The amount of tax being paid by listed companies is as much an issue for investors as it is for governments. In the 1990s, corporate tax rates were far higher than they are now. This fall has been the second biggest driver of the rise in profitability over the last 20 years according to Deutsche Bank research. The G20 has tasked the OECD to look at reforming a situation whereby Apple allegedly pays 2% in tax on its overseas income. Even if corporate taxes do not rise for some time the uncertainty could damage world growth.
- Our research shows some huge variances in median effective corporate tax rates* from country to country with US firms paying an average of 32% versus 25% for the UK and 13% for Ireland
- An energy firm could pay as much as 40% of their profits in tax, whereas a leisure firm like Ladbrokes paid an estimated and contrastingly low figure of 16% in 2012
- Generally, utilities, healthcare, financials and technology firms pay the lowest % of profits in tax with energy firms topping the table
- German industrials have hugely benefitted from a halving of corporate tax over the past 20 years and could be vulnerable should tax rates creep higher since their cost of capital does not leave much headroom
- IT names, but less so healthcare, could become quite a bit more expensive to own if they lose their ability to use their geographical flexibility of location to reduce their tax liability
Threat to firms with low margins
In the short term, politicians are marginally reducing corporate tax in order to stimulate growth. But the effect on growth is likely to be small and even countries lowering their spending are still borrowing more as our Economics team explain: ?There is little doubt that the UK government's (borrowing) target for the whole year of ?108.5bn will be breached, and possibly to quite a substantial degree?. So with governments running such high deficits, corporate tax rates may start to rise and the impact will be hardest felt for those companies whose returns are closest to the cost of capital such as German industrials. The short interest changes can be seen below ? note the recent doubling of demand to borrow Heidelbergcement and Fraport Frankfurt Airport Services.
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Not good news for IT and Healthcare
It is hardly surprising that IT and Healthcare are adept at paying comparatively low amounts for corporate tax given the portable nature of their manufacturing (into tax efficient countries) and their habit of booking profits where it suits them. Google, Amazon and Starbucks have all been in the headlines for their low UK corporation tax thanks to booking profits in their Irish entities. The latter has by far the lowest corporate tax regime of any developed nation at 13% and also hosts Facebook.
Rising tax rates are no reason for investors to panic, however. According to Deutsche Bank, the effect of tax rates for these sectors rising to 35% is small with IT more affected than healthcare. Short sellers continue to be short the following names in the US IT sector.
UK companies domiciled away from the UK
Research from our Dividend team throws up the statistic that 100 members of the FTSE Allshare are non-resident in the UK for tax purposes. The biggest of these are the miners as the table shows. WPP has since moved back as their name suggests. But this under states the situation since certain companies can book profits from large parts of their business in non UK jurisdictions yet remain tax domiciled in Great Britain.
Gambling stocks
888 Holdings and Bwin.Party are two UK listed gaming companies whose tax country is Gibraltar. The big players, William Hill and Ladbrokes, are listed as being UK domiciled yet are known to have phone betting arms in Gibraltar. It could be this that explains why Ladbrokes effective rate of tax is so low:
2008 15.8%
2009 16.3%
2010 27.2%
2011 21.2%
2012e 16.0%
2013e 12.0%
Source: Deutsche Bank
Summary of US and UK sector corporate tax rates according to research carried out by Markit?s Data Analytics & Research group in Chicago
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Tax analysis UK
- UK companies pay less corporation tax than US firms
- UK utilities pay the least corporation tax at 20% of income
- UK energy firms pay the most at 41% of income
- There is a massive divergence of tax paid by UK companies (even within the same sector)
- If we exclude investment trusts, the UK property firms top the low tax list headed by Hammerson followed by De La Rue and then Shaftesbury
- Tax analysis US
- US companies pay more corporation tax than UK firms
- US technology firms the lowest corporate tax at 29% of income
- US telcos pay the most in tax at 37% of income
OECD tax reform agenda
The G20 nations, led on this by the US, UK and Germany, are keenly awaiting an upcoming report by the OECD on how to reform international tax rules to avoid ?base erosion and profit shifting? (BEPS). This is the buzz word for the totally legal practice for companies to book their profits in countries with the lowest tax and their expenditure in countries with the most generous tax breaks.
For full background click here: http://www.oecd.org/ctp/BEPS_Background_Brief.pdf In brief, cross border corporate tax still draws on principals as things stood when the League of Nations was passed in the 1920s! The idea was that international corporate tax was a game of swings and roundabouts that balanced itself out in the long term. But Apple has made a mockery of this. The largest company in the world by market cap is alleged to pay as little as 2% on its (enormous) overseas earnings and whose effective rate of tax in the US is amongst the lowest too (ranking 263 out of 1056 in our universe).
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With the G20 gearing up for reforms to cross border tax treaties the uncertainty could cause companies and investors to hesitate and the last thing the slow growing world economy needs is another reason to play for time.
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Source: http://www.dataexplorers.com/news-and-analysis/corporation-tax-issue-investors
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