US com­pa­nies warn tax avoid­ance crack­down will hit earn­ings

The Pak Banker - - COMPANIES/BOSS -

A global crack­down on tax avoid­ance has forced a surge of warn­ings by multi­na­tional com­pa­nies that higher pay­ments are set to hit their earn­ings. A Fi­nan­cial Times anal­y­sis of com­pany fil­ings re­vealed that more than twice the num­ber of US com­pa­nies alerted in­vestors to the risk of higher taxes in their 2015 ac­counts than a year ear­lier. Nearly a fifth of the 136 US com­pa­nies sound­ing an alert were tech­nol­ogy com­pa­nies such as LinkedIn and Ya­hoo .

Tax struc­tures that were once used to max­imise re­turns to share­hold­ers risk be­com­ing a li­a­bil­ity as gov­ern­ments close loop­holes to raise rev­enues and re­spond to pub­lic anger over ag­gres­sive avoid­ance. The tech sec­tor in par­tic­u­lar has been the fo­cus of pub­lic out­rage, with Google and Face­book ear­lier this year spark­ing con­tro­versy in Europe over the low rates of tax they have been pay­ing.

The OECD es­ti­mates up to $240bn in tax is lost to avoid­ance ploys such as the book­ing of prof­its in tax havens. Last year it drew up a plan to stop the prac­tice known as "base ero­sion and profit shift­ing" (Beps). Di­a­geo warned in July that some of its pro­pos­als would have a ma­te­rial im­pact on a num­ber of UK com­pa­nies. Nearly £1bn a year will be shaved from cor­po­rate earn­ings in the UK alone af­ter the gov­ern­ment an­nounced last month that tax breaks on in­ter­est costs would be cut.

Other global anti-avoid­ance ini­tia­tives in­clude a crack­down on the "dou­ble Ir­ish" struc­tures used to shift cor­po­rate prof­its from low-tax Ire­land to a zero tax coun­try such as Ber­muda. Coun­tries such as France are also look­ing to force tech com­pa­nies to pay tax on busi­ness from for­eign-based en­ti­ties.

A third of the US warn­ings came from com­pa­nies in the phar­ma­ceu­ti­cals, in­surance and as­set man­age­ment sec­tors, in­clud­ing pri­vate eq­uity busi­nesses such as KKR, Black­stone and Car­lyle. Other com­pa­nies re­fer­ring to tax risks in their ac­counts in­clude Crocs, the footwear com­pany, Sotheby's, the auc­tion house, Hy­att Ho­tels and TimkenS­teel Cor­po­ra­tion.

De­spite warn­ings that ad­verse tax changes or au­dits could ma­te­ri­ally in­crease com­pa­nies' costs, in­vestors have been slow to ap­pre­ci­ate the po­ten­tial risks, ac­cord­ing to Fiona Reynolds, manag­ing di­rec­tor of PRI, a UN-backed net­work of fund man- agers pur­su­ing sus­tain­able in­vest­ment strate­gies. She said: "I still think that in­vestors are not ask­ing the right ques­tions. They are in early stages of un­der­stand­ing the is­sues." Euro­pean com­pa­nies have also stepped up their warn­ings on tax is­sues.

New re­port­ing rules were high­lighted as a po­ten­tial threat by com­pa­nies in­clud­ing Syn­genta, a Swiss agribusi­ness. It said greater trans­parency on the al­lo­ca­tion of tax­able prof­its, "may lead gov­ern­ments to re­strict or dis­al­low cur­rently le­git­i­mate and ac­cepted tax plan­ning strate­gies".

Just eight out of the 29 tech com­pa­nies cit­ing Beps-re­lated risks had is­sued sim­i­lar warn­ing in the pre­vi­ous year. Even so, some com­pa­nies have long noted the pos­si­bil­ity of tax prob­lems in the "risk warn­ings" sec- tions of their ac­counts. Google has in­cluded a warn­ing that tax out­comes could "ma­te­ri­ally" af­fect fi­nan­cial re­sults in its ac­counts for at least the last 10 years.

Price­line, the on­line travel com­pany, has ex­panded its tax warn­ings six­fold in the last five years. Its lat­est ac­counts use 2,700 words to set out a se­ries of chal­lenges, in­clud­ing a claim by the French tax au­thor­ity that its sub­sidiary Book­ has a per­ma­nent es­tab­lish­ment in France.

It said it in­tended to con­test an as­sess­ment from the French tax au­thor­ity in De­cem­ber that the com­pany owed €356m, mostly in penal­ties and in­ter­est. But it warned that ad­di­tional taxes or the need to mod­ify its busi­ness prac­tices to re­duce its ex­po­sure had the po­ten­tial to have a ma­te­rial im­pact on its busi­ness.

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