Tax Reforms are Coming, Who is Most at Risk? (Round 1)

Let me begin with a disclaimer: I am neither a tax expert nor a financial analyst. I am not even close to being either one. I am simply writing about tax avoidance in the context of sustainability. Therefore, the analysis here is to contribute to the discussion on tax avoidance as a sustainability risk to companies and should not be taken as investment advice.  

 

Photo: Channel 4 news UK

 

In the wake of the European sovereign crisis, multinational companies have faced increased pressure to pay their share of taxes from revenues earned internationally, pointing to an emerging regulatory risk among such companies in the next few years, if not sooner. Already, tax regimes in Europe are changing with a two-year tax reform initiative headed by the OECD. These reforms will essentially make it more difficult for the companies to reroute income and avoid tax receipts in countries where they make their money. Recognizing the future regulatory risks, Facebook committed to stop using Ireland to reroute its advertising sales from the UK, and recognize these sales as UK revenues.

Why is Tax Avoidance an ESG Issue?

Simply put, tax avoidance deprives countries, rich or poor, developed or developing, of funds for public spending and welfare. Tax avoidance schemes are workarounds of inconsistencies in the different tax regimes, but they are legal and until recently, tolerated by many developed countries. Tax avoidance is legal, but is it ethical? In an era of strained welfare and social services, high income inequality in the US and migrants needing assistance in Europe, even the rich world could certainly use more money.

Risks to Companies

Impending tax reforms in Europe suggest that tax avoidance schemes will become less tolerated and companies will be forced to honor tax rates in countries where they generate revenues. This will impact profitability. In addition, no company wants to be labelled a tax cheat and risk customer backlash.

As an experiment, I am looking into eight US-domiciled companies whose products and services I use extensively, and determine which among the eight face the highest risks from tax reforms. Due to the complexity of this issue, as well as the lack of publicly-available disclosures, I simplified my analysis by using three indicators:

  • 10-year US tax rates (Note: the US statutory corporate rate is 35%)
  • US taxes (federal + state) paid as percentage of operating income (5 years)
  • Foreign taxes paid as percentage of international revenues (5 years)

The companies I am looking into are Apple, Tripadvisor, Expedia, Priceline Group, Amazon, Facebook, Google/Alphabet, Ebay. All companies are incorporated in the US, and except for Apple, which was incorporated in California, all other seven companies list Delaware as their jurisdictions of incorporation.

Next time: Risk based on 10-year tax rates. BRB.

 

 

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