The global tax deal that the G-7 nations reached over the weekend isn’t like pulling an emergency brake that brings a runaway train to a screeching halt. Its effects will be slight for most companies, and won’t be felt for some time.
But the pair of proposals—a system that taxes companies in line with where they operate and a 15% minimum corporate tax rate—can eventually make it tougher for multinational corporations to shift their revenues to tax havens and reduce their tax bills.
The immediate impact, though, won’t be significant, given the relatively low 15% rate and plenty of details left to be figured out. Still, a shift away from a global tax system that pits countries against each other in a race to the bottom to attract businesses could mean higher overall corporate taxes down the road.
Higher corporate taxes, in turn, usually pull down markets because they eat into companies’ earnings. To know how much, though, investors should understand the global package agreed to by Treasury Secretary
Janet Yellen
and her counterparts in Canada, France, Germany, Italy, Japan, and the U.K. The deal next goes before the Group of 20 and then a coalition of 137 countries convened by the Organization for Economic Cooperation and Development, or OECD.
Jefferies strategist Sean Darby breaks down the G-7 agreement:
“Firstly, multinationals will pay at least a 15% global minimum corporate tax rate in each country they operate from,” he wrote “Secondly, …taxes would apply to any global company with at least a 10% profit margin. Thereafter, 20% of any profit above that would be allocated and taxed in the countries where they operate from.”
To be clear, the G-7 proposals are international agreements that represent a big step forward in how countries are approaching taxation of multinational corporations. But nations have their own tax laws, which will take years for lawmakers to draft, negotiate, and pass—and could look very different from the G7’s proposals. Republicans in the U.S. are currently opposed to corporate tax hikes, for example.
The X Factor of each country needing to pass its own legislation to implement the G-7 agreement explains why an immediate impact from last weekend’s proposals won’t be felt. Then, couple that with the 15% minimum corporate tax rate, which simply isn’t all that high.
Earlier this year, Goldman Sachs’ David Kostin calculated that a 15% minimum…
Read More: What a 15% Global Minimum Corporate Tax Rate Means for the Stock Market