Global tax proposal may hit tech hardware, Morgan Stanley says

Technology hardware, health care and pharmaceutical companies would be most impacted by U.S. proposals to rewrite global tax rules, according to an analysis by Morgan Stanley.

President Joe Biden’s initiative to make the world’s biggest and most profitable 100 or so corporations pay more where they operate rather than where they are headquartered could raise the median effective rate for nine tech manufacturers to 26% from 14.4%, the bank said in a report this week.

In pharmaceuticals and health care, 20 companies might see an increase to 26.3% from 16.6%, according to the study by equity strategists Todd Castagno, Victoria Irving, Amruta Pabalkar and Jonathan Walker.

Ben Torres/Bloomberg

The analysis highlights how the U.S. proposals, which have turbocharged years-long negotiations between nearly 140 countries, could also significantly shift the focus of the tax debate. The talks previously emphasized targeting companies based on activity, with European countries singling out digital giants.

The new approach risks throwing up political difficulties to achieving a deal as intended by July, because it’s uncertain how much governments will want to increase tax on health care after the pandemic, or on tech hardware amid a prolonged semiconductor shortage, according to the report.

Hurdles to overcome

Other hurdles include a Congress that may balk at legislating if other countries are reluctant, political challenges elsewhere, and ongoing trade tensions over unilateral digital taxes. The strategists also said the global talks may partially refocus on business activity as low-margin companies including Amazon.com Inc are likely not in the scope of the current U.S. proposal.

“Political willingness to achieve an agreement on digital tax reform by July appears clear, but these are complex issues and a delayed agreement potentially by October looks more realistic,” the analysts said.

Most of the companies exposed to the Biden proposal are American — 48% of the 107, according to Morgan Stanley, followed by France with 8%.

The analysts cautioned that the numbers are hypothetical as they employed a simplistic framework for how profits would be reallocated, and, in the absence of details of the U.S. approach, the list of companies in scope could change.

The authors assumed the U.S. plan would set thresholds of greater than $20 billion in annual revenue and 10% or greater profit margin, and that certain industries would be carved out of the final deal.