Posted on: 28 Apr, 17
After some time away from debating Trump, Oury and Clark are back at it! However, is Oury starting to warm to some of America’s 45th President’s ideas?
Excellent question my friend. For a long time now the US has had an extremely high tax rate relative to the rest of the world. This made more sense before globalisation and the internet... when companies couldn’t operate with their accounting out of Bahamas, their management in Dublin, manufacturing in China, IT in Bangalore and their call centre in the Philippines. You simply couldn’t move the information and data from one place to another efficiently. So if you wanted to do business in the biggest market in the world – namely the US of A… there was a price to this, and you needed to set up a business there and suck up the tax rates.
Things really changed with the internet and cheap international travel, didn’t they?
In so many ways! Suddenly location became less important – and what has happened… well… as we all know US corporations have spent a lot of time (and indeed money on clever advisors) setting up their global structures to minimise tax. Apple, Starbucks, Amazon – all of them have worked very hard to avoid having to handover their 39% (this is the average federal plus state tax) to the US Government. They base themselves in places where they pay 20% or less… this has caused two problems: build-up of offshore money, and corporate inversions.
You mean they have not brought the cash back to avoid it getting taxed and have put their holding companies outside of the USA? So that could be the primary place they are taxed?
Basically yes – let’s not get lost on the point – but yes you could put key IP – your brand, your formulas, your designs in offshore country X with 0% tax and then charge the worldwide for this value…
Got it. But hang on, you said corporation tax was 39% in the US – that doesn’t sound that high? I mean the higher rate for individuals in the UK is 40- 45% plus national insurance.
Yep, but on a worldwide level, a corporate rate of 39% is very high… I mean take a look at the chart to see the rates of its neighbours!
The average of the EU is 22.5%! And the UK is now sitting at 19% and Ireland at 12.5%!
Yeah but gosh does it rain in Ireland…
This is true – but look at the US, the American Dream is all about making money… but the tax rate is ridiculously high!
Okay I get it, so have others been bringing their tax rates down?
Well certainly the UK has, check this out!
The UK’s corporation tax rate in the early 80’s and before was over 50%!! No wonder we had some trouble back then with our economy… You can see here the correlation between tax rates and foreign direct investment.
Meanwhile the US corporation tax rate hasn’t changed much over the last 30 years while globalisation has kicked in. So actually, when you look at it – the US hasn’t kept pace with what’s going on the world – and actually I think Trump is right – they are long overdue a reduction.
Sorry Oury, did you just say you think Trump is right?!
I did – it’s sort of ironic as he is a nationalist, but part of his nationalist approach means he needs to get the big US business back in America paying all their tax and doing as much stuff as they can on home turf – not in Ireland, Luxemburg, HK or even the UK. And that means dropping tax… and yes – it’s a sensible move. Things have got very out of hand. When it gets to the point that the UK and many other governments are attacking all these big American companies for immoral tax practices, they weren’t avoiding tax they just were trying to get out of paying 39% in America!
And that’s true Oury, the moral shift has really come. It just isn’t okay anymore to not pay tax where your business is, or to be clever by putting things offshore… Things have changed a lot - 10 years ago, paying a lot of money to clever advisors to come up with efficient offshore tax structures was just normal! IF you had the money to pay the fees, and the income to justify the stress and complexity of administering things. Now you just don’t do it. You put yourself up to scrutiny and criticism from customers, investors and the tax man. Companies have been taking the micky in my opinion.
They have in many ways, and in other ways it’s confusing as these are the rules that are there. It’s fair enough to use the rules to play the game as best you can. Really globalisation meant the rules don’t work anymore and they need to change… which is what BEPS is all about – but that’s a long topic for another day.
YEAH! Get back to Trump… what’s he up to, and what does it mean?
Well the facts is… what you want to do and what you are able to do, are two entirely different things
Yes! He’s got to get past Congress… and that means that all sorts of “deals” need to be done on so many levels for this to go through. But let’s say he gets there. What does that mean for everyone...?
Well first most businesses (by volume) are not true corporates but various forms of “look through” entity (which basically means that the company doesn’t pay tax, but the owners do depending on their personal circumstance - the money flows through the company into the pockets of the owners and taxes them as individuals). Meaning it is really only the largest corporations that will benefit, and much of the commentary also suggests that companies heavily into real estate will benefit most from Trump’s proposals…
Spooky, doesn’t he own some large corporates heavily invested in real estate…!?
Well quite… it is likely to be the ultra-wealthy that will benefit most, as they will be able to access their offshore cash at a low tax rate. Most “average” citizens/businesses do not have international holding structures.
That all being said though, the headline rate of Corporation Tax does have a big effect on people’s decisions. Most of the time the people I deal with making the decisions aren’t tax experts, and really only look at headline rates, rather than the real rate. I think it will have a positive impact on people’s thoughts about what they set up and put in the USA.
Very fair point Clark and I agree – but strangely in the USA this is not born out in reality like it is in the UK. Normally when the tax rate goes down, perversely you get more tax back because more people come to trade, and less avoidance. But in the USA this isn’t reflected in history. Tax cuts in 2001 and 2003 during George W Bush’s administration did not jump start growth. Neither did Obama-era cuts. Yet in 1990, when President George HW Bush raised taxes, gross domestic product growth went up for five years.
Gosh how strange! So basically America can’t afford to do it. But it is needed in some ways because the very big companies which are paying corporation tax have caused chaos avoiding tax in the world…?
Spot on Clark. More than that, we haven’t talked about state taxes in the US, which are on top of federal taxes. We have taken an average across the US of both which is 39%. I think it’s actually fair to say that the result of this headline tax is that people don’t like it and find other ways… If you look at this graph, the result of the corporation tax rate is that the effective rate (which is using offshore and look through structures) is now as low as the UK
So wait – what?? Are you saying that they already have lower tax than the UK…?
Yes according to this graph because so many companies are ‘look through’ and don’t pay tax when you average it out, the overall effective rate of all companies is really low!
That is bonkers! So why bother then? Surely this will mean that the effective rate would get even lower…
Yes it could - Why bother indeed! Why bother having a tax rate people avoid and use other structures which have their own issues – and all end up at the same place! Give them something reasonable and simplify the situation, the set up, and indeed the world. Stop the anger going on in the UK and Europe about tax avoidance…
Don’t you mean evasion?
No I don’t. They have become the same thing and it is high up on the political agenda of the UK and Europe too. Make tax fair, and make it simple, then we will pay it and not come up with absurd clever tactics to undermine countries tax income – which is required to service the business that are existing and trading within them.
So you like Trump now then?
I don’t think it’s a matter of liking him or hating him – who knows who he is – it’s a question that he says some things which are ridiculous and offensive to a good majority of people. BUT there are some things he is right about… and at the end of the day, the high corporation tax rate in America has caused too much money to be spent on clever accountants and lawyers to come up with ways to mitigate it. This then ends up creating these complicated structures that just don’t really reflect the reality of what seems fair… like Starbucks never paying its fair share of tax in the UK! It is this that is causing huge upset and anger by smaller businesses and people who can’t do this - who can’t play the system. In that sense, a balance needs to be restored so that things become fairer for everyone. Frankly we all know it should be the other way around, big corporations should pay more tax than small ones, but to get there, it may get worse - before it gets better.
We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.
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Well, there we go Trump is actually going to try and push for a 15% tax rate in the USA. I wonder what that‘s going to do to world order?