These 9 Countries Have No Corporate Tax
The United States may represent the pinnacle of financial excellence around the globe with the largest GDP, the most renowned stock market, and arguably the greatest economic clout of any country, but it also has a corporate tax rate that would cause just about any multinational based here to quake in its boots.
Within the United States, corporations face a peak marginal corporate tax rate of 40%. By comparison, the global average corporate tax rate is just 23.6%, and it's declined each year since 2006, when it was 27.5%.
Understandably this doesn't mean that all businesses are paying 40%, as there an ample number of deductions that can be used to offset their profits. Clinical-stage biotechnology companies, for instance, can carry forward their losses and use them against future earnings (should one or more of their clinical programs succeed) in order to keep their effective tax rate near 0%. Likewise, Facebook has been able to deduct stock options given to its employees against its profits. In 2012, Facebook earned more than $1 billion in profits but wound up receiving a $295 million refund check from the IRS! It actually could be a while before Facebook pays more in taxes than you.
However, Facebook's case isn't the norm, and comparably speaking the U.S. corporate tax rate is the second highest in the world, behind only the United Arab Emirates at 55%. Relative to all other industrial nations, the U.S. corporate tax acts as a possible red flag for foreign investment dollars and can even push U.S. companies overseas.
Known as corporate tax inversion, U.S. companies agree to purchase a company in an ex-U.S. country and then relocate their headquarters to that country with the hope of lowering their corporate tax rate. Take AbbVie's pursuit of Irish-based Shire as a perfect example. Although AbbVie's takeover offers point to a number of product synergies and cost savings with Shire, this deal is really all about lowering AbbVie's peak corporate tax rate from 40% in the U.S. to Ireland's peak rate of just 12.5%. This would result in literally hundreds of millions in annual tax savings for the combined entity.
9 countries with no corporate tax
Although Ireland might appear to be the king of the crop when it comes to low corporate tax rates, there are nine countries around the globe that have absolutely no corporate tax, according to data from KPMG.
These nine countries are:
- Bonaire, Saint Eustatius and Saba
- Cayman Islands
- Isle of Man
While these small getaways might appear to be too good to be true, there are ways these countries generate revenue from corporations that call them home.
In the Bahamas, corporations are subject to property taxes that are often pretty high, considering that it's a prime destination for well-to-do retirees. In addition, businesses pay Social Security wages for their employees as well as a number of other indirect taxes and fees such as business license fees, registration duties, and import duties. Let's be clear that a corporations' effective taxes in the Bahamas are likely to be significantly lower than in the U.S., but they're not exactly zero, either.
The Cayman Islands, another popular tax haven, has even fewer taxes than the Bahamas, with corporations paying duties on imported goods as well as a stamp duty on transferred Cayman Islands real estate. The effective tax rate that Cayman Islands-based multinational corporations typically report (often in the low double-digit percent range) is merely taxes paid in foreign countries by their subsidiary.
Knowing this can make you a smarter investor
Why does this matter? Understanding where a stock holding in your portfolio is based could mean millions or even billions in possible tax savings. Corporations based overseas could potentially be more attractive takeover targets than those in the states. Additionally, those businesses operating overseas that are able to keep more of their profits could potentially return part or all of these savings in the form of a dividend, share buyback, or a combination of the two, to shareholders.
While the location of a company's headquarters shouldn't be a primary factor that tips the scales on whether to invest in an ex-U.S.-based company, investors should also keep in mind that one prominent risk remains. The U.S. and other EU nations are cracking down on tax haven abuse and could potentially turn to using sanctions against these countries to reduce corporate tax evasion. Were this to happen, the benefits of incorporating in these countries could be lost. I would suggest we're still a long way off from seeing this happen, but it's a scenario worth keeping in the back of your mind.
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The article These 9 Countries Have No Corporate Tax originally appeared on Fool.com.Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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