnings level, it’s really going to be negligible,” said Julian Emanuel, chief equity and derivatives strategist at BTIG.
The proposal would only reduce the earnings per share of companies in the S&P 500 by 1-2 per cent next year, according to an estimate from Goldman Sachs.
Most affected by the minimum rate would be companies with a high proportion of overseas sales and those that rely heavily on intellectual property and channel IP licensing fees through lower-tax jurisdictions.
Of about 40 US companies with expected tax rates below 15 per cent in 2022, 15 are in the chip sector and 10 in healthcare and pharmaceuticals, according to Goldman analysis.
Nvidia, the world’s most valuable chipmaker, reported an effective tax rate of less than 2 per cent last year, in part by booking profits in the British Virgin Islands, Israel and Hong Kong. Yet its shares closed at a record high on the first trading day after the G7 announced its plan.
The chipmaking boom stoked by the leap in digital activity during the pandemic looks like “overwhelming the modest . . . negative of putting a floor on international corporate tax rates”, Emanuel said.
Among the least affected by the minimum rate would be big tech companies, some of which have become less vulnerable following recent changes to their tax arrangements
Google once kept much of its intellectual property in Bermuda and licensed it to other parts of the group — a way of shifting profits to a low-cost country. But after Donald Trump’s 2017 US tax reforms it moved its IP back to the US — a path also followed by Microsoft, putting a much larger slice of profits squarely inside the US tax net.
As a result, some big tech groups probably “won’t end up paying significantly more tax” because of the G7 minimum, said Seamus Coffey, an economist at University College Cork and former adviser to the Irish government on tax reform.
The second part of the plan — a tax based on where customers are located — is also unlikely to hurt the biggest digital companies as it would largely replace the digital services taxes already imposed on them in countries such as the UK and France. A refusal to lift these taxes until the G7 plan is adopted could turn into one of the plan’s biggest obstacles.
Yet even if the immediate impact is marginal, the changes could herald a turning point in corporate tax receipts.
According to some experts, a tax rate floor might make some countries more confident they can raise their own rates higher than the minimum without risking an erosion of their national tax base. The Biden administration has pushed for the international deal as a prelude to its own plan to raise the US corporate tax rate to 28 per cent from 21 per cent.
The proposal is also likely to have considerably more bite than a similar tax on international profits adopted as part of the 2017 US overhaul, known as Gilti. The US tax is applied on a worldwide basis, meaning companies can average out the rates they pay in high and low-tax countries. By contrast, the G7 agreed on a country-by-country plan, applying the minimum 15 per cent rate to profits earned in each individual location — a direct challenge to the world’s tax havens.
The proposed changes are already rippling through the corporate tax world, as companies prepare for a new administrative burden — and with it the possibility of new forms of tax avoidance. The fact that “every large business in the world will now have two new taxes they have to comply with” will be a boon for tax advisers, one lawyer said.
Large businesses are already looking at the cost of operating in countries with tax rates below 15 per cent and working out whether they “represent the best place to be invested”, according to Chris Sanger, EY’s London-based head of tax policy.
Tim Sarson, tax partner for KPMG UK, said that as companies rethought the location of their operations it was likely to “lead to lots of rebalancing between countries and . . . to some restructurings of supply chains and value chains in the tech sector”.
The proposals also threaten to influence broader decision-making. Not applying part of the tax plan to companies with a profit margin below 10 per cent, for instance, could incentivise up-and-coming businesses to keep reinvesting rather than chase higher margins, according to Christian Hallum, senior tax and extractives specialist at Oxfam’s Danish wing.
The 10 per cent threshold could produce other unintended effects. To prevent Amazon’s profitable cloud division from being sheltered under its low-margin ecommerce business, for instance, the OECD is exploring a way to tax the division separately.
That would lead to a cat-and-mouse game that the tax authorities would find hard to win, some experts warn. Any attempt to tax individual units within companies would prompt them to restructure to get around the taxes or try to place their most profitable divisions in low-tax countries, said Bob Willens, a US tax analyst.
“If they’re going to focus on the divisions of companies,” he said, the tax will be “so easy to avoid”.
Additional reporting by Chris Giles