Business & Investment

“Really tough selling”: multinationals shrug off G7 tax assaults

The stock market reaction was a collective yawn, but Big Tech modestly welcomed the plan.

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If some of the most powerful multinationals put down the bomb, they cannot know it from their reaction, or the reaction of investors.

Last weekend, the G7’s finance minister signed a contract to impose a radical new tax on the world’s 100 largest companies, which are taxed where they make sales, not where they are incorporated. A minimum corporate tax rate for much larger corporate groups has also been proposed to end the race to the bottom among countries seeking inward investment.

By removing some of the attractions of routing profits through tax havens, this plan could overturn some of the most widely used avoidance strategies in the corporate world.

However, the stock market reaction was a collective yawn, as investors determined that the threat to profits was not great enough to take stock prices into account. Meanwhile, Big Tech, whose main targets were huge profits and complex tax avoidance strategies, welcomed the plan modestly.

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Margie Patel, Senior Portfolio Manager at Wells Fargo Asset Management, said: “It’s wishful thinking in some big powers, but it’s going to be a very difficult sale for some small countries that may lose their appeal as tax havens.”

A tax rate of at least 15% on corporate profits that are part of the package will only be effective if sufficient countries have adopted it. If this is not the case, the entity can continue to circumvent the rules by moving to a more friendly jurisdiction.

The market has come to the conclusion that it will not happen

Margie Patel

The second part faces even more challenging challenges and requires global unanimous consent. This applies to the 100 largest multinationals with a rate of return of over 10%. For profits above that level, 20% is taxed in the country in which the customer is based, narrowing the scope of shifting profits to lower tax jurisdictions. ..

Even if the plan goes on, the additional tax increase (estimated to be about 4% of current global corporate tax receipts) is just a round-off error for most corporate accounts.

Julian Emmanuel, Chief Equity and Derivative Strategist at BTIG, said:

Goldman Sachs estimates that the proposal will only reduce S & P 500 companies’ earnings per share by 1-2 percent next year.

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The most affected by the minimum tax rate are those with a high percentage of overseas sales and those that rely heavily on intellectual property and channel IP license fees through low tax jurisdictions.

According to Goldman’s analysis, of the approximately 40 US companies with expected tax rates of less than 15% in 2022, 15 are in the chips sector and 10 are in healthcare and pharmaceuticals.

Nvidia, the world’s most valuable chip maker, reported last year’s effective tax rate of less than 2%, partly due to profits in the British Virgin Islands, Israel and Hong Kong. Still, on the first trading day after the G7 announced its plans, the stock closed at a record high.

The Nvidia logo for technology company is headquartered in Santa Clara, California.
The Nvidia logo for technology company is headquartered in Santa Clara, California. Photo courtesy of Robert Galbraith / Reuters file

The chip-making boom, inspired by the leap in digital activity during the pandemic, seems to “overwhelm the understatement of lowering international corporate tax rates … the negatives,” Emmanuel said.

Large tech companies are least affected by the minimum tax rate, and some have become less vulnerable due to recent tax changes.

Google once held much of its intellectual property in Bermuda and licensed it to other parts of the group. This is a way to transfer profits to low cost countries. However, after Donald Trump’s 2017 US tax reform, he returned IP to the US. This is another path Microsoft has taken, and has made far greater profits in US tax revenues.

As a result, some major tech groups are probably “not paying significantly more taxes” because of the G7’s minimum amount, Cork University economist and former adviser to the Irish government’s tax reform. Said Seamus Coffee.

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The second part of the plan, customer location-based taxes, will also replace the digital service taxes already levied in countries such as the UK and France, so it is unlikely to hurt the largest digital companies. There is none. Refusing to raise these taxes until the G7 plan is adopted can be one of the biggest obstacles to the plan.

However, even if the immediate impact is small, the change may signal a turning point for corporate tax receipts.

According to some experts, the lower limit of tax rates may convince some countries that they can raise their tax rates above the minimum without risking damaging their tax base. There is. The Biden administration promoted international transactions as a precursor to its own plan to raise the US corporate tax rate from 21% to 28%.

This proposal could also have significantly more bites than a similar tax on international interests known as Gilti, which was adopted as part of the 2017 US overhaul. US taxes apply worldwide. This means that companies can average the tax rates they pay in high and low tax countries. In contrast, the G7 has agreed on a country-by-country plan, applying a tax rate of at least 15% on profits earned at individual locations. This is a direct challenge to tax havens in the world.

The proposed changes have already spilled over into the corporate tax world as businesses prepare new administrative burdens and the potential for new forms of tax avoidance. One lawyer said the fact that “every large company in the world is subject to two new taxes that must be complied with” would benefit tax accountants.

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According to EY’s London-based tax policy director, Chris Sanger, large corporations are already considering operating costs in countries with tax rates below 15%, and “the best place to invest.” I am considering whether it represents.

Tim Sarson, KPMGUK’s tax partner, said that as companies rethink their location, “it is likely to lead to a lot of rebalancing with the country.” .. .. For rebuilding the supply chain and value chain of the technology sector. “

Proposals can also influence a wider range of decisions. According to Christian Harm, senior tax and extraction specialist at Oxfam, for example, up-and-coming companies will pursue higher rates of return if they do not apply part of their tax plan to companies with a rate of return of less than 10%. Instead, it may motivate you to continue reinvesting. Danish wings.

A threshold of 10% can cause other unintended effects. For example, to prevent Amazon’s profitable cloud sector from being protected under low-margin e-commerce businesses, the OECD is looking for ways to tax each sector individually.

Some experts warn that it will lead to a cat-and-mouse game that tax authorities find difficult to win. U.S. tax analyst Bob Willens says that when trying to tax individual units within a company, he either restructures to avoid taxes or places the most profitable departments in low-tax countries. I said it would be.

“If they intend to focus on the corporate sector,” he said, taxes would be “very easy to avoid.”

Additional report by Chris Giles

© 2021 The Financial Times Ltd

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“Really tough selling”: multinationals shrug off G7 tax assaults

https://financialpost.com/news/economy/a-really-tough-sell-multinationals-shrug-off-g7-tax-assault “Really tough selling”: multinationals shrug off G7 tax assaults

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