A corporate minimum tax seems almost certain. The G-7 has agreed to support new rules for a global minimum tax rate on corporate profits and a new way of dividing the income from taxation on the world’s largest and most profitable companies.
US Treasury Secretary Janet Yellen (L) meets with the Secretary General of the Organization for the Economy … [+]
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The deal would introduce a minimum tax of at least 15% and give countries more power to tax the profits of digital companies – like Google, Apple and Facebook – that pay relatively little taxes in many of the countries in which they operate. Proponents of the plan say it will level the playing field and protect vital tax revenues. Critics warn that doing so will hurt smaller economies and encourage outlier countries that are not part of the deal – namely China and Russia – to use lower corporate tax rates as a weapon in world trade. Both sides have solid reasons for their arguments, but it seems that the new regulations are full steam ahead.
Or is it?
The approval required for such a global legislative revision would have to be massive, and there are first indications that there is not an entirely global consensus on this issue. Some countries with very low tax rates – such as Ireland – are reluctant to join as concerns remain that their tax base could be severely eroded if profits could no longer be relocated to their territories. Ireland is not a member of the G7, but it is a member of the wider inclusive framework and group of more than 100 countries participating in the Organization for Economic Development and Cooperation (OECD) international tax negotiations, which also focus on establishing a global minimum tax . All of these constituencies need to reach a consensus before a major overhaul can begin.
The US has already proposed tax changes that would penalize companies from countries that do not levy minimum taxes, but some analysts have suggested that this type of tax law change could violate America’s obligations as a member of the World Trade Organization.
In addition to the complexity, local tax authorities will also have a say in this matter. Some cities are concerned about how a minimum tax will affect their local industries – and hence their tax revenues – and are calling for exemptions even before negotiations have officially started. For example, while Britain has expressed its support for the plan, the City of London is pushing for an exemption for the financial services industry, and it may not be alone in that request.
“Our position is that we want financial services companies to be exempted, and EU countries are in the same position,” a UK official told the Financial Times.
That may be wishful thinking. With this deal, President Joe Biden wants to master a tightrope act in hopes of not alienating US tech companies. If the global minimum tax only affects companies like Google and Facebook, it will end up being particularly punitive and not ingratiate the president with some very important allies a year before the midterm elections. Hence, any outsourcing for a given industry would likely create another and a different. It wouldn’t be long before every deal went toothless.
In the meantime, multinational corporations are facing a highly uncertain future that is difficult to predict and even more difficult to predict in corporate finances. Previously, I compared the dilemma of planning for the unforeseen when multinational corporations try to dance on a pin, and that may actually be generous considering the latitude large global corporations have in this area. It almost seems certain that something will happen in a relatively short time, but what will the details of a global tax deal be? And how much lead time will these companies get?
Early summer could be the best indication of how viable this plan is. The G-20 is due to meet in July and a revision of global tax rules is on the agenda. That should give multinationals an idea of how much the issue will be pushed back and which stakeholders will be thrown a lifeboat in the midst of an impending storm of volatility. All eyes are on this one, and the next move can be the greatest.