Big Tech: no worries for the
On Saturday, the G7 countries backed a landmark proposal to simplify and equalize corporate taxes around the world. The G7 is a group made up of the seven largest so-called advanced economies in the world: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
The proposal calls for a minimum tax of 15% on profits, regardless of where a business is incorporated, and G7 countries intend to stabilize the international tax system, increase confidence and transparency and level the playing field. One of the main groups targeted by the proposal are the big tech companies, which often use their international reach, tax havens and other loopholes to avoid paying taxes in their home country. ‘origin or in other major economies.
Dramatic differences in financial regulations across borders have historically been exploited by companies to dodge taxes in their territory, often in seemingly absurd ways. For example, several buildings in Bermuda, a popular “tax haven“, serve as the “headquarters” of a downright ridiculous number of companies that certainly could never all fit into the office at the same time. Amazon.com Inc. (AMZN, Financial) paid no federal income tax in 2017 and 2018.
In an attempt to recoup at least some of the taxes dodged by tech giants, some countries have introduced taxes on digital services, including Britain, France and Italy. However, these efforts were only an interim solution until international tax rules could be established.
Many investors seem to view the G7 tax decision as some sort of devastating setback or insurmountable hurdle for the tech giants. However, the companies themselves don’t seem to share this pessimistic view. In fact, most seem to consider this a welcome change, and there are indeed several reasons why the benefits outweigh the costs.
Dodge the worst
While large corporations may not be able to dodge taxes entirely once the G7 decision goes into effect, paying the 15% minimum tax still wouldn’t force tech giants to shell out. as much money as they would have paid their fair share of taxes in their home country.
There has long been talk of banning the use of tax havens to dodge taxes, and the spotlight has once again been drawn on this subject due to the economic devastation caused by the Covid-19 pandemic. Governments need money to fund everything from social security and education to roads and economic support initiatives, and the more money they need, the more incentive they have to force the world’s biggest companies to pay their fair share of taxes.
For many companies, the G7 agreement can be seen as a more attractive alternative to paying taxes from their home country. For example, in the United States, the federal corporate income tax rate is 21%. The minimum tax rate of 15% set by the G7 proposal and the 20% rate that would apply to companies with profit margins above 10% would be cheaper than having to pay 21%.
Additionally, not all tech giants would meet the profit margin threshold for the 20% rate. Amazon’s profit margins, for example, have historically been less than 10%.
Evening the playground
Of course, a lower tax rate than they reasonably should pay in their home country isn’t the only benefit the tech giants see in the G7 tax proposal.
The deal “marks a welcome step forward” in efforts to “bring stability to the international tax system,” according to an Amazon spokesperson. âWe hope that discussions will continue to move forward with the broader G20 alliance and the inclusive framework. “
Facebook (FB, Global Vice President of Global Affairs Nick Clegg also applauded the proposal, saying the social media giant “has long called for reform of global tax rules.” The deal is an “important first step towards providing certainty for businesses and building public confidence in the global tax system,” Clegg tweeted on Saturday.
Alphabets (GOOG, Financial)(GOOGL, Financial) Google also seems to view the proposal favorably. A Google spokesperson reportedly told Sky News the company strongly supports the initiative.
One of the main benefits of having a global tax deal would be that in essence no competitor could beat you in terms of cheating / playing the system. There would also be no benefit in making accounting acrobatics or reporting profits in a faraway country with minimal economic activity, so businesses would no longer need to pay the expenses associated with tax evasion.
The myth of shareholder retreat
While the big tech companies themselves welcome the G7 tax ruling, shareholders may fear that the value of their shares will be affected. After all, if the company pays more taxes, won’t its shares be worth less money? What if stock prices fall because of this?
These are common misconceptions that shareholders have, but in fact, the internal decisions of a company almost always have much more impact on its actions than the external factors. There are notable exceptions to this rule, with the Covid-19 pandemic being a prime example. However, if a company like one of the tech giants, which has enough profits to pay millions if not billions of top executives a year, allows a measly 15% tax to impact shareholders, this should be due to a deliberate decision to pass on costs. to shareholders.
The bottom line is that if legions of much less profitable small businesses are able to pay more than 20% in taxes, there is no reason why very profitable mega-caps cannot pay as much or less. It all depends on the wisdom and efficiency with which they choose to allocate their capital. This is the reason why, despite the fact that McDonald’s (MCD, Financial workers in the United States earn a minimum wage of $ 7.25 compared to the equivalent of a salary of $ 22 in Denmark, the average Big Mac in the United States costs $ 5.66 compared to just $ 4.87 in the United States. Denmark (figures taken from The Economist’s December 2020 Big Mac Index).
The G7 tax proposal not only aims to level the playing field by setting a corporate tax rate of at least 15%, but it also attempts to simplify an incredibly complex international tax system. With an unnecessarily complex system comes a lot of unnecessary costs, of course, and when we also consider that the alternative approach to international tax evasion would be to make the system even more complex, it seems to be much less of a headache for everyone. people involved – big tech included – to simply set a base rate that applies to everyone.
That’s why companies like Amazon, Facebook, and Alphabet don’t seem to worry about not being able to dodge taxes in the future. In addition, the strength of these companies, whether in terms of profits or balance sheets, is not to be despised; if they are truly worth the price of the shares that investors are willing to pay for them at this point, they should be able to afford to pay taxes without shifting the burden onto shareholders.
If at some point in the future we see a famous mega-cap tech giant claim that the reason for its poor performance was taxes, that could very well serve as a sell signal of unprecedented clarity.