by NerdWallet | June 27, 2013 10:00 am
There’s more than a twist of irony that the G8 Summit occurred this week in Northern Ireland – because the Republic of Ireland, right across the Ireland/United Kingdom border, is going to be very much on peoples’ minds this year.
Ireland is struggling to attract foreign investment – and has had some success by providing a favorable tax environment for corporations to stockpile money. Ireland has become a favorite jurisdiction for American companies looking to keep money out of the United States, where any earnings are subject to an onerous 40 percent corporate income tax rate, which is the highest in the developed world. The global average is 24.8 percent, according to KPMG. In contrast, Ireland is only asking a 12.5 percent cut of the profits. The Isle of Man has a corporate tax rate of zero.
The Obama Administration, and some of the European Union economies, would like to change that. UK Prime Minister David Cameron has been out front in calling for a tightening of tax rules around the world to eliminate this kind of tax jurisdiction arbitrage. Socialist French President Francois Hollande called for tax havens to be eliminated worldwide. And former UN Secretary General Kofi Annan recently said, “The extensive use made by foreign investors of offshore-registered companies operating from jurisdictions with minimal reporting requirements actively facilitates tax evasion.” And Germany’s Angela Merkel – usually decidedly on the small-government side compared to Hollande and Annan, declared her intention to use the G8 Summit to put an end to tax havens once and for all.
We wrote up one recent flashpoint here, where American technology giant Apple (AAPL) came under Congressional fire for not bringing money earned abroad back home to face the U.S. cleave-axe.
The problem: The G8 is only eight countries – and Ireland isn’t one of them. Neither are Liechtenstein and Bermuda, nor any other countries frequently cited as tax havens.
And therein lies a global application of the free rider problem: It is in each country’s interests for all the other countries to crack down on tax havens – but not to do so themselves. Ireland has had great success in marketing itself as a friendly place for multinational corporations to do business. But other havens, including Jersey, Guernsey and the Isle of Man – all British crown dependencies, have also benefitted immensely from the practice, attracting billions of dollars to British financiers operating through subsidiaries in these jurisdictions without having to be physically present there themselves.
Meanwhile, there’s more than a bit of hypocrisy at work even here in the United States. Even as Congress rails at Apple for actually complying with the tax law (no criminal tax evasion was even alleged), the United States itself seeks to attract foreign investment and provides it a generous tax subsidy: We do not levy capital gains tax on foreign nationals who invest their money here. Specifically, capital gains that are not directly connected with a trade or business in the United States are tax-free to foreign nationals who have spent less than 183 days in the country over the previous three years.
Obviously, this is to attract foreign capital for investment in the United States.
Furthermore, there is a microcosm of the developed world at work here in the United States, in the form of intense competition between states to attract and retain investment. Governors from low-tax states are constantly courting businesses in high-tax states, and this is an accepted practice under our own system of federalism. (Some, incidentally, would like to change this, and eliminate what they call inter-state “job-poaching”).
For whatever it’s worth, though, the leaders of the G8 countries did come to at least a pro forma agreement, set forth in the Lough Erne Declaration, which includes the following tenets:
Even Ireland – arguably a big beneficiary of what critics of some corporations call “profit-shifting” agreed to help the G8 put a stop to it – but only in the improbable event that all other countries do the same. Whether that happens, remains to be seen.
Below is a list of countries with a corporate income tax rate of zero:
Tax Rate of U.S. Neighbors:
Tax Rate of G8 Members:
EU Average: 22.74 percent
Number of countries charging the U.S. rate of 40 percent or higher: Zero
Source URL: http://investorplace.com/2013/06/international-taxes-on-the-g8-agenda-aapl/
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