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Tax avoidance, Keynes once said, is a uniquely rewarding intellectual pursuit. But in the corporate world, it is set to become a lot less lucrative.
New international tax rules will restrict the scope to profit from arbitrage and curb a race to the bottom in corporate tax rates. That will remove an important driver of shareholders’ returns. Declining tax rates accounted for a hefty 22 per cent of the profit growth of S&P 500 non-financial groups in the three decades to 2019, a study by the Federal Reserve’s Michael Smolyansky has shown.
Once fully bedded in, the new 15 per cent minimum tax is expected to force multinationals to pay between 6.5 per cent and 8.1 per cent more tax, according to the OECD.
The impact will be felt most acutely by companies that use tax havens, euphemistically known as investment hubs. These places, where foreign direct investment exceeds 150 per cent of gross domestic product, include Singapore, Switzerland, the Netherlands, Luxembourg and Ireland. They account for nearly a fifth of the profits earned by multinationals — though significantly less of their revenues, assets or employees.
In a remarkable turnaround, these hubs are preparing to tax multinationals at a 15 per cent rate. Some companies’ filings have already warned about the potential impact. Dublin-based Ryanair, which had an effective tax rate of 8.9 per cent in the year to March, is braced to pay more from April. US chipmaker Broadcom highlights its tax breaks in Singapore and Malaysia. These saved $2.1bn of tax in the 2023 fiscal year, increasing income per share by 13 per cent.
Bermuda-headquartered insurers and reinsurers are also prepared for an increase. Lloyd’s insurer Hiscox’s tax charge was 6.7 per cent of profits in 2022. It reckons its rate will rise to between 12 and 15 per cent, though the overall impact will be lessened by other incentives Bermuda plans to offer.
Also in the frame are the technology and pharmaceutical sectors. Their wealth of intellectual property makes them particularly adept at shifting profits. Meta’s Nick Clegg acknowledged in 2021 the prospect of paying more tax, and in different places.
Low-tax countries are potentially at risk if companies depart in response to higher rates. For now, they are big winners. The OECD says they could rake in up to a third more corporate tax. S&P upgraded Ireland’s rating to double A last year, saying the tax changes did not alter its view of the country’s creditworthiness.
Some jurisdictions will be able to compensate companies paying higher tax rates by providing new subsidies and credits. But the minimum tax regime is cleverly designed.
That will not stop tax avoiders from trying to circumvent it. But it will limit their scope.
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