November 1, 2021 | Written By - Reema Gupta '22
Some of the United States’ biggest companies, like Apple, Nike, Microsoft, and even Pfizer, have revenues nearing 12 figures. However, they usually end up paying only about $6 billion, in the case of Apple, to the United States through corporate taxes. However, here is the issue: the United States tax rate on exported items and domestic sales sits at 21%, meaning that 21% of each company's profits is taxed.
So how are these multi-billion dollar conglomerates saving billions of dollars in profit? The answer is that they milk legal loopholes for all their worth. One of the biggest legal loopholes is off-shore banking, otherwise known as “tax havens.” In certain countries, the corporate tax rates are just half of the US’, nearing 5.5%. If companies store their profit in those areas, they would only pay 5.5% in taxes instead of 21%, or something higher.
There are multiple pros and cons to off-shore banking. One of the positives is that it actually helps countries that harbor off-shore banks, many of which are developing nations. Even if their corporate tax rate is low, they hold trillions in cash that is all taxed and helps boost their overall GDP. Apple has nearly $125 million in Ireland alone, for example, and the total amount of money in off-shore accounts is just over 1.3 trillion dollars. Off-shore banking does help countries by generating revenue.
On the other hand, it hurts the domestic economy. In the US in particular, because larger corporations will deposit their profits off-shore, smaller corporations will have to face higher tax rates. The US and many other governments rely on corporate taxes to fund a majority of their spending, meaning that if more and more companies go off-shore, smaller companies are left to front the money required to continue spending.
That’s why the G20, a group of leaders from 20 of the wealthiest countries, have sought to create a global corporate tax minimum of 15% in tandem with the Organization for Economic Co-operation and Development. In addition, they propose that companies making over a 10% profit or those with an annual turnover of a little over $20 million must be taxed on profits from sales within a certain nation. Just this weekend, all G20 leaders have agreed to formally endorse the proposition. As of today, more than 140 countries have agreed to commit to this policy. But there are several notable holdouts. Ireland is one, being home to some of the biggest off-shoring companies. Ireland itself received nearly $12 billion dollars from corporate taxes alone. But despite lobbyists, Ireland did join in on the agreement eventually because of relations with the US and the majority of other countries who are on-board with the bill.
It’s important to note that while this bill will decrease off-shore banking in the long-term, countries that rely on corporate taxes will not be hurt immediately and they will still have a steady income. Multinational corporations, under this legislation, must pay tax on products they sell within territories. Meaning, global conglomerates who previously used nations with cheap corporate taxes will now have to pay for any revenue they make in that area. Those countries will still have a regular income stream.
In conclusion, this crack-down on off-shoring is not only historic but quite controversial. Because western countries are heading most of the deal, for several countries, like Ireland, whose economy relies heavily on corporate tax revenues, it can feel like they are being pressured into deals instead of willingly signing. This would not be surprising as the G20 has dominated the economic sphere for years. But, for now, this tax seems to be rapidly heading towards becoming a reality and I, for one, am excited to see what happens next.
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