Forex Trading Library

The Hidden Trading Implications of Global Corporate Tax

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We don’t have all the details on the proposed global minimum corporate tax as it’s still in discussions. We do, however, have enough to start considering how it could affect the markets, and what that means for trading.

Tax rates evidently affect corporate profits, so it’s logical most people consider the impact on stocks. But forex could be affected as tax policy also affects international cash flows.

Furthermore, corporate hedging of raw materials can be influenced by tax policy. In turn, this could impact the price of commodities.

Intentions don’t always mean results

A global minimum corporate tax (and other global minimum taxes) has been on the agenda for the OECD for a while. They have already pioneered several agreements meant to increase tax collection across the world.

Exceptions are often carved out on a domestic level which can be due to internal lobbying or to ensure compliance with constitutional law.

Already the UK has carved out an exception for their financial services industry. We expect more carve-outs as negotiations continue. Countries seek to preserve the advantages that they obtain from their current tax regimens.

How much that will “water down” the impact of the agreement is yet to be seen.

How currencies could be impacted

The intended target of the legislation are smaller countries that try to attract foreign investment with lower tax rates. Ireland and Luxembourg are prime examples.

If the result of the agreement is that companies from the Eurozone move their HQ’s from these countries back to, for example, Germany,  the impact on currencies would be minimal. This is because the operations are happening within the Euro area.

But if the result is to encourage companies to move to other jurisdictions, the transfer of funds could change currency dynamics.

Apple, for example, has a significant amount of its financial activity in Ireland. However, these funds would no longer enter the Eurozone if they were discouraged to continue to operate there. This could have downward pressure on the Euro.

Where is the money coming from?

Aside from jockeying for the most competitive tax jurisdiction, the other question is whether corporations will see their profits impacted – or the increased costs will simply be passed on to customers in the form of inflation.

This means that countries with higher tax regimes could experience a contribution to inflation. Prior OECD schemes in this vein have not resulted in a significant reduction in corporate profits in the medium or long term.

Therefore, as the company adjusts its pricing model a few months later, the potential drop in stock value could be recovered.

Finally, a higher tax rate might encourage companies to have a higher cost base in accounting terms. For example, by holding more inventory and in particular, more raw materials.

Instead of holding reserves in the form of treasuries or bonds, which are subject to tax, companies might be encouraged to buy more commodities to hold as assets, since they aren’t taxed.

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