Corporates brace for for global tax hike, impact on profits and overseas investment unclear

The G7 finance ministers’ recent approval of G20/OECD proposals for a more equitable international corporate tax regime ups momentum of global tax reform for large multinationals.

The agreement, which aims to help governments deal with the economic fallout of the pandemic, will introduce a 15 percent minimum global corporate tax rate for all participants, as well as measures to tax companies on business conducted in overseas markets.

It has, however, already drawn its critics for its potential impact on the profitability of large corporates and their cross-border business activities.

At deVere Group, a leading financial services company with operations in nearly 30 countries worldwide, CEO Nigel Greene questions whether taxing corporates more now will achieve the desired outcome. He argues that keeping tax and business policies competitive would help economies recover strongly and at a faster pace.

“For many companies, a global minimum corporation tax will hike their costs of doing business around the world. Is this then the right policy to pursue as the world is trying to reboot after the pandemic?” says Greene. “This is especially the case as these higher costs will ultimately be passed on to consumers and suppliers.”

“This is a tax on profits – and the more profitable a company is, the more it will be affected,” says Dan Neidle, practice area leader, TPE London at Clifford Chance. “Those groups that are highly profitable and organised in such a way as to reduce the tax burden will be most affected.”

However, John Weybourne, head of tax at global financial company Apex Group, believes there is no real need for corporates across the board to panic.

“The actual tax rate may still be negotiated down to a lower rate of 10-12 percent at the upcoming G20 Summit,” says Weybourne who advises Apex Group on its tax strategy.

“These proposals are also geared at MNCs with consolidated revenues of €720m per annum, making them the key carriers of the burden,” he says. “Most G7/G20 economies already operate a corporate tax rate above 15 percent, making the change insignificant for MNCs based in the world’s largest economies.”

He notes that certain OECD jurisdictions, such as the Cayman Islands, do have a lower tax rate, but the number of MNCs based in them is so low that few will be captured by the new tax regime.

However, certain large MNCs, particularly in the tech industry, remain likely to bear the brunt of the new tax regime – particularly the measures it brings to charge tax on business conducted overseas.

“Companies such as Facebook and Amazon are likely to be among those affected,” says Luke Davis, CEO of private equity company IW Capital. “The deal comes after years of negotiations and continued press around the lack of tax paid by some large firms. In May, it was reported that Amazon paid no corporation tax in Europe on €44bn of income and a bumper year for the firm during lockdown.”

Investment impact

Questions also still remain over the new tax regime’s exact impact on corporates’ cross-border investment strategies.

Greene argues that many corporates will become more selective in their Foreign Direct Investment (FDI) strategies.

“This means that countries which are not especially appealing for investment, except for a low tax regime, will be left hugely disadvantaged,” he says.

“Foreign companies and international agencies would be likely to move elsewhere where there are low taxes as well as other important attractive draws, taking with them direct and indirect jobs and wealth, plus all the other associated benefits of FDI.”

However, Weybourne believes the new regime will likely have a lesser impact on the way companies structure themselves geographically and their investment overseas.

Apex Group itself is still investing rapidly across borders through an M&A strategy geared at growing its business and building its client base in new jurisdictions.

The financial services group plans to buy around ten companies over the next year to increase its geographical coverage, develop its product base and grow its technological capabilities. It hopes to expand into South Africa and New Zealand through acquisitions so that it can offer a more localised service in these countries.

“Our decision to make an acquisition in Dubai in 2020 was not due to the lower tax regime but to acquire new customers. A 15 percent minimum global tax will not change MNCs’ commercial drive. The commercial strategy and rationale always comes first and tax comes further down the list. For most MNCs the biggest drive overseas is to establish an increased overseas presence,” he says.

Other taxes still possible

Despite the expected introduction of the new global corporate tax regime, additional measures to generate more tax from corporates may still be on the cards.

“The high level of progress made on the minimum global corporate tax so far means that the introduction of a global cash flow tax instead is highly unlikely now,” says Neidle. “A tax on cash flows would also represent a major radical change -– it is not how the current corporate tax system works.”

However, Weybourne notes: “There has been discussion of something that is more VAT focused – a tax that is concerned with the tax that is applied at point of sale for companies with sales in certain countries.”

Meanwhile, a group of US economists are challenging whether the global corporate tax regime will help underdeveloped countries overcome large deficits accumulated amid the pandemic.

The group have recently written to the G7 arguing that, while the 15 percent corporate tax regime will generate additional revenues for certain governments, it could reinforce the unfair bias of international tax rules in favour of the richest countries, which host the most MNCs.

According to James Henry, global justice at Yale and senior tax advisor at Tax Justice Network, a financial transaction tax on stock trades through public exchanges should also be considered.

“If the 15 percent minimum tax was the only collective tax reform that the G7 undertakes right now, a huge opportunity will be missed,” says Henry. “There is a chance to help developing countries recover from this historic tax injustice as well as from the pandemic, and to help finance public investments and advance the cause of international tax justice.”

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