As the calendar ticked over to 2014, two thoughts crossed my mind, as they seem to do every year at this time. One is that it's time to start things fresh and new, and two is that it's time to get ready to do my taxes.
That's right: Tax day, America's necessary evil, which helps fund our government, our military, Social Security, Medicare, education and transportation, is just three and a half months away.
As is fairly common on a year-to-year basis, there are quite a few tax code changes coming your way in 2014, especially concerning the implementation of Obamacare. Yet, all things considered, our top marginal tax rate of 39.6% is no match for the world's highest marginal tax rates found in Aruba, Sweden, and Denmark, according to a study conducted by CNBC and KPMG, which range between 55.4% and 58.95% at the top marginal bracket. With the exception of a few select high income-tax states in the U.S., we have it made relative to the rates throughout much of Europe.
There's another side to this story
However, there's another side to worldwide income taxes that we haven't looked at yet. In November we examined that CNBC/KPMG study of the world's highest income-tax countries, but we failed to look at countries that have absolutely no income tax.
Today, we're going to do just that by examining a 2012 KPMG study highlighted by CNBC that identified 10 of its 114 surveyed countries where citizens pay zero income taxes. Keep in mind that countries that choose not to collect income taxes still have other methods of generating revenue, but zero-income-tax countries can also, potentially, offer unique investment opportunities for investors.
In no particular order, the 10 countries with no income taxes are:
- United Arab Emirates
- Saudi Arabia
- Cayman Islands
- The Bahamas
Notice a trend?
With the exception of Brunei in Asia, this entire list of income-tax free countries is dominated by Middle Eastern or tropical tourist destinations that rely on essentially two factors to help generate revenue. For the six Middle Eastern countries and Brunei, it's oil and natural gas deposits that contribute to a significant portion GDP, while the Bahamas, the Cayman Islands, and Bermuda rely on tourism and the extremely high living costs to drive wealthy individuals into their country.
In many cases, however, oil and gas revenue and tourism aren't enough to keep the economic hamster on its wheel. Although these countries don't directly tax their citizens with an income tax, there are other forms of revenue collection.
Many countries, for instance, require citizens to contribute to a national social security fund while also requiring employers to make contributions on behalf of their employees. You'll find this practice in place in Kuwait, Oman, the Bahamas, Saudi Arabia, and the United Arab Emirates, just to name a few.
Another trend you'll notice within these countries, especially the Middle East, is a rising number of foreign workers. The attraction of paying no income taxes, and in some cases avoiding taxes levied only on country nationals, lures foreigners in droves to these countries, especially when it comes to working in the highly lucrative energy business. Because foreigners are often willing to work for lower pay than citizens are, it could create an unemployment issue for current citizens or a tax burden for the Middle Eastern countries down the road.
How can this data help you invest better?
As an investor looking at this data, you might find that the first thing that stands out is just how important oil and natural gas production is to the Middle East. In other words, this region will stop at nothing to sustain production in order to finance infrastructure improvements and social projects as needed. This means oil and gas companies that have collaborations throughout these countries could be liquid gold!
A few names that come to mind here are France's Total (NYSE:TTE), the United States' Chevron (NYSE:CVX), and Netherlands-based Royal Dutch Shell (NYSE:RDS.A). Total, for instance, is involved in oil production in Iraq, Iran, Kuwait, Qatar, Oman, and the UAE. Some of its assets are wholly owned ventures, while others are partially owned ventures, as in Qatar and Oman. Both Chevron and Royal Dutch Shell boast project interests in Iran, Iraq, Kuwait, and Qatar. All three companies boast worldwide diversification and should derive somewhat steady cash flow from this region for decades to come.
Alternatively, a unique way to take advantage of a growing tourism presence in the Bahamas, Bermuda, and the Cayman Islands is through either Royal Caribbean Cruises (NYSE:RCL) or Norwegian Cruise Line (NYSE:NCLH). There are few cruise liners that service Bermuda, let alone all three countries, but Royal Caribbean and Norwegian are the lone two. With the U.S. economy showing strength in the third quarter with GDP growth up a robust 4.1%, I wouldn't be surprised to see vacationers opening up their wallets with ease this coming summer, which would be a big bonus for both cruise lines.