A Brief Q&A on the Latest Global Tax ‘Breakthrough’

In a rather odd intro to Independence Day, the US and 129 other countries reached a broad agreement on a global minimum tax rate last Thursday, supposedly a big step toward a huge overhaul of the world’s tax system. We have seen a lot of chatter in the days since, and if our inbox is any indication, this is a hot topic among you, dear readers. So here is your handy dandy guide to where things stand and what is really at stake for global Tech companies.

130 countries sounds like critical mass. Is this debate over now?

Probably not. Excluded from those 130 countries in the OECD’s agreement are Ireland, Estonia, Hungary, Nigeria, Kenya, Sri Lanka and Peru. The latter four all have corporate rates over 20%, making their absence less of a wild card. But Ireland, Estonia and Hungary boast rates under that 15% global minimum, making it less meaningful than the press release indicates. Essentially, what happened last Thursday was that a bunch of nations who charge 15% or more agreed to … keep charging 15% or more, while shifting some revenue collection among one another.

Weird. What is the point of that.

Beats the heck out of us. Marketing? Grandstanding? Saying they did something?

In all seriousness, a lot of nations have long griped that big Tech and Tech-like companies make money off their residents’ transactions while funneling all tax revenue to a regional headquarters in a low-tax country. In the name of getting their “fair share,” they want profits taxed where companies earn them, not in the nation where the company has its address. In addition to setting a minimum rate, this global deal would establish a formal system to do exactly that.

That means some nations—including the US—will probably get lower revenue. Why would the US want to spearhead this?

It does sound odd. But we kinda see two reasons. One, several nations have passed digital services taxes, charging Tech and Tech-like companies for transactions done in their borders. That creates an annoying tax patchwork, and the US would rather have a broader deal that lets them get a cut of foreign companies’ activity here on our shores as well. Two, the current administration has lofty goals of jacking up corporate taxes and the rate US companies pay on global income. Getting firm agreement from other nations not to lower their own corporate tax rates to lure US businesses is key to having even a chance of selling that change to Congress.

Back to those 130 countries that agreed on this thing, is it a sure thing that this accord becomes an actual tax regime?

Nope. Outside the autocracies participating in this, in most of these nations, leaders can’t just wave their hands and change tax laws. That requires legislation, making change easier said than done in several nations. On our shores, as the twisted saga over the infrastructure bill shows, the combo of intraparty gridlock on the Democrats’ side and the 50/50 Senate split is like the Bermuda Triangle for legislation.^[i] Elsewhere, several European nations have minority governments, no government (the Netherlands) or diverse coalitions of parties that barely agree on anything. It seems likely to us that gridlock will force at least some of these nations to drop out. That raises questions like: At what point does this get holier than Swiss cheese, defeating the entire purpose and inspiring everyone to quietly bury the notion?

I keep reading that Ireland, Estonia and Hungary’s resistance could also torpedo this. How?

Their influence applies at the EU level. EU tax changes require ratification from all 27 member-states. It takes only one to veto something. Right now, there are three vetoers. If history is at all a reliable guide, we can expect an extreme pressure campaign from Brussels. But getting all three to surrender to bullying seems like a tall order to us. The EU itself is a party to the OECD deal, and without its participation, see the previous comment about Swiss cheese.

One more question: Several articles have noted that if this tax regime takes effect, Tech and Tech-like giants’ tax bills could rise by a collective $100 billion or so. Yet these articles also note these companies are in favor of this new system and, in some cases, actually lobbied for it. Why would they be on board?

We see a couple of broad reasons. One, the alternative is an expanding patchwork of digital services taxes in several nations. Complying with disparate tax systems across multiple countries is a big headache, and they are probably banking on an overarching system being simpler and cheaper to navigate. Two, competition. Successful people and companies seem to have a pathological need to pull up the drawbridge behind them—preventing competition by removing the advantages that allowed them to succeed. The US’s huge Tech and Tech-like giants have already gotten what they need from tax havens. They are now big enough that the extra taxes they would incur under the OECD deal are pocket change—a tiny fraction of earnings and market cap. But smaller competitors would have a tougher time. Not only would they not have the same advantages the giants enjoyed on the way up, but they would have to staff up their accounting and compliance departments in order to ensure sales are accurately tallied in every country where they are doing business and would have to pay taxes. That raises overhead, cuts profits and reduces the incentive to spread globally. In our view, this is the grand irony here: In aiming to cut Tech giants down to size, these tax-hungry governments are probably preventing competition, helping the very companies they are trying to rein in.

LOL!^[ii]

Yep.