The G7 meeting hasn’t even started yet, but that hasn’t stopped the finance ministers getting their moment in the sun. Over the weekend, they announced a global minimum tax agreement that should start to spell the end of tax tourism for large corporates. The idea is that all countries will have a minimum corporation tax threshold of 15% and therefore companies have limited incentive to book profits in tax havens. The agreement has a very long way to go before it starts to make an impact, not least because it now needs to get the approval of the G20 next month and then after that the 139 countries of the OECD. As well as agreement on taxation rates, there is also agreement on tax jurisdiction, where companies are taxed in a country where the revenues are generated. This is probably the more important element of this agreement to most European countries, as big tech makes huge profits in these countries, but pay tax in lower rate domiciles. Also worth considering is that countries will still be able to manipulate the pledge by offering incentives, rebates, minimum thresholds etc. all in a bid to attract more capital investment from these companies. It’s also not going to be plain sailing legislatively, so we’re not expecting this to become the law for a couple of years yet. The tech giants have ‘welcomed’ the news, with statements from all of the big players generally in support of the move forward – but what upside have they got in coming out against the reforms?
Another important meeting due to take place ahead of the G7 is between Joe Biden and Boris Johnson. The President is expected to turn the thumbscrews on the PM to stick to the Northern Ireland protocol and not in any way jeopardise the Good Friday Agreement. The leverage the US has over Boris is considerable, not least a UK-US trade deal which might continue to be towards the bottom of the White House to-do list if the situation remains unresolved. Mr Biden is also going to have a chat with the EU and say they need to drop the bureaucracy and adopt some pragmatism to get to a workable solution. Talks between the UK and EU are due to resume this week and it wouldn’t be too unreasonable to think that this talking to might break the impasse. The Times has the story.
There’s a Commons vote today against the government’s decision to cut the UK foreign aid budget from 0.7% of GDP to 0.5%. The number seems small when quoted this way, but that 0.2% difference is about £4bn and has been widely criticised by the opposition, as well as rebels within the conservative party. The rebels would have to number more than 40 if the vote was to pass, but it may be that Boris decides not to test the loyalty of the backbenches and may also decide that in the week leading up to the G7, he doesn’t want to reinforce his position that the UK can’t afford to play its part. We suspect he may use some Commons airtime today to confirm that the UK is sticking to its 0.7% obligations and also make a pledge of x million vaccine doses to developing countries, following up on the US saying they’ll donate 80 million and given the UK has ordered more than 500 million doses, it seems like we’ll have some spare.
The Delta variant is 40% more transmissible than the Kent strain that it has replaced as the most common in the UK, according to Matt Hancock. The debate still continues over the 21st June unlocking, but the government are starting to soften their resolve over it being set in stone and our best guess is that it gets pushed back by a month. There’s an interesting point, that though hospitalisations aren’t necessarily ending in intensive care, admissions rising mean there is less capacity for normal procedures and as such waiting lists will continue to grow and the catch up for operations and treatments will take even longer.
Across the Pond: Before Biden jumps on Air Force One, he’s set to sit down with senior republican Shelley Moor Capito. Ms Capito is leading the negotiation on the infrastructure bill, the latest proposal of which was rejected by Biden for falling short of what was needed. Republicans are said to be heading towards $900bn, whilst Joe Biden has suggested a narrower $1 trillion package. It’s not just the money being spent, but how to pay for it that the two sides can’t agree on, but the news of a 15% global minimum tax is being pushed by Biden’s team as a strong positive for the Treasury’s overall tax receipts. In a week where deals are likely to be flowing thick and fast, we wouldn’t bet against this getting agreed ahead of the President’s trip to the UK.
In other US news: Banks and prime brokerages are reigning in their hedge fund clients’ ability to short sell certain stocks in a bid to limit future losses from so called ‘meme stock’ events that we saw earlier in the year (think GameStop). The PB’s are increasing collateral requirements and outright limiting the number of short positions their clients can hold with them in a bid to reduce their own exposure, fearing a repeat of Archegos’ implosion back in March. The story is a slightly longer read and is on Yahoo.
One of the world’s largest contract electronics manufacturer has warned that the microchip shortage is likely to last until at least the middle of next year. Flex make all kinds of electronics for a multitude of companies and is one of the biggest individual customers of all of the chip manufacturers. They’re saying all the manufacturers are pushing back their forecasts for when the shortage will end and are also saying that it is likely the shortage will spill over into other consumer electronics, such as smartphones and televisions. The FT has the full story.
Looking at this week: The data calendars are relatively busy throughout and the G7 gets underway on Friday, with plenty of pre-meetings in London likely to be taking place. The markets have got off to a slow start for the week, but likely to be subject to change.
Have a great week.