Multinational companies are dismissive of G7 tax attacks

If some of the most powerful multinational companies put a bomb at their feet, you won’t know from the reaction of them or investors.

G7 Finance Minister last weekend An agreement was reached to impose a new tax on the 100 largest companies in the world, which will be levied where they sell rather than where they are incorporated. It is also proposed to set a minimum corporate tax rate for larger groups of companies to end the race to the bottom among countries seeking foreign investment.

By removing some of the attractiveness of transferring profits through tax havens, the plan may disrupt some of the most widely used tax avoidance strategies in the corporate world, while also suggesting a complex new set of rules for tax planners to participate.

But the stock market reacted by yawning collectively because investors felt that the threat to profits was not enough to affect stock prices. At the same time, large technology companies — whose huge profits and complex tax avoidance strategies are the main goals of the proposal — welcomed these plans.

“The market has concluded that it will not happen,” said Maggie Patel, senior portfolio manager at Wells Fargo Asset Management. “This is wishful thinking for some large countries, but for some smaller economies that may have to lose the appeal of tax havens, it will be a very difficult choice.”

Part of the package, which is to impose a minimum 15% tax rate on corporate profits, will only be effective if it is adopted by enough countries-otherwise, companies can continue to circumvent the rules by moving to a more friendly jurisdiction.

The second part faces more severe challenges and requires global consensus. This will apply to the 100 largest multinational companies with profit margins of more than 10%-for profits above this level, 20% will be taxed in the country where their customers are located, thereby reducing the transfer of profits to lower tax jurisdictions Range.

Even if the plan is implemented, the additional tax increase-estimated to account for about 4% of current global corporate tax revenue-will be nothing more than a rounding error in the accounts of most companies.

BTIG Chief Equity and Derivatives Strategist Julian Emanuel (Julian Emanuel) said: “This may be a headwind, but honestly, in terms of overall profitability, this is really negligible.”

According to Goldman Sachs’ estimates, the proposal will only reduce the earnings per share of S&P 500 index companies by 1% to 2% next year.

The most affected by the minimum tax rate will be companies with a high proportion of overseas sales, and companies that rely heavily on intellectual property rights and IP licensing fees through low-tax jurisdictions.

According to Goldman Sachs’ analysis, of the approximately 40 US companies that are expected to have a tax rate of less than 15% by 2022, 15 are in the chip industry and 10 are in the healthcare and pharmaceutical industries.

Nvidia, the world’s most valuable chip maker, reported an effective tax rate of less than 2% last year, partly because of profits in the British Virgin Islands, Israel and Hong Kong. However, on the first trading day after the G7 announced its plan, its share price hit a record high.

British Chancellor of the Exchequer Rishi Sunak and U.S. Secretary of the Treasury Janet Yellen

The finance executives of the Group of Seven, including the British Chancellor of the Exchequer Rishi Sunak and the U.S. Secretary of the Treasury Janet Yellen, have developed a plan to coordinate corporate tax © Stefan Rousseau/Pool/ AFP via Getty

The chip manufacturing boom triggered by the leap in digital activity during the pandemic seems to “overwhelm the humble… Emanuel said the negative impact of setting a lower limit on international corporate tax rates.”

The least affected by the minimum tax rate are the large technology companies, some of which have become less vulnerable after the recent tax arrangement changes

Google once kept most of its intellectual property rights in Bermuda and licensed it to other divisions of the group-a way of transferring profits to low-cost countries. But after Donald Trump’s 2017 U.S. tax reform, it moved its intellectual property back to the U.S.-Microsoft also followed this path, putting more profits directly into the U.S. tax net.

Simons Coffey, an economist at University College Cork and a former adviser to the Irish government’s tax reform, said that, because of the minimum requirements of the G7, some large technology groups may “end up not paying more taxes.”

The second part of the plan-taxation based on the location of the customer-is also unlikely to harm the largest digital companies, as it will largely replace the digital service taxes already imposed on them by countries such as the United Kingdom and France. Refusal to cancel these taxes before the G7 plan is passed may become one of the biggest obstacles to the plan.

However, even if the direct impact is minimal, these changes may herald a turning point in corporate tax revenue.

Some experts believe that the lower tax rate limit may give some countries more confidence in raising their tax rates above the minimum level without risking erosion of their tax base. The Biden administration pushed for an international agreement as the prelude to its plan to increase the US corporate tax rate from 21% to 28%.

The least affected by the plan will be technology companies such as Nvidia.The day after G7 announced its proposal, its share price hit a record high © Tyrone Siu/Reuters

The proposal may also be more influential than a similar international profit tax (known as Gilti) adopted as part of the 2017 U.S. reform. U.S. taxes are levied on a global scale, which means companies can average the tax rates they pay in high-tax and low-tax countries. In contrast, the G7 agreed to a country-by-country plan to apply a minimum tax rate of 15% to the profits earned in each place—a direct challenge to the world’s tax havens.

As companies prepare to meet the new administrative burden and the possibility of new forms of tax avoidance that follow, the proposed reforms have caused waves in the corporate tax world. A lawyer said that the fact that “every large company in the world must now comply with two new taxes” will be a boon for tax consultants.

Chris Sanger, head of tax policy at Ernst & Young in London, said that large companies are already considering operating costs in countries with tax rates below 15% and determining whether they are “the best investment locations”.

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

Tim Sasen, tax partner of KPMG UK, said that as the company reconsiders its location, this may “lead to some reorganization of the supply chain and value chain of the country and the technology industry”.

These proposals may also influence broader decision-making. Christian Hallam, senior tax and extractive expert at Oxfam, said that, for example, not applying part of the tax plan to companies with profit margins below 10% may incentivize startups to continue reinvesting instead of chasing higher profits. rate. Danish wing.

The 10% threshold may have other unexpected effects.For example, in order to prevent Amazon’s profitable cloud division from being sheltered by its low-margin e-commerce business, the OECD is exploring a way Separate taxation.

Some experts warn that this will lead to a cat-and-mouse game that is difficult for tax authorities to win. US tax analyst Bob Willens said that any attempt to tax individual departments within companies will prompt them to reorganize to avoid taxation, or try to place the most profitable departments in low-tax countries.

“If they focus on the company’s department,” he said, the tax will be “easily avoided.”

Additional reporting by Chris Giles

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