The significant year for Marikina was in 1887 when shoemaking started to flourish. Back in the good old days, the Sapatero Shoe Company made shoes, sold the shoes, and paid the government taxes on the profit. A hundred years later, the company started selling shoes to stores in Hong Kong. The company paid taxes to the Philippine government on the profits.
Two decades later, “SapShues” has closed its Philippine factory and is now making its products in Barbados, Bulgaria, and Paraguay. The original Philippine corporation—Sapatero Shoe Co.—is a dormant shell and the company is now legally domiciled and headquartered on an island in the Caribbean. Its HQ basically consists of a desk, a computer, and several bank accounts.
While following all national laws to the letter, its accounting firm—Sums of Anarchy—has reduced the income tax liability to a rate lower than its former bookkeeper paid in the Philippines. The nations of Barbados, Bulgaria, and Paraguay are happy with the corporation investing in their countries, providing employment, and paying income taxes. But one of the reasons that SapShues is there has to do with a lower tax rate than having their factories in Germany, Brazil, or the United States.
Both personal and corporate tax laws around the world are like a five-kilo bucket of worms, sort of connected but all different. A citizen of one country working in another can be forced to pay taxes on the same income in both countries. A corporation may be subject to the same “double-taxation” but only when the income is returned to the home country. A company that is incorporated in country ‘W’ could be subject to the income of its operations in country ‘X’, ‘Y’, and ‘Z.’
Tax laws are critical in corporate decision making in the 21st century. There is a big difference between setting up operations in Ireland or Cyprus with an income tax rate of 12.5 percent or in France (32 percent) or Brazil (34 percent).
But never fear. The G-7 countries, in the interest of “fairness”—which now has as many definitions as “gender”—has a solution. It’s called the “global minimum corporate tax rate.” “Finance ministers from the world’s richest countries have agreed to back a corporate tax rate of at least 15 percent, to stop tax havens competing to attract tech giants like Amazon and Facebook.”
“The global minimum tax would be levied only on the world’s 100 largest and most profitable companies.” They forgot to add to that sentence…“until we make it law for every company.” Alex Cobham, chief executive of the Tax Justice Network (TJN), slammed it as “very unfair” and said the figure should have been “at least 25 percent.”
Here is the rationale: “There is significant corporate tax revenue at stake in all this; it is estimated that governments miss out on between $200 billion and $600 billion in revenues each year,” according to the Atlantic Council.
That $200 billion to $600 billion is money, profits that the corporations retain. They spend that money in large measure on expansion for things like factories, research and development, and on expensive liquor and fancy food. After all, it is their money. But TJN says that the billions in new tax taken would be used by governments to “eradicate poverty.” Assuming Facebook Advertising, Apple, and PayPal stay and pay twice as much tax in Ireland, maybe soon Dublin’s streets will be paved with gold. The Philippines trying to attract foreign investment through tax incentives not so much.
It is great when the rich make the rules for everyone else.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.