136 Countries Agree To Global Minimum Corporate Tax Rate!

Hey guys, welcome back to the channel!

So in this video, we have some interesting news to me. I guess probably a lot of people would zone out at the thought of corporate tax rates, but to me, we have some interesting news. Because last Friday, 136 countries agreed to set a minimum corporate tax rate of 15%. Personally, I actually think this is a really important step in the right direction of potentially eliminating tax havens. So let's talk about what's being put forward, how it might work, and who the winners and losers will be. All right, let's get started.

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So yes, last Friday, 136 countries agreed to set their minimum corporate tax rate at 15%. The idea is obviously to try and stop corporate tax havens. This is essentially where a small country, usually with no large industry or natural resources, deliberately lowers their corporate tax rate to undercut the surrounding countries in order to attract more international businesses to set up shop in their country.

So the idea is that, you know, even though the corporate tax rate gets lowered, the country still ends up with more tax revenue total, as more companies start operating in their country. And then another effect is that because more companies are coming to your country, this also creates fresh new jobs for your citizens. So you know, it sounds like a smart plan, right?

Well, obviously it works for the tax haven, but it is extremely frustrating for all the other countries. I mean, they're out there trying to do the right thing. They're trying to make corporations pay their fair share of tax, but instead, the corporations just funnel their profits to the tax havens. This means obviously less tax revenue for the country that's trying to do the right thing and ultimately it means the citizens of those countries lose out because of what that tax revenue could have provided for them.

For example, I live here in Australia. We have a 30% corporate tax rate. You know, Facebook, a global company, shovels pretty much all of its Australian revenue to Singapore to avoid paying tax. In fact, Facebook made 712.7 million dollars in ad revenue within Australia last year, but they only paid 20 million in tax. So, aka, only 2.8% of their Australian ad revenue went back to Australians through corporate tax.

Why? Because they shoveled 559 million to their Singaporean subsidiary under the guise of resale of advertising inventory. Now, the way they structured it annoyingly is perfectly legal, but obviously the reason for doing this is to avoid tax because Singapore only has a 17% corporate tax rate. And that's really annoying because it means that Facebook basically gives no money to the Australian government, no money to healthcare, to roads, to services, to defense. Yet, it gets to operate here like all the other Australian businesses and it gets all the same privileges. It just doesn't seem very fair.

But last Friday, as I said, there was a really big step taken to start to reduce the effect of tax havens. We had 136 countries agree to set a global minimum corporate tax rate of 15%. And yes, you can argue no, it should have been higher, and I'd probably agree with you, but in all honesty, I still think this is a really good first step. Because it's quite a big effort to get that level of cooperation on such a large issue as this.

For example, many tax havens have actually agreed to these terms: companies such as Ireland, Singapore, the Cayman Islands, Luxembourg, the Netherlands, Bermuda, etc. So these are all small countries implementing the same tax haven tactics. For example, Ireland is considered one of the low tax hubs of Europe. In 2003, they set their corporate tax rate to just 12.5%, beating every other country in close proximity. And for Ireland, it's actually worked wonders.

See, before this, Ireland was just viewed as a bit of an agricultural backwater with not a lot going on. But once they changed the tax laws, you had thousands of major U.S. companies – we're talking pharmaceuticals, the Googles, the Facebooks, etc. – they're all flooding to set up shop in Ireland. This created more tax revenue for Ireland and also more jobs for their citizens. Overall, smart call for them, but it also screwed over all the other European countries trying to do the right thing. Those countries ultimately lost out on tax revenue because corporate profits were shoveled to Ireland instead.

But now this effect should be vastly reduced. We have 136 countries coming together and agreeing that a minimum of 15% corporate tax will be charged. And yes, I know as I said, 15% isn't a huge tax rate, but as I said before, it's an important step in the right direction.

Because before this, these tax havens were really in a race to the bottom. For example, between 1985 and 2018, the global average corporate headline rate fell from 49% to 24%. And by 2016, over half of all U.S. corporate profits were booked in just seven tax havens: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. That's astonishing!

And what do you notice about all these places, right? They're all tiny, without the space for, you know, huge population growth or major industry to develop. So for these countries, it really just is a battle to continue to undercut the next tax haven, which unfortunately continues to drive the corporate tax rate towards zero, allowing companies to avoid paying their fair share of taxes.

And because some of these countries really do rely on being tax havens, some people are now asking the question: you know, will the 15% minimum corporate tax rate actually solve the problem of tax havens? Because, of course, the tax rate is an incentive, but countries can also provide other financial incentives to try and lure more business into their borders. They could, you know, they could provide land at a good rate, they could offer a financial incentive for jobs created, they could provide an infrastructure grant, or they could set out terms to be able to achieve tax credits.

I mean, in these instances, the corporate tax rate may very well be 15%, but companies will still be able to save a lot of money in other areas, still courtesy of the government. I mean, if that happens, then the effective result could be what we already have now: companies will still favor operating out of the tax havens, the government continues to give them large financial incentives. It's just not in the form of a low tax rate.

So it's an interesting debate, and this is really only the start. So we'll have to see what happens over the next year or two in terms of what happens next. This article notes the accord will go to the Group of 20 leaders. Agreement there is likely since all 20 members signed Friday's deal. Implementation then moves to the individual countries.

And that's the thing, right? It then goes to the individual countries to actually get this done. So you can imagine that has the potential to take some time. The article also notes the tax on earnings, where companies have no physical presence, would require countries to sign an inter-governmental agreement during the course of 2022, with implementation in 2023.

So it sounds like this thing will likely be an issue throughout the next year, with implementation probably the year after. But you know, I'd still like to see this being done, and I think it's fair, and I think it's the right thing to do.

And you know, I'd love to hear from you guys. Do you think this will work? Do you think countries will find a way around it? Do you agree that tax havens should be dealt with, or you know, do you believe that countries should be allowed to do what they like?

I mean, maybe you are from Ireland or from Singapore, and maybe the idea of tax havens has actually benefited you in your own life. So I'd love to hear different perspectives, opinions down in the comments section below.

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And thanks always for the support, guys! If you're interested in how I go about my investing, profitable links down in the description below. Active investing, passive investing, whatever you want to learn about, it's over on Profitful. Full long in-depth step-by-step courses that will help you learn about how to implement either the passive investing strategy or the Warren Buffett value investing strategy. So if you're interested, links in the description.

That's it from me, guys. Thank you very much for watching, and I'll see you guys next time.

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