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Why small firms should be concerned about the global minimum tax, and what to do about it

Posted by Shivali Anand

September 3, 2021    |     4-minute read (649 words)

Many people assume that the global minimum corporate tax, approved at the G20 on July 10, will primarily affect tech titans and large multinational businesses.

Large corporations are undoubtedly the focus of the tax, which is slated to go into force in 2023. Companies with revenues above $890 million in participating countries (130 at the time of publishing) must pay at least 15% corporate income tax in any country where their products or services are marketed under the global minimum corporation tax.

On the other hand, small-and-medium sized enterprises will not be immune to its impacts once it is implemented. As part of the same ecosystem, small- and medium-sized businesses will also feel the consequences of revising international tax rules, most of which will be negative.

What is the GMT's goal?

Currently, corporations may transfer their headquarters to low-tax countries and report profits there to avoid paying taxes on their earnings.

Countless multinational corporations have moved revenue from intangible sources such as patents, software, trademarks, and intellectual property royalties to these tax havens to avoid paying higher taxes in the nations where their earnings are produced.

The GMT's goal is to bring this to an end by:

  • Creating a mechanism that dissuades multinational corporations from transferring profits to foreign countries. Affected firms will pay at least 15% tax in countries where sales are made rather than in countries where they declare earnings.
  • Getting rid of the habit of certain countries undercutting one another with lower corporate tax rates.

Understand the significance

Even though small- and medium-sized enterprises lack the scale and resources to take advantage of international tax havens, they must deal with the implications of the global corporate tax rate.

Pressure on corporate supply chains: The GMT is not great news for small firms that rely on major corporate clients, including manufacturers, medical device providers and pharmaceutical corporations. Due to declining corporate profits, such businesses are likely to suffer a severe demand risk.

In addition, after adoption, a modest corporate supply chain shrinkage is expected. Small companies that supply impacted enterprises are expected to face increased pressure from higher quality standards, faster delivery expectations, inventory management needs, improved procedures and shorter product lives, all of which are accompanied by faster innovation cycles. 

Increased competitiveness: Surprisingly, the global minimum tax may benefit certain small firms, especially those in the software and technology industries. Changes would level the playing field for people competing with giant firms by reducing the edge that only multinational corporations have. For example, software firms that are now experiencing significant cash flow problems might envision a brighter future in which they compete on an equal basis with public companies like Google and Apple.

Preparing for action

The GMT, according to the finance executives of global corporations, will remain stuck in uncertainty for some time due to the unresolved nitty-gritty and pending Congressional approval. Businesses should take the time to prepare for potential consequences by strengthening their basics and weighing our recommendations below.

Here are some immediate actions that small companies can take:

Brainstorm: Gather your company's executives, managers and financial consultants to discuss the potential impact of the GMT on operations. Create plans to enhance the business's fundamentals, such as increasing revenue growth, managing costs and encouraging R&D.

Develop new KPIs: Work on creating recent sales or marketing measures to assess the impact of a GMT.

Improvise and diversify: This is especially important if you have a lot of corporate clients. Create new supply chain initiatives by connecting with clients regularly. Take measures to enhance quality, speed up delivery and shorten the product development cycle. You may also want to broaden your consumer base.

Boost marketing and consider expansion: If you compete against significant businesses, you should increase your marketing and sales efforts to acquire a larger market share. You may want to consider growing your firm by seeking a loan or equity financing.

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