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  1. #1

    Readjustment coming...

    The OECD/G20 pressure on 'double non-taxation' suggests that governments mean business about making sure international companies pay due tax where business is done and will find it less easy to manipulate and avoid tax. It won't be easy to implement, but to the extent that governments are successful, earnings per share after tax will be seriously dented - with all that that implies. I foresee endless articles when the press (which I suspect up to now has regarded the matter as political hot air with little likely effect) wises up to the prospect.

    It was not hard to foretell that somehow or other governments that have taken on huge debts from the private sector, and yet more debt through supporting weak economies by QE, would look for ways to redress the imbalance by soaking the profitable healthy corporate sector.

    I look forward to endless analyses by stockpickers of how individual companies are forecast to be affected if the G20 is even half-way successful. It looks like the investing minefield is going to acquire another mine!

  2. #2
    I rather take the opposite view - that it'll have little or no effect. Other than a few high profile cases like Starbucks and Google etc., there is little evidence that mainstream UK-based international companies of the type that we all invest in via the London Stock Exchange evade tax so significantly that paying a 'standard' tax rate would fundamentally affect the value of UK companies and indices. Also, as with so many things devised by politicians, there is a confused message here; on the one hand Governments vie with each other to LOWER Corporation Tax rates to attract businesses to their shores and offer incentives such as Capital Allowances and The Patent Box to induce them to invest by offsetting these costs against CT.........and then publicly lambast them when they do! Of course it's hard to swallow when companies use obviously phoney schemes to shift profits made in one country to another with a lower tax rate (I sold something on Ebay to another UK resident but noted that the transaction seemed to go via Luxembourg!), but human nature is such that if there's a legal way to do it, they will. Who here doesn't use ISA's and how bad do you feel about that? Some commentators even advocate doing away with Corporation Tax altogether. There would then be a 'level playing field' for all companies, net profits would be correspondingly higher leading to higher company valuations, greater investment and it is likely that the tax take would more than be recouped via higher (taxed) dividends and Capital Gains taxes.

    Whether the politicians pull it off or not, I won't be losing much sleep over it.

  3. #3
    I think you are both right, well established companies do appear to pay their fare share of taxes.
    Then again it is only the public who pay these taxes, via buying goods and services, hence creating the profits that allow the corporations to pay corporation tax. if corporation tax became 0% then governments would have to raise both indirect and direct tax. Which would be both painful, but also transparent.

    So rightly the G20 is going to get a grip of the Starbucks etc of this world and at the same time harmonise the corporation tax within the G20 stopping the race to the bottom.
    Also it might make for a fairer playing field and get companies that have outsourced their factories into third world countries to avoid any tax at all whilst selling completed products back to the first world. In turn creating profits for them, but problems for first world governments.

    So long as the third world governments clean up their act and spend the extra tax revenue on the people, education, healthcare and infrastructure projects etc and not simply to off shore bank accounts.

  4. #4
    I know zilch about this, but it is interesting to see that some commentators are advocating doing away with Corporation Tax altogether. Would it work to recoup it via slightly raised/altered VAT, or would that have impossible side-effects?

    I'm sure governments hate to lose a tax, but simplicity is a powerful thing. When people understand the system they are not afraid to be involved - and that is so vital. Without the simplicity of PEPs in the 1980's I don't know where I'd be now.

  5. #5
    Those international companies that have been paying a fair whack in countries where they do their business will not face a problem, but those that have been using trans-border accounting devices to pay less, and it seems often far less, tax will surely suffer in their earnings after tax if a more rigorous and fair regime is adopted internationally. To the extent that governments are successful - about which there must be considerable doubt - analysts will/should be looking to identify which companies they might be and what the effect on earnings after tax might be. In these days of low growth and low returns, a few percent here or there makes quite a difference.


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