Editors’ Note: This article touches on politics, so we remind you that MarketMinder Europe favours no politician nor any political party and assesses developments solely for their potential impact on markets, economies or personal finance.
Last fall, when 137 nations including low-tax burden countries Ireland, Estonia and Hungary agreed to sign onto a global minimum corporate tax deal, many observers we follow in financial media presumed the years-long process had taken its toughest step—the path to passage was now clear! We never really agreed, though, and have long harboured doubts that this process will deliver results. If it does, it is unlikely to happen fast, in our view, limiting the market impact. We got more evidence supporting our scepticism Tuesday.
For the uninitiated, the global corporate minimum tax is an Organisation for Economic Cooperation and Development-led initiative to ensure countries get a slice of revenue generated within their borders and arrest an alleged “race to the bottom” in which countries try to lure large corporations to domicile within their borders using lower and lower tax rates.[i] The deal signed last fall has two prongs, or pillars. The first aims to resolve fairness disputes about which country gets what tax revenue. It exclusively governs companies with global sales exceeding €20 billion (£16.8 billion) and “profitability” above 10%, transferring taxing rights over these firms from their home countries to those where the sales actually took place. [ii] Given the parameters, Pillar One would presently affect about 100 companies globally, half of which are US-based.[iii]
Pillar Two is far broader. It installs a 15% global corporate minimum tax rate, which applies to any company with more than €750 million (£630 million) in revenue.[iv] That will cast a very wide net and rope in many more firms outside America.
When US President Joe Biden took office early last year, his administration backed the global minimum tax effort, with Treasury Secretary Janet Yellen initially pushing for a 21% minimum tax rate.[v] Considering Pillar One tilts heavily toward taxing US firms, many proponents we follow saw his administration’s stance as a watershed moment that would usher in the eventual deal.
But it still hasn’t proven to be smooth sailing. First opposition was about the rate. The 21% rate was just too high for EU members Ireland (12.5% corporate tax rate), Estonia (20% tax rate on distributed profits only) and Hungary (9%).[vi] In order to get these nations on board, proponents slashed the proposed global rate to 15%. After those three signed up, only Kenya, Nigeria, Pakistan and Sri Lanka remained in opposition. All carry corporate rates exceeding 20%, so their omission wasn’t generally viewed as problematic, according to most sources we follow. The October deal looked to many observers we read like the framework for legislation all the (sufficiently democratic) countries would have to pass in order to enact this tax.
Whilst loads of people—including us—strongly doubt whether the US could pass such legislation today, most observers we follow seemingly assumed the EU would do so easily. Getting Ireland, Estonia and Hungary on board meant all 27 members agreed to the framework deal. So the EU’s finance ministers have been pressing forward in recent weeks in an effort to craft that legislation at the union level. But it now seems this won’t be easy, either.
All 27 EU nations must approve the legislation for it to take effect. On Tuesday, Malta, Poland, Sweden and Estonia put the brakes on talks. It seems almost all their concerns centre on Pillar Two, which isn’t a shock to us considering it has far more breadth. Poland reportedly wants firm legal assurances that both Pillars will be enacted. Others have concerns around implementation and methodology, including the timeline—the EU plan would require the provisions to be enacted in national laws in 2023, which some of these nations argue is too aggressive.
French Finance Minister Bruno Le Maire—a staunch supporter of the global minimum tax—says they will revisit the issues in the coming weeks and is optimistic an EU deal can be reached.[vii] Perhaps. But in our view, the longer this takes, the more opposition is likely to arise.
We think this is doubly true given the political backdrop. France has a presidential election in April. Though Le Maire’s boss, President Emmanuel Macron, is the favourite to win, that isn’t assured. A new administration may not prioritise this proposal to the extent Macron and Le Maire have.
But the even bigger issue we see: The clock is ticking on November’s US midterm elections. Biden’s Democrats currently have one of history’s smallest edges in the House and the smallest possible edge in the Senate.[viii] The president’s party normally loses seats in midterm elections, and his approval numbers aren’t great. Just 41% of respondents said they had a favourable view of his administration’s performance in Gallup’s February poll.[ix] That is the second-lowest rating for any president at this point in their tenure since former President Dwight D. Eisenhower in February 1954. (It edges former President Donald Trump by two percentage points.) If history and polling are any indication, control of Congress could flip this fall.
If that happens, the global minimum corporate tax will look even less likely to become a reality in America, in our view. Given Pillar One mostly targets American firms, how will the EU view this? Will hesitancy like Poland’s grow? Will other nations get cold feet and choose alternative routes? In this sense, the US midterms could kill or greatly impair passage of a global corporate minimum tax.
We think there is some good and some bad to this. On the good side, major changes that happen slowly (or not at all) won’t sneak up on stocks, limiting surprise power. That is good for markets, in our view, as our research shows surprises tend to move stocks most. On the bad side? We think the framework, if implemented in a clear way, could have ended piecemeal attempts like France’s and the UK’s to tax digital services. If it falls apart, we could reasonably see those fractured efforts moving forward more broadly, adding to uncertainty somewhat. Now, this is all speculative and distant—nothing to sweat in the here and now, in our view. But it is worth keeping an eye on how this debate plays out and how local politics could sink a global tax.
[i] “Yellen: ‘Global Race to the Bottom’ in Corporate Tax,” Staff, BBC News, 23/3/2021.
[ii] “International Community Strikes a Ground-Breaking Tax Deal for the Digital Age,” OECD, 8/10/2021.
[iii] “Corporate Taxation in the Global Economy,” International Monetary Fund Fiscal Affairs and Legal Departments, 10/3/2019.
[iv] See note ii.
[v] “Yellen Calls for Minimum Global Corporate Income Tax,” Christopher Rugaber, Associated Press, 5/4/2021.
[vi] Source: KPMG, as of 16/3/2022. Distributed profits, in Estonia’s case, means those paid as dividends or deemed distributed in servicing expenses. Reinvested profits aren’t taxed.
[vii] “France Fails to Win Over Doubters on How to Implement Global Minimum Corporate Tax Rate,” William Horobin and Geoff Percival, Bloomberg accessed via The Irish Examiner, 15/3/2022.
[viii] Source: US Senate and House of Representatives, Party Divisions, as of 18/3/2022.
[ix] Source: Gallup, as of 16/3/2022.
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