International tax competition is under threat – which stocks are most vulnerable?
The idea of a global corporate tax regime is taking off, with the US proposing a sales tax on multinationals. John Stepek looks at which companies could lose out.
Tax competition between nations has served the world's biggest companies rather well over the decades.
Do your business in one part of the world where it's most profitable, then funnel those profits through the most favourable tax regime, which happens to be in a completely different part of the world.
With plenty of countries competing for your business, if one decides to hike tax rates, you can always shift elsewhere.
At least, that's the theory. But that might be changing.
It might soon be harder for big companies to go tax regime shopping
The idea of a global corporate tax regime, one that prevents big companies from picking and choosing exactly where in the world to pay tax, and how much of it to pay, seems like a pipe dream.
After all, competing on tax is one way in which countries can attract business from big companies. A lot of small countries have benefited from this (Ireland is a good example) but it's not just small countries. Right up until the pandemic, the UK was keen to keep cutting corporation tax and even now that it's going back up, Rishi Sunak has been careful to make sure it stays roughly in line with the peer group average.
Then there's the politics. Deals to attract business from big companies are appealing to politicians and their egos. National leaders enjoy nothing more than cutting the ribbon on a big new job-creating factory or office block built by a big multinational. It's a great photo opportunity.
The fact that said multinational will end up paying less tax, and will probably stick around for less time than the half a dozen or so small, local businesses that are just down the street from it, rarely comes into the equation.
On top of that, there's a bit of flag-waving involved on the behalf of the companies themselves. It's one thing if a US-born multinational doesn't pay enough tax in the US. But if another country decides that it should be getting a bigger share of the wealth, the US lobbyists come out in force to prevent such confiscation.
Finally, there was something of a consensus in the 1990s, one that went alongside a general pro-globalisation tone, that job creation and trade and all the rest was the more important thing to focus on. Governments and business could work alongside one another. As long as they paid enough tax – and there was enough to go around – then no one was going to stress too much about the exact numbers.
But the tone has changed. And that's something that investors in the companies which have benefited most need to be aware of.
The people versus Big Tech
One of the most obvious issues is the amount of power that has accrued to Big Tech companies. Governments are increasingly uncomfortable with this power, mainly because it's crowding onto their turf.
Google shouldn't own everyone's data – the government should! Facebook shouldn't be thinking of launching a digital currency – that's the government's main source of power! Twitter shouldn't be censoring certain points of view – that's the government's job!
We can all have a chuckle about it, but it's also true. The reason that tech bosses are being dragged in front of competition hearings in both the US and the European Union is fundamentally nothing to do with consumer detriment. Consumers (thus far) have enjoyed nothing but gains from the rise of Big Tech.
It's about power and influence. It's about companies being seen getting too big for their boots and governments deciding to slap them down (which, incidentally, has always been the driving force of “antitrust” – consumer detriment is a side issue).
Governments also represent the political will of the people – by and large – and the fact is, the people are a bit fed up with the notion of big corporate power in general. It was OK on the way up when everyone was making money. But after 2008, that changed.
The banks (rightly) bore the brunt of that irritation for a long time after the financial crisis. But increasingly people aren't happy about the idea (fair or not) that there's a class of tech-savvy gazillionaires pulling the strings from somewhere in Silicon Valley.
The sense is that they see the rest of us as a kind of mixture of feudal-style gig workers, dozy and endlessly manipulable consumers, and future candidates for ingredients in Soylent Green. Hence the discontent.
The US is now more comfortable with the idea of higher taxes on big US companies
So what's happening now? The OECD (the club of the world's wealthiest countries) has been trying to hammer out a plan to both tax multinationals in a more consistent manner and to impose a minimum global tax rate on companies.
Joe Biden's team in the US has now sent out a pitch to those countries which would involve the biggest companies (including US ones) paying tax based on their sales in a given country. Long story short, sales are a lot harder to shift around than profits, so it's a fairer way to work out where business is actually being generated and where it should therefore be taxed.
This matters because the US has been the sticking point here. And of course, Biden is proposing it because he wants to raise corporation tax in the US again. That'll be easier if there's nowhere else to run to.
Now to be clear, I'm not saying that any of this is good or bad. You'll have your own views on exactly how much tax any individual or corporation should pay. But we're not here to philosophise. We're here to highlight threats and opportunities for investors, and this is one that we've been highlighting in MoneyWeek magazine for a number of years now. (You can get your first six issues – plus a beginner's guide to bitcoin – absolutely free here.)
We live in a world where public debt is high (and it already was before the pandemic). Central banks and governments have put in place policies to keep the price of that debt low. But those very policies have also contributed to one group of private individuals and companies doing exceptionally well for themselves.
Governments need money. The big banks had it; they don't have it anymore. Who has it now? The big tech companies. They're on the hit list, and this is how the politicians get it.
This is all part of the Great Rotation – a more inflationary world, a swing in power from capital to labour, etc – it's all linked. But in purely investment terms, it's another factor that implies that the big winners from recent decades will no longer be the winners from here on in.
If you're looking for a sector that's used to haggling with governments over tax during good times and bad (rather than being given a free pass), then ironically enough, the mining industry is probably a good hunting ground. Dominic explained why that sector's good times might be just beginning yesterday.