Big U.S. tech might feel chilled by the G7 global minimum tax

Two-thirds of the world’s largest companies paying less than 15% effective tax are based in the United States

Pauses may soon be pumped out of America’s awe-inspiring big tech race as U.S. policymakers approve a G7 global minimum taxation initiative that would have a disproportionate impact on America’s silicon behemoths.

In the recent global equities scorecard by Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, US stocks were at the bottom of the rankings for second-half performance, with concerns over new tax measures among the top considerations. for degradation.

Large-cap U.S. tech and healthcare companies are expected to face the most downward pressure on earnings due to the Group of Seven’s projected global minimum tax of 15%, according to the report.

Although more than a quarter of companies in the MSCI ACWI Index paid less than this amount in terms of effective tax in 2020, the new G7 initiative focuses on the biggest and most profitable companies – a combination measures that do not bode well for the United States. darlings of the growth of the last decade.

Bloomberg Intelligence has identified that the United States is among the countries with the lowest market-capitalization-weighted effective tax rate in the world, accounting for two-thirds of companies worldwide that paid less than 15% d ‘effective taxes in 2020.

This, Adams said, has a lot to do with the propensity of US large caps to attribute intangible income sources to international jurisdictions – and vice versa for the costs incurred by intangibles – with many overseas homes having rates. federal and local laws combined far lower than those in the United States.

While details of the G7 initiative have yet to be made public at the time of the release of the BI dashboard, the research provider predicted that the minimum tax would start by targeting the top 100 companies. and the most profitable in the world – 56 of which are headquartered in the United States and 41% of those workforces are in technology or healthcare.

Of the top 100, 26 paid less than 15% effective taxes last year, and 65% of those culprits are based in the United States. Additionally, while a third of the U.S.-domiciled MSCI All-World Index constituents paid less than 15% effective tax in 2020, the tech industry paid small contributions more often than other sectors.

Michael Casper, small-cap equity strategist at Bloomberg Intelligence, added: “Based on the latest annual corporate filings, the median member of the S&P 500 paid an effective tax rate of 19.5%, but 116% 388 stocks with identifiable rates paid less than the new minimum. .

“A quarter of them are information technology companies. The median tech stock of the S&P 500 paid 16.2% effective tax, though nearly half – 29 out of 60 – paid less than 15% last year. “

On the FAAMG grouping of the five largest stocks in the index, only Microsoft and Alphabet paid an effective tax rate above the 15% threshold in 2020.

Given the scale of large-cap tech companies below target, it’s clear that effectively enforcing – or at least discussing – a 15% minimum rate could cause big business headaches. American technology.

Speaking about the potential impact of the initiative, BlackRock said in its weekly market commentary that the shift in momentum underway away from growth stocks, overlaid on the possibility of a global minimum tax, has tempered the short-term enthusiasm of the company for US large-cap stocks. .

The world’s largest asset manager added that US President Joe Biden might be particularly keen to support this kind of initiative for practical reasons, given the generous – albeit watered-down – budget spending programs his government has put in place. announced since taking office.

He added that regions that are expected to enjoy the full pace of their own economic recovery during the rest of the year, such as Europe and Japan, also have higher taxes and tighter regulations than the United States, limiting the extent of the impact to be felt. by the G7 plans.

“Uncertainties about potential tax increases make it difficult for investors to position themselves for the potential impact at this time,” the BlackRock commentary noted. “We see US stocks potentially under pressure from higher taxes and other factors, but so do small and mid-cap US companies, as tax increases and regulations targeting large multinational companies are less likely to affect them. “

The asset manager also said he believes structural changes will remain favorable to large-cap tech companies and may offset some of the impact of tax hikes with further income increases.

However, another structural point to note concerns the discussions around environmental, social and governance (ESG) classifications, this point being raised in a recent report by Vincent Deluard, director of the global macro strategy of the StoneX group, that large companies Technologies that work relatively well on environmental measures should be penalized for their shortcomings on social considerations – such as low tax contributions, monopolistic behavior and low employee numbers.

As ESG continues to evolve and data on these areas becomes readily available, it will be interesting to see if one of the more fluid sources of capital in the market uses its power to put tax contributions at the center of the coin. ‘agenda.