A “landmark deal.”[i] That is what many are calling a global minimum tax agreement G7 finance ministers reached over the weekend, endorsing a 15% corporate tax rate and agreeing to tax multinationals’ profits where they are earned regardless of whether they have a physical presence in that country. But before you pencil in the hike, we think a little perspective is in order—and not just because President Joe Biden and Treasury Secretary Janet Yellen face tough sledding getting tax changes through Congress. You see, as the name implies, the G7 is just seven nations, all of whom stand to gain more than they lose from this agreement. An actual global deal, whether via the G20 or OECD, is another matter entirely. That is but one reason this weekend’s agreement isn’t a game changer for any one country—or for giant Tech and Tech-like companies.
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. 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 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 Tech, Consumer Discretionary and Internet Media companies this tax targets could ensure their margins never meet that threshold, avoiding the tax altogether. But if they don’t, paying 15% in France, Germany, Italy and Britain, instead of booking all European profits in Ireland at 12.5%, isn’t exactly going to destroy after-tax earnings. If anything, it might raise barriers to competition from smaller companies, which we suspect is a big reason some Tech-like giants actually supported this effort.
But that is 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 state rates), 19% (with a scheduled increase to 25% in 2023), 29.9%, 34.4%, 27.8%, 29.7% and 26.5%.[ii] What do all of those numbers have in common? You guessed it: They are all a lot higher than 15%. A global minimum doesn’t require any of these countries to raise their own rates to level the playing field for all. Instead, they all get a bit more of the global tax pie. Therefore, this agreement was always the easy part.
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. Cyprus’s government has made similar statements about its own 12.5% rate, torpedoing any eurozone agreement. It is hard to imagine Hungary, whose strongman president champions national sovereignty at every turn, letting other OECD nations strong arm it out of its 9% corporate tax rate. If Viktor Orban doesn’t like following EU rules, why would he let the OECD dictate tax terms to him? Nations that attract businesses with favorable 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 not a brave new era for global taxation. Nor is it a ginormous new cost for multinationals and Tech companies. If ratified, it might 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. It is just a potential thing—a thing that could easily become not a thing if it fails to pass America’s gridlocked Congress or all of the other six national parliaments.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.