The G7 finance ministers, at a meeting in London last weekend, have agreed to support a minimum global corporate tax rate of at least 15%.
These moves are not surprising. Both are aimed at reducing tax arbitrage across jurisdictions with low corporate tax rates. The G7 countries have been in talks about these policies for years, and the OECD has been looking at similar proposals. But the impetus for an agreement being reached on these moves now is interesting.
Corporate tax rates are increasing, but not uniformly: the UK corporate tax rate will rise to 25% on 1 April 2023, France is 32%, Germany 30%, Italy 28% and the US 26%. The Republic of Ireland is at 12.5%. Without an agreement on a minimum global tax rate, countries would continue to move their profits to jurisdictions with low corporate tax rates. The global corporate tax rate allows governments to tax the overseas profits of companies resident in their country at 15%.
The other driver for change is the shifting mood regarding aggressive tax planning. There has always been a loud argument that companies should be allowed to use the legal loopholes in the global tax system.
Considerations of fairness and good corporate responsibility are starting to push back at that idea. Easing the pressure on the over-taxed middle-class and making sure that big corporates pay the correct tax in the right place feeds into the growing view that tax transparency is as important as environmental and social factors when thinking about corporate responsibility. Do not underestimate that Covid has had an impact on these decisions. Billions of tax pounds will be raised by ensuring that tax is collected in the country where a large corporation makes its sales.
With ethical investing focussing on tax in the same way it does on other ESG factors, large companies are doing due diligence exercises on their supply chains to identify risk areas, both financially and from a reputational point of view. Future investors are also interested in a healthy tax profile.
More and more, investors and buyers are taking a hard line on tax strategies undertaken to reduce tax, regardless of the legality of the loophole. In these circumstances, investors look for tax indemnities and possibly also price chips to ensure they are cocooned against any repercussions.
If you are on the acquisition trail, have you fully factored in the future known tax rises and the risks of those you may not have anticipated? Business is now, locally and globally, operating in an environment where taxes are rising, so the probable risks are to your disadvantage. Aside from price, there is the reputational risk that aggressive tax planning carries and depending on the circumstances, walking away from a deal may be the only response.