G7 digital tax threatens big tech companies like Facebook and Google

On June 5, the G7, a group of wealthy countries including the US, Canada and the UK, agreed to a new 15% tax rate impacting large tech companies.

How does the tax work? Digital companies like Facebook and Google pay little taxes overseas despite generating significant revenue abroad.

Unlike companies selling physical goods taxed via tariffs/custom duty, companies selling digital products (i.e. advertising/software) avoided most of these.

The new tax agreement by the G7 changes that with 2 main proposals:

1. Countries can tax 15% of a company’s profits made internationally.
2. Countries can tax foreign companies — even if sales are digital.

Thanks to proposal 1, companies that reduce taxes by deferring profits to tax-haven countries will have more taxes coming their way.

Impact on stocks? More taxes, lower profits, but the impact isn’t likely to be felt for some time. According to Monika Loving of advisory firm BDO (via WSJ):

• Even if a deal is reached, it would still be 18 months or longer before each country implements the law.
• It could be 2+ years before tax revenue is collected from the new law.

Also, the law would only affect the most profitable companies of certain countries — those with at least a 10% net income margin — which largely consists of the biggest US tech companies.

For now, most of the details are still being worked out and the proposal needs to receive support from the larger group of countries, G20, in July. The deal has a long way to go.