this is how the global minimum corporate tax will work

After many years of negotiations, there is already an agreement within the G7 to implement a global minimum corporate tax. The G7 countries (USA, Japan, Germany, Great Britain, France, Italy and Canada) have signed the agreement and now the negotiation will be extended to the G20 (Spain belongs to the group through the European Union and also as a permanent guest) and then to the OECD.

The agreement is not only that a global minimum corporate tax of 15% is established, which is not very relevant since almost all countries have a higher rate (the great exception would be Ireland, with its 12.5%). The big news is where would these taxes be paid.

Locating the benefits

One of the novelties of this agreement is that the companies would not pay the benefits where they want to locate them, as they have done until now. Nowadays multinational companies set their headquarters where they want and sell their services to their affiliates, which are those that in turn make sales to end customers.

Although there are rules to avoid this, in practice the headquarters can sell at the price they want to their subsidiaries and therefore limit their profit and pay most taxes where the headquarters are located.

One more twist that some companies do is to optimize the tax bill: they set the headquarters not where they have R&D but in countries with lower corporate taxes in order to minimize the tax bill.

The new global minimum corporate tax

From now on change the the status quo which said that multinationals pay taxes mainly where they have their headquarters and will pay them where sales occur. The original system had its logic, since R&D is very important (what does the great quality of search results bring to Google, its clients around the world or the great R&D work they have done in California?) . But companies have abused the freedom they had to minimize the tax bill.

The agreement fixes that large companies that have at least a 10% margin will be affected by this new scheme. 20% of the profits that exceed this 10% margin will be relocated to the countries where the sales have occurred, and will be taxed with a minimum of 15%.

Spain, benefited

Spain has never been a great multinational producer. We have some, but even looking at the IBEX35 you can see companies that act basically locally. This lack of multinationals and our large business fabric based on SMEs it has traditionally been a weakness (and still is).

However, our great negotiating asset in any treaty, for example the EU, is that we are a relatively large market. Almost 47 million inhabitants place us as the 29th country in the world in terms of population with a per capita level of wealth around 30. Both lists are not equivalent, since many small countries are very rich and Spain is, in terms of GDP, the 14th richest country in the world.

Therefore, foreign multinationals usually do a good business in Spain, since we are a fairly large and interesting market, and we are not able to compensate for this with companies that do the same outside.

This new tax system, therefore, in principle is going to benefit us. The tax bill of large foreign companies operating in our country will increase tax revenues. And yet the reduction of the collection by our multinationals selling abroad is going to be scarce. It remains to be seen whether the very large tech companies adopt a strategy similar to the one they have used with the Google, from increase prices to compensate for this new taxation.

By the way, the Google tax should be repealed once this new global minimum corporate tax starts operating, since it was supposed to be established to promote these agreements that we are finally seeing coming.

Amazon, surely out

As we already commented some days ago, Amazon’s policy of reinvesting its profits for growth could make them unaffected by this deal. To date and since its creation, Amazon has kept profits to a minimum. In fact in 2020 its margin was only 6.3% (and this has been the highest margin in its history).

Perhaps within the new G20 and OECD negotiations there will be changes, such as some billing amount above which would apply to all companies, but it is complicated. In the end What Amazon is doing is investing heavily and it is not diverting profits to reduce the tax bill.

What could happen is that if you consider that Amazon has different divisions and some of them do have a high profitability (like cloud services) These benefits are subject to the new tax scheme. If something is decided along these lines, companies would lose the flexibility to move profits between separate units as they see fit, which is not very logical. if we want innovative companies that generate wealth and employment.

Source: El Blog Salmón by

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