Earlier this month, the Finance Ministers of the most advanced economies, known as the Group of Seven (G7), backed a US proposal that calls for corporations around the world to pay a minimum tax rate of 15% tax on earnings. Originally the US proposed a tax rate of 25% but after negotiations they agreed to bring it down to 15%. The agreement is intended to stop large multinational companies from seeking out tax havens and will force them to pay more of their income to the governments.

Such a deal aims to end what US Treasury Secretary Janet Yellen has called a “30-year race to the bottom on corporate tax rates” as countries compete to lure multinationals. Major economies are aiming to discourage multinationals from shifting profits to low-tax countries regardless of where their sales are made. Multinational companies have long used creative but legal ways to shrink their tax bills. One is to book profits from customers in places like Boston and Berlin as if they came from, say, Bermuda, which has no corporate income tax.

The global minimum tax rate would apply to overseas profits. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their tax to the minimum rate, effectively eliminating the advantage of shifting profits.

The entire idea behind the implementation of this new tax is to help nations that may be cash strapped at this point, to rebuild their economies. Not all countries agree to this proposal. Many countries within the European Union for example, most likely think that this tax reform is extremely controversial.

Within the European Union, various member states charge different corporate tax rates and can attract big name firms by doing so. Ireland’s tax rate for example is 12.5% while in France it can be as a high a 31%. Ireland has openly come out against the global minimum tax, saying that it would actually hurt its economy. Some major countries, such as China for example, are also unlikely to buy in as well. It seems that officials believe that if enough advanced economies actually sign on, then other countries would be essentially cornered and would have to follow suit.

A rise in corporation tax has the same effect as an increase in the cost of materials which can lead to businesses raising prices as they attempt to do everything they can to maintain as high a profit margin as possible. High corporate tax rates actually divert investments away from the corporate sector, essentially being a roadblock for investments that would otherwise raise the productivity of workers and increase those workers real wages. So, a higher corporate tax in real life translates to lower wages for workers and even fewer job opportunities. Studies estimates that labour likely bears about 70% of the burden of the corporate income tax. So, these increased taxes would have a direct impact on individual consumers, whether we are aware of it or not.

A G20 meeting scheduled for Venice next month will see whether the G7 accord gets broad support from the world’s biggest developed and developing countries. Any final agreement could have major repercussions for low-tax counties and tax havens such as Ireland. However, the battle for low-tax counties is less likely to be about thwarting the overall talks and more about building support for a minimum rate as close as possible to its 12.5% or seeking certain exemptions.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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