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Why small businesses should be wary of the possible global minimum tax on large companies

Posted by Kanika Sinha

July 22, 2021    |     4-minute read (652 words)

Many people believe that the global minimum corporate tax— which the G20 signed off on July 10 — will affect only tech giants and sprawling multinational corporations.


No doubt, large companies are the target of the tax, set to take effect in 2023. The global minimum corporate tax mandates multinationals with more than $890 million in revenue and based in participating countries (130 and counting at the time of publication) will pay at least 15% tax for corporate income in each country where their products or services or sold.

But once implemented, small- and medium-sized businesses will not be immune from its effects. As part of the same ecosystem, SMBs will also bear the effects, mostly adverse, of the overhaul of international tax laws.

What is the goal of the GMT?

Presently, companies can move their headquarters to low-tax jurisdictions and declare profits there to avoid taxes.

Legions of multinational companies have migrated income from intangible sources such as patents, software, trademarks and royalties on intellectual property to these low-tax havens in order to skirt higher tax rates in countries where their profits are earned.

The GMT aims to end this by:
  • Creating a system that discourages global companies from shifting profits. Affected companies will pay a minimum 15% tax in countries where sales are made, rather than where it decides to declare profits.
  • Eliminating some countries’ practice of undercutting one another with lower corporate tax rates.
Know the impact

  Although SMBs do not have the scale or resources to take advantage of international tax havens, they will have to deal with the implications of the global corporate tax rate.

Corporate supply chain pressure: The GMT spells bad news for small businesses that rely on large corporate customers such as manufacturers, suppliers for medical device companies and pharmaceuticals. Such organizations are likely to face an acute demand risk on account of shrinking corporate profits. 

In addition, a slow corporate supply chain contraction is in the cards post-implementation. Small businesses that supply affected corporations are likely to encounter the pressure of rising quality standards, faster delivery expectations, inventory management demands, improvised processes and shorter product lifetimes accompanied by quicker innovation cycles.

Increased competitiveness: Surprisingly, the global minimum tax is good news for some small businesses, particularly in software and technology. For those competing with large corporations, changes would level the playing field by eliminating the advantage that was enjoyed only by big companies operating across countries. For example, software startups that otherwise run into severe cash pressures can imagine a better future, operating on more equal footing as public peers such as Google and Apple.

  Getting ready

  The financial chiefs of multinational companies speculate the GMT will be mired in uncertainty for some time, owing to the unsettled discussion on the nitty-gritty and pending Congress’ approval. Businesses should use the time to hedge against anticipated consequences by focusing on strengthening their fundamentals and reviewing our suggestions below.

  Here’s what small businesses can consider acting upon now:

  Brainstorm: Convene your leaders, managers and financial advisers to examine the possible impact of the GMT on your business. Devise strategies to strengthen the business foundations such as improving revenue growth, cost management and promoting R&D.

  Create new KPIs: Work toward developing new sales or marketing metrics to measure the impact of a GMT.

  Improvise and diversify:This is particularly important if you have large corporate customers. Create new supply chain initiatives by interacting more frequently with your clients. Take steps to improve quality, expedite delivery and refine your product development cycle. You may also wish to diversify your customer base away from large corporations.

  Amp up marketing and mull expanding: If you compete against large corporations, increase your marketing and sales efforts to capture additional market share. With better opportunities at hand, you may wish to consider expanding your business by raising debt or equity capital. 

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