The United States has the second-highest corporate tax rate in the world at 40%; it's second only to United Arab Emirates' rate of 55%. Moreover, the U.S. corporate tax rate has increased in recent years while rates across the globe have declined — the worldwide rate stands at 22.6%, down from 29.5% a decade ago. Japan, for instance, already has reduced its corporate tax rate to 33.06%, from a high of 52.40%, and plans to drop the rate further to below 30%.This scenario is, of course, frustrating for U.S. businesses and detrimental to the competitiveness of the nation as a whole. (For more, see: Do High Corporate Tax Rates Hurt Americans?)

Given the current atmosphere, what do you think U.S. companies will do? They'll find ways to cut their federal tax obligations. The most obvious way to do this is through deductions and legal loopholes, but parking money overseas in low-tax rate countries is more popular than you might realize. (For more, see: America's Most Outrageous Tax Loopholes.)  

According to the U.S. Public Interest Research Group, more than 64% of Fortune 500 companies have a subsidiary in Bermuda or the Cayman Islands, both of which boast a 0% corporate tax rate. To give you an idea of the magnitude of this situation: In 2010, the Internal Revenue Service estimated that U.S. companies (not just Fortune 500 companies) booked profits in Bermuda and the Cayman Islands that were 16 times the gross national product of those two countries combined. (For more, see: Taking a Look at Tax Havens.)

U.S. companies known for having subsidiaries in tax-free countries include Apple Inc. (AAPL), International Business Machines Corp. (IBM), Citigroup Inc. (C), and PepsiCo (PEP). Upper management for each one of those companies has consistently stated that they’re doing nothing wrong, which is accurate. (For more, see: How Large Corporations Get Around Paying Taxes.)

You can’t blame a company for wanting to cut costs. The solution would appear to be to lower the corporate tax rate in the United States, but with record government debts, that’s not a likely scenario. (For more, see: The U.S. National Spending and Debt.)

Another tactic used by U.S. companies is corporate inversions. This means that a company will buy a smaller company located outside of the United States and then move its headquarters to that location, thereby reducing tax obligations. The U.S. government will continue to fight against these tactics in order to keep business (and taxes) in the United States. (For related reading, see: Difference Between Subsidiary and Sister Company.)

Currently, the biggest tax havens for U.S. companies are Bermuda, Ireland, the Cayman Islands, Luxemburg, the Netherlands, and Switzerland. But that doesn’t mean these are the top countries for low corporate tax rates.

Low End

The countries with the lowest corporate tax rates are the Bahamas (0%), Bermuda (0%), the Cayman Islands (0%), Ireland (12.5%), and Switzerland (17.9%).

The Bahamas doesn't tax profits, dividends or income. It also lacks capital gains, withholding and sales taxes. The only tax requirements are business licensing feesproperty taxes, and import and stamp duties. Most offshore businesses are exempt from business licensing fees and stamp duty. Depending on market cap, multinational corporations pay an effective tax rate between 5% and 15%. (For related reading, see: How are Effective Tax Rates Calculated from Income Statements?)

Bermuda offers no corporate tax rate with multinationals averaging an effective tax rate of 12%. The Cayman Islands offers no corporate tax rate with multinationals averaging an effective tax rate of 13%. These are the lowest averages, which makes them so appealing to U.S. companies.

High End

As mentioned above, the United States has a high corporate tax rate of 40%. It’s interesting that Japan has been battling deflation for two decades and is slashing its corporate tax rate in order to attract more business and fuel growth, while at the same time the United States is in the early stages of deflation (disguised by low interest rates and debt-fueled growth that has led to a record high in the stock market) and is increasing its corporate tax rate. (For more, see: Japan's Strategy to Fix its Deflation Problem.)

Unfortunately, given the high debt load, there is no clear-cut solution. That said, the No. 1 priority should be paying off debt, which will allow for organic growth without a dark cloud hovering over the U.S. economy. (For related reading, see: Top 10 US Economic Indicators.) 

Argentina also has a high corporate tax rate at 35%. It’s currently battling creditors over debt (claiming vulture-like tactics), the falling peso vs. the U.S. dollar (not good for debts serviced in U.S. dollars, and declining gross domestic product growth. It’s another Catch-22. Needless to say, Argentina is not the ideal place to do business right now. (For related reading, see: Where NOT to Invest in Latin America.)

Pakistan also has one of the highest corporate tax rates at 34%. The good news is that it’s estimated to see 4.7% GDP growth this year. In addition to a high corporate tax rate, Pakistan must deal with consistent security concerns, which makes it an unappealing place to do business. (For related reading, see: How Terrorism Affects Markets and the Economy.)

Then there’s Venezuela, which has a corporate tax rate of 34%. This is a country that relies on fossil fuels for 95% of its exports, and oil hasn’t been behaving well lately. Additionally, Venezuela's inflation rate is 63.4%, which is the highest in the world. In Venezuela (and Argentina), reducing the corporate tax rate wouldn’t have much of an impact on the local economy. (For more, see: Is Venezuela Close to Collapse?)

The Bottom Line

U.S. companies always are going to find ways to cut costs. This is capitalism. Despite the United States having the second-highest corporate tax rate in the world, there are deductions, loopholes, inversions, and the opportunity to park money in tax-free countries. And even though the domestic tax scenario isn’t good, the overall environment far better than what you would find in Argentina and Venezuela. This isn’t meant to imply that we should appreciate what we have and move on; it’s more along the lines of appreciating what we have while continuously looking for solutions that can improve the situation. (For more, see: Pros and Cons of Offshore Investing.)

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