The end of corporate tax havens?

Corporate tax havens are slowly heading for extinction after the EU officials ruled them unfair.

766_Markets-634

American companies "are more profitable than ever", says Ben Levisohn atBarron's partly due to how little tax they are paying. The corporate tax rate in America is among the highest in the world, at 39%. But the actual rate paid by companies has fallen to 29%, from 35% in 1990. And some pay far less: cruise-ship operator Carnival has paid an average of just 1% of income in taxes in the past ten years.

Why the disparity? America only taxes companies on their domestic earnings, so a firm's tax bill can legitimately be lowered by shifting profits overseas,where tax rates are lower. "Hence the relentless rise of tax planning as a core part of multinationals' business plans," says The Economist.

The OECD think tank estimates that this may be costing national exchequers "as much as $240bn a year, or 10% of global corporate income-tax receipts". But now, a backlash may be imminent. "Every government is looking for revenue," David Kostin of Goldman Sachs tells Barron's. That poses "a risk to companies that have been paying low taxes".

In particular, many firms have become experts at arbitraging the European Union's tangle of different national tax regimes. But last week, the EU's antitrust officials ruled that tax breaks that some EU members had granted to Fiat Chrysler, Starbucks and other multinationals constituted unfair state aid. These arrangements "shifted profits from one company to another in the same group, with no valid economic justification", EU antitrust chief Margrethe Vestager told The Wall Street Journal.

The rulings showed that "artificial and complex methods endorsed by tax rulings cannot mask the actual profits of a company, which must be properly and fully taxed". Now regulators are looking into hundreds of tax agreements across the EU, including investigations involving Apple in Ireland and Amazon in Luxembourg.

Although the firms involved say they have done nothing wrong, it's clear that corporate tax havens "are gradually... heading for extinction", says Edward Hadas on BreakingViews.com. Some firms are already changing their practices. Higher taxes will put margins under pressure and opportunities to cut costs are limited. Hence future earnings growth may be weaker than expected which is likely to be bad news for the historically expensive US market.

Recommended

Inflation looks likely to take off this year – but there’s one key risk
Inflation

Inflation looks likely to take off this year – but there’s one key risk

With the world’s governments spending money hand over fist, inflation looks certain to take off at some point. But China could change all that. John S…
19 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021
A beginner’s guide to inflation – everything you need tko know
Inflation

A beginner’s guide to inflation – everything you need tko know

One of the most frequently mentioned topics in the news these days is inflation. But what exactly is inflation and how does it affect the economy and …
18 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021