What's going on?
The US reckons new tax rules for multinational companies are long overdue, so it proposed a new plan this week to make it happen.
What does this mean?
The world’s governments have spent billions keeping their economies ticking over during the pandemic, so it’s not surprising that they’re keen to replenish their coffers by raising taxes. What is surprising is that the OECD – the economic organization that’s been locked for years in efforts to revamp the global tax system – has finally made headway on exactly that.
It’s thanks in large part to the US, which last week laid out plans for a minimum global tax rate of 21% – a big jump from the 12.5% the OECD’s long been proposing. The US is now reportedly suggesting countries should be able to tax all the biggest multinational companies based on how much they earn there. And while that wouldn’t necessarily change how much they’d have to pay, it’d certainly change who they’d have to pay.
Why should I care?
For markets: Those taxes should come in handy.
The US’s sudden enthusiasm for global taxation isn’t bureaucratic selflessness: a higher worldwide minimum would allow the country to raise its national corporate tax rate from 21% to 28% without the risk other countries will undercut them and lure its companies overseas. Any extra cash in the bank wouldn’t hurt either – especially now it has a $2 trillion infrastructure plan to pay for.
The bigger picture: At least it’s something new to worry about.
US companies won’t be best pleased: analysts reckon the proposed overhaul would cut their earnings growth by up to 9% next year, with the tech and pharma sectors at risk of even heftier shortfalls (tweet this). That might be why tax is now number two on the list of things investors are worried about, according to a survey by Royal Bank of Canada – right behind central bank policies, but ahead of last quarter’s inflation fears.