Why the G7’s Tax Deal Is Probably Less Than It Seems

A landmark deal.^[i] That is what we have seen many headlines call a global minimum tax agreement Group of Seven (G7) finance ministers reached over the weekend, endorsing a 15% minimum corporate tax rate and agreeing to tax multinational corporations’ profits where they are earned regardless of whether they have a physical presence in that country. But before presuming a tax hike is inevitable, we think a little perspective is in order. For one, US President Joe Biden and US Treasury Secretary Janet Yellen appear likely to encounter gridlock in America’s Congress, where legislators from both parties have indicated they are rather cool on the notion of sweeping tax change. Without ratification in all participating nations, the weekend’s deal likely amounts to nothing. Beyond that, the G7 is just seven nations, all of whom appear to gain more than they lose from this agreement, in our view. An actual global deal, whether via the Group of 20 (G20, a forum for 19 individual countries and the European Union) or Organisation for Economic Co-operation and Development (OECD), is another matter entirely, in our view. That is but one reason we think this weekend’s agreement isn’t a game changer for any one country—or for giant Tech and Tech-like companies, which many financial analysts think this tax plan targets.

Like all G7 communiqués, this breakthrough is a political agreement, not a new law. But if the participating nations pass the relevant legislation, it would establish a minimum tax rate of 15% for all multinational companies doing business in these nations. That includes big US Tech and Tech-like firms, which would have to start paying taxes in all nations where they sell goods and digital services, not just the countries where they officially domicile. The communiqué states this coordinated regime would replace national digital taxes, ending the US’s separate tit-for-tat battles with France and the UK. Yet it isn’t clear, in our view, that this will raise a ton of revenue for these nations or be a giant headache for businesses, considering the tax applies only to companies whose profit margins exceed 10%. The huge American Tech, Consumer Discretionary and Internet Media companies this tax seems to target could ensure their margins never meet that threshold—for example, by spending and reinvesting back into their business—helping them avoid the tax altogether. But even if they don’t, paying 15% in France, Germany, Italy and Britain, instead of booking all European profits in a low-tax nation like Ireland (whose corporate tax rate is 12.5%), isn’t exactly going to destroy after-tax earnings, in our view. If anything, it might raise barriers to competition from smaller companies, which we suspect is a big reason some Tech-like giants publicly supported this effort.^[ii]

But we think that is largely where the significance ends. The G7 consists of the US, UK, Germany, France, Italy, Japan and Canada. Their corporate tax rates, respectively, are 21% (plus varying US state rates), 19% (with a scheduled increase to 25% in 2023), 29.9%, 34.4%, 27.8%, 29.7% and 26.5%.^[iii] What do all of those numbers have in common? You guessed it: They are all a lot higher than 15%. The agreement doesn’t require any of these countries to raise their own rates to level the playing field for all. Instead, they all theoretically get a bit more of the global tax pie. Therefore, agreement amongst these seven nations was probably always the easy part, in our view.

We think an actual global deal is another matter entirely. A G20 or OECD agreement would require Ireland to participate. But Ireland’s finance minister has already said its famous 12.5% corporate tax rate isn’t going anywhere.^[iv] Cyprus’s government has made similar statements about its own 12.5% rate, likely torpedoing any eurozone or EU agreement.^[v] Similarly, it is hard to imagine Hungary, whose president champions national sovereignty at every turn, letting other OECD nations strong arm it out of its 9% corporate tax rate.^[vi] President Viktor Orban has a long history of opposing EU intervention in domestic budgetary matters (and other issues), making it unlikely, in our view, that he would let the OECD dictate tax terms to him.^[vii] In our experience, nations that attract businesses with favourable tax rates aren’t going to surrender their advantages just because others ask them to.

So we see this weekend’s big news mostly as sound and fury, with little substance. It is neither a brave new era for global taxation nor a huge new cost for multinationals and big US Tech companies, in our view. If ratified, we think it could be a small revenue boost for some European countries, a small headache for some companies and a small job creator for corporate accountants. But we wouldn’t overrate it as a positive or negative for the global economy or markets. It is just a potential thing—a thing that could easily become not a thing if seven legislatures fail to pass it.