Global minimum tax raises prospects for multinational tax hikes, says Fitch

The Group of Seven (G7) countries’ backing of a global minimum tax of at least 15% highlights widespread interest among major developed market governments in raising taxes for multinational companies, says Fitch Ratings. 

Globalisation, a trend toward digitalisation, US President Joseph Biden’s aversion to digital service taxes on US technology firms and efforts to shore up public finances as the world recovers from the coronavirus pandemic underscore the agreement. Tax rates are not typically a key rating driver for Fitch-rated issuers and near-term cash flow implications are unlikely due to the length of time to enact legislation. 

There is no guarantee a global minimum tax will become legislation in the US or any other OECD country, given the large number of countries where passage would be required and weak bipartisan support for higher taxes in the US. However, the announcement by the largest nations is the first step to a multilateral agreement and a core pillar of Biden’s ‘Made In America’ tax plan, which initially proposed a global minimum tax rate of 21%. 

If passed, the global minimum tax would apply to certain US companies generating significant foreign earnings regardless of whether they have a physical presence in international markets where they conduct business. Many multinationals pay lower taxes than domestic peers due to the blending of income streams from high and low tax countries and other tax advantages. 

Quantifying the potential effect of a global minimum tax on corporate cash flow is not straight forward. However, the aggregate effective tax rate for technology companies was below the proposed global minimum tax of at least 15% at 12% in 2019, according to our analysis of about 875 Fitch-rated US corporates across multiple sectors.

Canada, France, Germany, Italy, Japan, the UK, the US and the EU agreed in principal to implement new international tax rules and remove digital service taxes, per the 5 June G7 Finance Ministers and Central Bank Governors Communique. 

The group committed to an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises. G7 Finance Ministers committed to a global minimum tax of at least 15% and agreed on the importance of progressing on these efforts and reaching an agreement at the meeting of G20 Finance Ministers next month.

A global minimum tax would allow countries to increase revenue from large multinationals without the use of digital service taxes. It might also be welcomed by technology companies, given the prospect of replacing a patchwork of disparate taxing rules across countries with a universal set of rules providing greater clarity for business planning. 

Digital tax legislation has already been enacted by 26 countries, including France and the UK, with many others having drafted or announced intentions to implement a digital tax, according to KPMG’s May 2021 developments summary on the taxation of the digitised economy. The US announced but temporarily suspended tariffs on goods from six trading partners subjecting US technology companies to digital service taxes on 2 June, prior to the G7 announcement. If a global minimum tax becomes legislation and individual countries chose to retain a digital service tax, it may be possible that a credit is provided against any future global minimum taxes that might be instituted. Digital service tax rates vary across countries but are generally based on revenues, which may produce a significant difference between any global minimum tax proposal on the profits of large multinational companies in a specific jurisdiction.