G-20 News

CAPITAL IDEAS: Race to the bottom

US Treasury Secretary Janet Yellen speaks at a press conference after attending the G7 Finance Ministers meeting in London on June 5, 2021. Justin Tallis / Pool via REUTERS

Ahead of the weekend of June 5-6, 2021, I enjoyed a discussion about a fully vaccinated (literally) water cooler with Nate and Scott, two of Berkshire Money Management’s advisers. The subjects discussed during the discussions were varied: economy, selection of investments, politics.

Our conversation turned to the recent gossip about global tax reform. Specifically, the meeting on Friday June 4 in London where US Treasury Secretary Janet Yellen planned to propose a minimum tax on multinational corporations to the Group of Seven Nations, or G-7, (Canada, France, Germany, Italy , Japan, United Kingdom and United States)

I didn’t care, noting that there was no way they would all agree on such a thing.

On Saturday of this weekend, I texted Nate and Scott and admitted I was wrong. The G-7 agreed, in principle, to a landmark agreement on tax reform. They decided to support a minimum overall corporate tax rate of at least 15%. To be clear, that would be an effective rate of 15%, as opposed to a stated rate.

The G-7 also issued a statement saying they would target “the biggest and most profitable multinational companies”. These large companies would be taxed at a rate “of at least 20% of profits exceeding a 10% margin”. This could hurt US mega-companies, especially some tech companies that sell digital products that are not easily associated with a physical location. However, eliminating taxes on digital services could potentially offset this pain for tech companies.

You can’t blame my cynicism; this type of coordination has been discussed for years without apparently any progress in the conversation. A deal from the G-7 finance ministers could be the impetus to move the dialogue forward in July 2021, when the G-20 meets in Venice. Among other countries, the G-20 includes China, India and Brazil. Then, the G-7 can begin discussions with the rest of the 135 countries associated with the Organization for Economic Co-operation and Development. Some of those 135 countries will not want to join the agreement. The United States has proposed ways to penalize companies doing business in countries that do not agree to impose minimum taxes.

Countries with corporate tax rates below 15% would not need to increase their rates. There would be a bribe in the company’s home country to raise the effective rate to 15%. The United States believes it would be fair because it would eliminate the advantage that low-tax countries have of courting companies on their land.

Yellen said the proposal responds to what has become a “30-year global race to the bottom on corporate tax rates”. When foreign countries offer lower corporate rates than those imposed by the United States, American companies are motivated to do business elsewhere. Businesses want to locate where they can be more competitive. For example, Ireland has a corporate tax rate of 12.5%, compared to 21% in the United States. Over the past two years, Ireland’s lower rate has attracted 700 US companies and 160,000 employees.

Multinational companies are also finding ways to shift their profits to avoid paying taxes, such as bypassing sales made to the United States or Europe and legally diverting those payments through the British Virgin Islands, Cayman Islands, Bermuda, Countries -Bas and Switzerland, which have weak tax structures. . Or, as the Tax justice network said, these five “jurisdictions [are the] more complicit in helping multinationals underpay corporate tax. According to Institute of Taxation and Economic Policy, some of these legal maneuvers allowed 55 of the largest and most profitable U.S. companies to evade payment of U.S. federal income tax in 2020.

However, there are considerable obstacles to reaching a deal. Each country will have to navigate its system. For example, here in the United States, Congress will have to write new laws to change the tax code. I do not know the bureaucracy of 135 countries. Still, I wouldn’t be surprised if other countries didn’t do anything until the United States came to an agreement. Suppose some of those same countries are as dysfunctional as America’s two-party politics. In this case, we’ll have some time to figure out which countries might turn out to be worthwhile investments and which sectors or caps (i.e. large caps, small caps) we might want to avoid.

If all goes as Yellen wants, it will take another 18-24 months for tax collections to change. This means that the stock market probably has about a year to start digesting the effects. Until then, that’s good news for the stock market. This distracts the White House from pushing the current corporate tax rate from 21% to 28%… for now. This is not a game-changer for my investment allocation today, as I did not expect a rate hike until 2024, if at all. (Why 2024? It would be unwise to raise taxes before the economy reaches full employment, which will not happen for a few years.)

The global minimum tax proposal would increase U.S. tax revenue by $ 140 billion over 10 years, says Strategas search. It is estimated that an additional $ 700 billion will be collected by the Treasury if the corporate rate is raised to 28%. It’s possible that under a second term, Biden will continue to push for those higher rates to pay for expenses that have occurred throughout the COVID-19 pandemic.

Stock market stability

The selling pressure on equities eased. The prices of small and large-cap tech stocks have stabilized since mid-March 2021 and have even shown early signs of recovery. The moderation of the sell-off came as the buying spread to previously declining categories and sectors of stocks. This suggests that the market has become more sustainable.

I suspect the tendency to persist, and we will avoid those cliché rhymes and alliterations, such as “fainted June” or “summer sale”. Instead of being on the defensive all summer long, my current plan is to invest as if the market consolidation resolves to the upside. I don’t expect a shock that we can’t handle.

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of over $ 500 million. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third-party sources. Unless otherwise indicated, any mention of specific securities or investments is for illustrative purposes only. The clients of the Advisor may or may not hold the securities that are the subject of their portfolios. The Advisor makes no representation that any of the securities mentioned have been or will be profitable. Full disclosures. Direct requests: [email protected] Is Bitcoin’s Collapse Warning Us To Exit The Stock Market?