On a conservative estimate, a third of the world’s wealth is held offshore, with 80% of international banking transactions taking place there. More than half the capital in the world’s stock exchanges is “parked” offshore at some point.” The Guardian, 28 December 2010
You could be forgiven for thinking that it is the Cayman Islands- after all its inhabitants are subject to no Corporate Tax, Income Tax, Capital Gains Tax or VAT. For those being paid in Japan, potentially facing a 40% tax bill on their earnings (not even including residential taxes!), this would seem almost laughable, and not in a good way. Your response to the above question would also have been met with understanding if you’d have said Bermuda or the Bahamas, who also have an effective tax rate of 0%. This is however only half of the answer.
Tax rates do vary dramatically depending on which country you live in. The accountancy firm Price Waterhouse Coopers (PWC) has crunched the numbers for the G20 nations. For each country, they calculated how much a high earner on a salary of $400,000 (£240,000) in 2013, with a mortgage of $1.2m (£750,000), would have left after all income tax rates and social security contributions. They assume this person is married with two children, one of them aged under six.
These are their findings. In each country, the wage earner takes home the following proportion of his or her salary.
- Italy – 50.59% (takes home $202,360 out of $400,000 salary)
- India – 54.90%
- United Kingdom – 57.28%
- France – 58.10%
- Canada – 58.13%
- Japan – 58.68%
- Australia – 59.30%
- United States – 60.45% (based on New York state tax)
- Germany – 60.61%
- South Africa – 61.78%
- China – 62.05%
- Argentina – 64.02%
- Turkey – 64.64%
- South Korea – 65.75%
- Indonesia – 69.78%
- Mexico – 70.60%
- Brazil – 73.32%
- Russia – 87%
- Saudi Arabia – 96.86% (so you take home $387,400 out of the $400,000 salary)
People are often keen to consider ways of reducing their tax liability as money saved is the same as money earned, and any money that you do not have to pay to the tax man is extra money in your bank account. Because of this it might make sense to consider the tax system of the country in which you live- paying particular attention to the current rates outlined by the tax authority. However, considering that our current financial system facilitates the borderless flow of capital across the globe, often digitally with a few clicks of the mouse, it would be more prudent to take a more global approach to tax planning. Why not go shopping for tax rates? You wouldn’t buy the most expensive pair of shoes just because you were standing in the shop at the time. You, as a consumer, a customer of a financial institution and a tax-paying citizen have the right to choose how and where you bank, and how and where you pay tax in accordance with the tax law of that locale.
Lets look at a big multinational for some pointers on reducing tax liabilities. Apple (NASDAQ:AAPL) probably have at least one of their products inside your pocket, office or home. We would receive little opposition if we were to refer to them as a “profitable” business. Now, despite having operations worldwide they are an American company. America currently has the highest Corporate Tax rate in the world at 39.1% (2014).
“We not only comply with the laws, but we comply with the spirit of the laws,” said Apple CEO Tim Cook earlier this year in a Senate hearing where he had to answer questions about Apple’s taxation planning. At present, Apple currently has $140 Billion in cash parked overseas, so we cannot help but presume that Cook is a fan of irony. Corporate tax can be complex (the complexity growing exponentially in-line with the scope of that particular businesses overseas operations) and a company’s corporate tax liability will change dynamically each year, but at this point in time it is estimated that Apple does not in fact pay 39.1% each year in taxes…..
A U.S. Senate probe last year revealed that Apple had sheltered tens of billions of dollars in profits from tax by using Irish companies that had no tax residence anywhere. Apple in the United States entered into deals with the Irish subsidiaries whereby the Irish units received the rights to certain intellectual property that were subsequently licensed to other group companies. This arrangement ensured almost no tax was paid in countries such as Britain or France and helped the group achieve an effective tax rate of just 3.7 percent on its non-U.S. income last year, its annual report shows – a fraction of the prevailing rates in its main overseas markets.
Most multinationals spend a phenomenal amount of money on tax planning as the expenditure is perversely dwarfed by the tax savings (they probably expense the Tax Specialist too!). Routine tax avoidance structures such as the “Dutch Sandwich” and the “Double Irish” which effectively take advantage of differences in the tax rates of different jurisdictions in a form of legislative arbitrage are coming under heavy scrutiny from regular tax-payers and cash-strapped governments.
The following documentary by VPRO called The Tax Free Tour (2013) illuminates common tax avoidance practices exercised by large corporations in their effort to minimize costs and increase profit margins. It is entirely possible that you will pay more tax on your earnings this year than Starbucks does.
In closing, by way of an answer to the question of “Who Has The Lowest Tax Rate In The World?”, we are able to answer with conviction that the lowest tax rate is payable by all of those (corporation or individual) who seek to arrange their affairs in such a manner as to be compliant with the laws of the governing tax jurisdiction in which they are legally owing to pay tax….
– Apple 8-k Investor Report, http://investor.apple.com/secfiling.cfm?filingID=1193125-13-298914&CIK=320193
– EU investigates tax rulings on Apple, Starbucks, Fiat, Thomson Reuters, June 11th 2014
– Corporate and Indirect Tax Rate Survey 2014 | KPMG
– Tax Breaks for Apple and Starbucks Investigated by E.U, NY Times, June 11th 2014
– PWC World Tax Summary, 2014