Money for Nothing

Macro Perspectives: Thu 8 Apr 2021

While the economy was in dire straits, no fiscal package was too large. Of course, we knew it couldn’t last. Sooner or later, a tax hike was coming, and we didn’t have to wait long. On April 5th, Treasury Secretary Yellen grabbed the attention of corner office occupants worldwide (more a figure of speech than ever) with a speech to the Chicago Council on Global Affairs: a call for countries to agree on a global minimum tax rate for large companies.

The seemingly collaborative stance of the US administration is entirely self-serving: the plan to pay for the mega infrastructure plan by hiking domestic corporate taxes won’t work if companies simply decamp to Ireland. A global minimum tax also blunts the argument that higher US corporate tax rates dent American competitiveness.

Over the past decade, growing corporate-tax avoidance has met with a growing backlash. Breakneck globalisation allowed multinationals to replace fears of double taxation with the joys of double non-taxation, using havens to game the system. By exploiting mismatches between countries’ tax laws, taxable profits could be cut or even made to disappear.

The game became easier with the rise of intangible assets. Unlike buildings or machinery, they can be shifted between jurisdictions almost instantly. Big tech has been a big beneficiary: the five largest Silicon Valley giants paid $220bn in cash taxes over the past decade, just 16% of their cumulative pre-tax profits.

How would a global minimum tax work?

Assuming it was set at 21%, American firms operating in, say, Ireland would have to pay a top-up tax of 8.5% to their government, on top of the 12.5% paid to Dublin.

Which stocks are likely to feel the impact?

The Biden administration is focused on generating revenue as much as competitiveness and wants to have a bigger claim on U.S. companies’ profits, regardless of where they are earned. The largest tech companies that have found it easiest to shift their profits abroad would bear a large cost. More broadly, any companies with substantial international earnings would be hit (in contrast to small caps, for example).

Watch this space…