US companies warn tax avoidance crackdown will hit earnings
Investors alerted to risks of higher payments as crackdown closes loopholes
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 managers 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” sections 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 Booking.com 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.
Many other tech companies are vulnerable to similar challenges because the businesses have typically booked their sales in Ireland, severely limiting the taxable profits they report in many other countries. Under pressure from the OECD, Ireland has promised to scrap by 2021 the quirk in its tax rules that allowed companies to exploit the different definitions of residence in the US and Irish tax codes underpinning the double Irish.
The companies warning investors about these changes include j2 Global, a provider of internet services, EMC, a computer data storage company, SanDisk, a data storage company, Synopsys, an electronic design automation business, Nuance Communications, a voice recognition company and LinkedIn, the social network company.
The UK’s “diverted profits tax” — a 25 per cent tax on contrived arrangements introduced last April — has also been cited as a potential risk by tech companies including LinkedIn, Facebook, Computer Sciences Corp and Qlogic.
Many tech companies view such unilateral efforts to tackle tax avoidance as a bigger threat than the Beps initiative. Shutterstock, a digital imagery company, warned that these “disjointed and uncoordinated” initiatives could lead to “excess or even double taxation of the same streams of income”.
