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Multinationals repel G7 tax attacks

If some of the most powerful multinationals have been bombed, you wouldn’t know from their reactions – or those of investors.

Last weekend, G7 finance ministers struck a deal on a sweeping new tax on the world’s 100 largest 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 has also been proposed to end a race to the bottom between countries seeking foreign investment.

By removing some of the attractions of funneling profits to tax havens, the plan could upend some of the most widely used avoidance strategies in the business world, while also setting up a complex new set of rules for tax planners. .

But the stock market’s response has been a collective yawn, as investors decide the threat to earnings is not large enough to be factored into stock prices. Meanwhile, big tech – whose huge profits and complex tax avoidance strategies were a prime target of the proposal – have greeted the plans with a muffle.

“The market has come to the conclusion that this is not going to happen,” said Margie Patel, senior portfolio manager at Wells Fargo Asset Management. “This is wishful thinking on the part of some of the bigger countries, but it will be a really tough sell to some of the smaller economies which may have to lose their appeal as a tax haven.”

Part of the package, a minimum tax rate of 15 percent on corporate profits, will only be effective if enough countries adopt it – otherwise companies can continue to bend the rules by moving into settlements. more user-friendly 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 percent – for profits above this level, 20 percent would be taxed in the countries where their clients are based, which would reduce the possibility of transferring assets. profits to low tax jurisdictions.

Even if the plan goes through, the additional tax levied – estimated at around 4% of current global corporate tax revenue – would be little more than a rounding error in most business accounts.

“It will probably be a headwind, but frankly, in terms of overall earnings, it will be really 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 to 2% next year, according to an estimate by Goldman Sachs.

Those most affected by the minimum rate would be companies with a high proportion of foreign sales and those that rely heavily on intellectual property and channel intellectual property license fees through less taxed jurisdictions.

According to Goldman’s analysis, of around 40 U.S. companies with tax rates expected to be below 15% in 2022, 15 are in the chip business and 10 are in healthcare and pharmaceuticals.

Nvidia, the world’s most valuable chipmaker, declared an effective tax rate of less than 2% last year, in part making profits in the British Virgin Islands, Israel and Hong Kong. Still, its shares closed at an all-time high on the first trading day after the G7 announced its plan.

British Chancellor Rishi Sunak and US Treasury Secretary Janet Yellen

G7 finance chiefs, including British Chancellor Rishi Sunak and US Treasury Secretary Janet Yellen, have drawn up a corporate tax harmonization plan © Stefan Rousseau / Pool / AFP via Getty

The chip manufacturing boom fueled by the surge in digital activity during the pandemic appears to “overwhelm the lowly. . . negative to put a floor on international corporate tax rates, ”Emanuel said.

Among the least affected by the minimum rate are large tech companies, some of which have become less vulnerable following recent changes to their tax provisions.

Google once kept 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 US tax reforms, he brought his intellectual property back to the United States – a path Microsoft also followed, placing a much larger share of profits in the US tax net.

As a result, some big tech groups “are unlikely to end up paying much more tax” because of the G7 minimum, said Seamus Coffey, an economist at University College Cork and former Irish government adviser on tax reform.

The second part of the plan – a tax based on where customers are located – is also unlikely to hurt larger digital companies, as it would largely replace taxes on digital services already imposed on them in countries like the United Kingdom and France. A refusal to lift these taxes until the adoption of the G7 plan could become 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 revenues.

According to some experts, a minimum tax rate could make some countries more confident that they can raise their own rates above the minimum without risking an erosion of their national tax base. The Biden administration lobbied for the international deal as a prelude to its own plan to raise the U.S. corporate tax rate to 28 percent, from 21 percent.

Among the least affected by the plan are tech companies such as Nvidia. Its shares closed at a record high the day after the G7 announced its proposal © Tyrone Siu / Reuters

The proposal is also likely to have a lot more bite than a similar tax on international profits passed as part of the 2017 US overhaul known as Gilti. The US tax is applied globally, which means businesses can average the rates they pay in high and low tax countries. In contrast, the G7 agreed to a country-by-country plan, applying the minimum rate of 15 percent to profits made in each individual location – a direct challenge for tax havens around the world.

The proposed changes are already having repercussions in the world of corporate taxation, as businesses prepare for a new administrative burden – and with it the possibility of new forms of tax evasion. The fact that “every big business in the world will now have two new taxes to comply with” will be a boon to tax advisers, a lawyer said.

Large companies are already looking at the cost of doing business in countries with tax rates below 15% and determining whether they “represent the best place to invest,” according to Chris Sanger, EY’s tax policy manager at London.

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

Tim Sarson, tax partner of KPMG UK, said that as companies rethink the location of their operations, it “would likely lead to a lot of rebalancing between countries and… Some restructuring of supply chains and value chains in the technology sector ”.

The proposals also threaten to influence broader decision-making. Failure to apply part of the tax plan to companies with a profit margin of less than 10%, for example, could encourage emerging companies to continue to reinvest rather than seek higher margins, according to Christian Hallum, senior tax specialist. and extractive industries at Oxfam. Danish wing.

The 10 percent threshold could produce other unintended effects. To prevent Amazon’s profitable cloud division from being protected by its low-margin e-commerce business, for example, the OECD is exploring a way to tax the division separately.

This would lead to a cat-and-mouse game that tax authorities would struggle to win, some experts warn. Any attempt to tax individual units within companies would induce them to restructure to circumvent taxes or try to place their most profitable divisions in low-tax countries, said Bob Willens, US tax analyst.

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

Additional reporting by Chris Giles

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