Many entrepreneurs shrug and say, "A global minimum tax is a big-corporation problem. It doesn't apply to me." This is a simplistic view of a global economic issue, and putting your head in the sand does your small business no favors. Global tax policy will impact different small businesses in different ways, and as a fractional CFO I see a minimum tax as both a threat and an opportunity. Will you be prepared to navigate the impact to your business?
What Is the Global Minimum Tax?
You likely have read headlines such as "Facebook, Google, and Microsoft 'Avoiding $3bn in Tax in Poorer Nations.'" The idea of big corporations taking advantage of tax loopholes is not a new one, but the information age has created new international opportunities to dodge the taxman. One basic flavor of this is to move intellectual property -- patents, trademarks, software, etc. -- to a nation with low corporate taxes such as Ireland (12.5 percent) or Switzerland (8.5 percent). A subsidiary corporation is formed there, which then charges royalties to the U.S.-based sister company. The U.S.-based subsidiary gets to write off the royalty expense, while the royalty profits are taxed at the foreign country's lower rates.
This has created competition among developed nations to lower corporate tax rates, creating concerns around a "race to the bottom."
The global minimum tax seeks to solve this inequity by forcing corporations to pay a minimum tax rate on their profits regardless of which nation they were attained in. Proponents argue this closes a major loophole and forces corporations to pay a fair income tax. Critics point to the unlikelihood of achieving global consensus on such an ambitious coalition. For example, if the G7 adopts such a policy, what is to stop China, India, or Singapore from stepping up to take Ireland's place as a tax haven?
The Impact of a Global Minimum Tax on Small Businesses
Hardly any small businesses have the scale or resources to take advantage of international tax havens (with the exception of hedge funds or private equity groups). However, the implementation of a global minimum tax would have secondary effects on small businesses that need to be considered.
The Good: Increased Small-Business Competitiveness
A global minimum tax is good news for small businesses that compete with large corporate customers. The tax would level the playing field by eliminating an advantage derived through complex accounting only affordable to very large corporations. This is especially true in software and technology, where a startup business faces significant cash pressures compared with its public peers like Google, Facebook, and Apple.
The Bad: Corporate Supply Chain Pressure
A global minimum tax is bad news for small businesses that rely on large corporate customers. These small businesses face an acute demand risk as corporate profits shrink from increased taxes. This is especially true for manufacturers and material suppliers for medical device companies, pharmaceuticals, and technology companies.
Corporate supply chain contraction from lower profits is subtle but powerful. Small businesses that supply such corporations may not see orders disappear overnight, but they will face increasing cost and price pressure, including:
- Demands for price decreases
- Rising quality standards
- Increased pressure for on-time delivery, JIT, consignment, vendor managed inventory, or other difficult-to-manage supply agreements
- Shorter product lifetimes and faster development cycles
Preparing your Small Business for a Global Minimum Tax
A global minimum tax is far from certain -- the developed nations still have many details to negotiate and approve. And, like any coalition agreement, it requires the approval of every nation's government to succeed -- a single dissenter can cause the entire agreement to collapse.
Until discussions become more definite and put before Congress for a vote, I am advising my clients to stay focused on business fundamentals, such as revenue growth, R&D, and cost management.
If and when a global minimum tax is enacted, you should take the following steps:
- Convene your managers, financial advisers, or board of directors to brainstorm the impact of a global minimum tax on your business.
- Create KPIs to measure and detect this impact. These will likely be sales or marketing statistics.
- If you have large corporate customers,
- Meet regularly with your clients to detect and understand new supply chain initiatives.
- Be proactive about improving your quality, delivery, and innovation cycle.
- Consider diversifying away from large corporate customers.
- If you compete against large corporate customers,
- Tactically increase your marketing and sales efforts to go after additional market share.
- Consider raising debt or equity capital to expand your business.
No matter the impact of the tax, it is always worth including macro-economic changes into your small-business strategic planning.