Beware The Carve Outs: As Momentum Builds For A Global Corporate Minimum Tax, Multinationals Must Stay Vigilant

Taxes

A corporate minimum tax seems all but certain. The G-7 has agreed to support new rules for a global minimum tax rate on company profits and a new way of sharing the revenues from taxing the world’s largest and most profitable companies.

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The deal would impose a minimum tax of at least 15% and give countries more authority to tax the profits of digital companies – such as Google, Apple, and Facebook – that pay relatively little tax in many countries where they operate. Supporters of the plan say it will create a level playing field and protect vital tax revenue. Critics warn it will harm smaller economies and encourage outlier countries who are not part of the agreement – namely, China and Russia – to wield lower corporate tax rates as a weapon in global trade. Both sides can build a solid case for their argument, but it appears it is full steam ahead on new regulations.

Or is it?

The buy-in required for this type of global legislative overhaul would have to be massive, and there are early indications that there isn’t quite a global consensus on the issue. Some countries with very low tax rates – such as Ireland – are reluctant to sign up, as concerns persist that their tax base could be severely eroded if profits could no longer be shifted to their jurisdiction. Ireland is not a member of the G7, but it is a member of the larger Inclusive Framework and the group of more than 100 countries participating in the Organization for Economic Development and Cooperation (OECD) international tax negotiations, which are also focused on establishing a global minimum tax. All of these constituencies will need to reach a consensus before a major overhaul is initiated.

The U.S. has already proposed tax changes that would penalize companies from countries that don’t impose the minimum taxes, but some analysts have already suggested that this type of change to tax law could violate America’s obligations as a member of the World Trade Organization.

Adding to the complexity, local tax authorities will also have a say in the matter.  Certain cities are concerned about how a minimum tax will affect their local industry – and as a result, their tax revenues — and they’re seeking exemptions before negotiations have even formally begun. For example, while the UK has expressed its support for the plan, the city of London is pushing to carve-out an exemption for the financial services industry, and they may not be alone in that desire.

“Our position is we want financial services companies to be exempt, and EU countries are in the same position,” one British official told the Financial Times.

That may be wishful thinking. President Joe Biden is looking to walk a tightrope with this deal in the hopes of not alienating U.S.-based technology companies. After all, if the global minimum tax only impacts firms like Google and Facebook, it will seem specifically punitive, and won’t ingratiate the President to some very important allies just over a year away from the midterm elections. So any carve-out for a specific industry would likely create another and another. It wouldn’t be long before any deal is rendered toothless.

In the meantime, multinationals find themselves staring down a highly uncertain future that is almost impossible to predict and even harder to project in company financials. Previously, I’ve compared the dilemma of trying to plan for the unforeseen as multinationals trying to tap dance on the head of a pin, and that may actually be generous on the amount of wiggle room large global firms have in this area. It seems like a virtual certainty that something is going to come to pass in relatively short order, but what are the particulars of any global tax deal going to look like? And how much lead time are these firms going to get?

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Early summer could be the best indication we have on how viable this plan is. The G-20 is set to meet in July, and an overhaul of global tax rules is on the agenda. That should give multinationals an idea on just how much pushback the issue is going to receive, and which stakeholders have a lifeboat thrown to them amid an oncoming storm of volatility. All eyes are on this one, and the next move may be the biggest.

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