Better aligned Corporate Taxes, the Arlesienne?

This is much talked about, but it has not yet been adopted. However, it remains a wish shared by many large States and G7 members, especially after a hard COVID period where states were highly solicited and increased dramatically indebtedness. The aligned not to claim adjusted corporate taxes within G7 members which would mean imposed to all seems to reach a next significant step. After BEPS, it could be another milestone in the direction of better harmonized taxes across the world.

 G7 corporate taxes alignment, a hard bargain

The G7 has focused attention in last England meeting on profit margins with a plan to award taxing rights to nations where they exceed 10 percent. Most big US groups exceed that level on worldwide earnings. Some companies internet giants pay these types of range of taxes. At least, most countries already tax above the 15% minimum favored by the G7. When we look at large corporations like Facebook, Microsoft, Alphabet, etc… the net income margin is awfully close not to say equal to the operating margin. We can mention countries, like Ireland already below 15%. It is a gamechanger and an unprecedent decision to try to tend to a better tax harmonization across the world. Of course leaders would impose smaller states to follow or to be excluded and boycotted. Time is changing and momentum is different. COVID certainly helped changing views. The accord found has two major components. On one side, the aim would be to address the race to the bottom on tax rates by imposing a global minimum corporation tax on large companies. The second would require the largest companies, most profitable ones, to pay more taxes in countries where they make money and sales. An old story already heard but never translated. BEPS intended to do so. Large corp’s should be prepared for higher tax bills. EU MNC’s would have to pay about EUR 50 billion or 15% of taxes. The biggest portion should be paid by tech giants and large US corp’s. All these reforms must pass through parliaments, congresses etc… and it will take time to be implemented. There will be a big tax bargain and we can easily imagine that USA will negotiate to authorize taxing more US large tech co’s again a guarantee of minimum taxation to help US increasing its own “Biden” taxes. The idea is to maintain a relatively high corporate tax rate without fear of being undercut by other “tax-aggressive” nations. The last thing they want is to feed a new tax war.

Race to the bottom

The tax assault will leave MNC’s unfazed. A minimum tax rate for large MNC’s may lead to an end in the race to the bottom between countries seeking inward investments. By removing some attractive routes to transfer profits through tax havens, the new strategy can help avoiding complex strategies set up by tax planners. Fortunately, it seems that this announcement has not affected the stock markets. Some people keep thinking it is wishful thinking and it is not going to become reality. A measure as proposed will only work if small countries follow and respect the rules. If not, companies will keep reallocating profits to friendlier jurisdictions. It is a headwind which at the total earning level will remain negligible. Of course, when Nvidia announced a 2 percent taxes paid last year, in part of booking profits in paradise islands, it may be appeared to man in the street as chocking. IP’s may be also relocated to countries with more normal tax rates. Why Google has IP’s in Bermudas? Not for climate reasons, I guess. The second aim of the G7 seems even more complicate to instore and to achieve although reasonable and understandable. The idea of penalizing largest companies when the profit margin exceed 10%, 20% of taxes will be paid / taxed in countries where their customers are based, reducing the scope of profit shifting to countries with lower taxation rates.

Who can predict the future of such projects? We all know it is a tough objective which may take time. Nevertheless, nobody could claim that the times have changed and that there is a new or reactivated momentum for revamping taxations across the world to get taxes more fairly collected. I am convinced that the sanitary crisis was a catalyst to reconsider these old stories often heard and never translated, apart from recent BEPS 15 actions from OCDE. A health crisis may change many things including taxes. We will see but should be prepared to change and advisors will have soon lots of work to revisit tax strategies.

Fran?ois Masquelier, ATEL Chair – June 2021