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11th June 2021, 3 mins.
Inflation is top of mind in markets at the moment, and specifically whether or not it will be persistent. Today, we want to take a break from the topic and discuss tax.
Last weekend, news reports signalled an agreement among G7 officials to support a global minimum corporate tax rate of at least 15%. It has been hailed as a historic agreement, but it is still dependent on the successful outcome of wider negotiations aimed in part at bringing Big Tech to heel on paying its fair share.
There is currently an odd situation where the global technology sector accounts for almost 20% of world profits but only around 10% of world taxation. We think it is this disconnect in particular that governments are aiming to resolve.
The US proposal will face stiff resistance around the world, not least from Republican lawmakers who have lined up to slam this fledgling multilateral accord, accusing Biden of harming US competitiveness and ceding tax rights to other countries.
However, we think that some form of this tax proposal will indeed ultimately become law in many countries since the public mood seems to be in favour of it.
What are the implications for investors?
According to Goldman Sachs, a 15% global minimum tax rate would represent a downside of just 1-2% relative to current S&P 500 consensus earnings estimates for 2022.
As you would expect at the sector level, Information Technology and Healthcare would face the greatest earnings risk. However, even those sectors appear to face aggregate downside risk of only less than 5% relative to current consensus estimates. So, on balance we do not think it is something which should worry investors too much.
In fact, the FAMAG stocks – Facebook, Apple, Microsoft, Amazon and Google – rose roughly 1% this week.
In summary, we see nothing yet in this proposal that implies we should be lowering our equity weightings, but we will be following this topic closely.
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