LETTER: G7 alone can’t decide global taxes
The initiative has merit but it will need much wider consultation
This weekend the G7 group of countries reached an agreement in principle on a proposed global minimum company tax rate. Naturally, this has been dubbed a historic event; if ratified, it would indeed be.
The US government would gain from higher tax receipts as American multinationals would no longer be able to shift revenue from low tax jurisdictions, and would be subject to the same minimum rate everywhere. Moreover, the higher taxes would fund President Joe Biden’s proposed $1.7-trillion infrastructure bill and ease the burden on the Fed to monetise government activity. The large European countries would in turn drop plans to place digital sales taxes on US internet companies.
The agreement applies to “large companies with profit margins of at least 10%” — it must be said that this provides plenty of room for creative accounting in terms of costing and transfer pricing. This compromise is most likely intended to prevent too much backlash from large corporations, who also happen to be large political donors.
Global acceptance of this agreement, however, is a big if. The proposed minimum global corporate tax rate of 15% would be higher than the rates in 45 countries, or 28% of the tax jurisdictions in the world.
While this agreement would solve problems encountered by G7 countries, it is inimical to the interests of the aforementioned 45 countries. Within that group are three EU member states —Ireland, Cyprus and Hungary. They could easily block this agreement from being ratified at the EU parliament (though it is unclear whether the EU would debate matters of fiscal sovereignty). Moreover, the three could block other legislation at EU level that Germany and France may be in favour of, which results in a political stalemate.
According to ITEP, there were 55 companies in the US with a pretax income of at least $10m that paid zero federal corporate tax in 2020; for example, Nike had a pretax profit of $2.8bn in 2020 yet paid zero taxes in America.
This is not sustainable, yet a sudden spike in effective tax rates would not be advisable either — consider that the medium-term outlook in this scenario for global equities (where US companies have a big weighting) would be for materially higher tax rates coupled with rising interest rates, while equity multiples are at historic highs and GDP trend growth is likely to decline. This can only lead to a sharp correction in prices, which would necessitate further monetary intervention.
While the initiative has merit, it will need much wider consultation to become a reality. A global shift in tax policy, with resultant global fiscal implications, cannot be decided by seven finance ministers alone.
Sanlam Private Wealth portfolio manager and CFA Society SA director. He writes in his personal capacity.
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