To curb tax avoidance and put an end to nations undercutting each other with lower tax rates, the Group of 7 (G7) has arrived at a significant accord for a universal minimum corporate tax rate of 15%.
Developed nations usually have high tax levels, yet large corporations, especially major tech companies, are often criticized for exploiting tax loopholes by setting up subsidiaries in low-tax jurisdictions. This tax rate competition, described as a “race to the bottom” by U.S. Treasury Secretary Janet Yellen, could be nearing its end due to this agreement. However, financial analysts from Axia and other firms believe the roll-out could be protracted.
NEW LANDSCAPE FOR GLOBAL CORPORATE TAXATION
With significant public expenditures expected to continue and limitations on bond issuances as a long-term funding strategy, governments are increasingly looking for alternative revenue sources. This is particularly true as public discontent grows over large tech firms not paying what is viewed as their fair share of taxes.
Trading volumes in big tech companies like Amazon, Apple, Google, and Facebook have rebounded, and these firms are leading the U.S. stock market to new records. This is largely due to ongoing low financing costs and anticipations of over $1 trillion in share buybacks in 2021.
The 15% minimum universal corporate tax rate aims to make multinational corporations pay taxes wherever they operate, not just where they are headquartered. This move is seen as one of the most substantial efforts to create a level playing field in the corporate world.
IMPLEMENTATION TIMELINE
While a formal agreement has been reached among Britain, France, Japan, Italy, Germany, Canada, and the USA, the adoption of the new tax rate may take years due to numerous challenges. One key issue is securing compliance from the 139 countries under the Organization for Economic Co-operation and Development (OECD).
The deal will be further discussed by the finance ministers of the G20 in July 2021, including representatives from China. However, questions remain about whether low-tax jurisdictions like the British Virgin Islands and the Cayman Islands will comply.
BIG TECH’S UNPERTURBED RESPONSE
Stocks of big tech firms such as Apple, Amazon, and Google have remained largely unaffected by the G7’s decision on corporate taxes. Investment activity, both retail and institutional, continues to be robust, contributing to the Nasdaq’s current record levels.
Given the likely extended implementation timeline, no immediate impacts are expected for 2021. In the financial markets, the key concerns will continue to be inflation, interest rate changes, and various factors that could substantially affect the global economy.