In our economy the role of the financial sector is (supposed to be) all about analyzing the potential risks and rewards of investments and loans and setting prices accordingly. There is supposed to be transparency, enforced by regulators, so that the risks are disclosed. Buyers and sellers depend on the accuracy, integrity and transparent disclosure of this information.
So think about this. You by stock in a company. You expect that information about the problems and prospects of the company are public and understood. But later it turns out the company has to pay a huge tax bill that wasn’t clearly understood, and the stock price plunges. Once again the financial sector failed to do what it is supposed to do. The information wasn’t made clear to the public, the regulators didn’t regulate and force it to be made clear, and the surprise hits investors hard. You’ve been scammed.
One such undisclosed risk exists right now with companies like Apple and many others that have been stashing profits in tax havens to dodge taxes. Investor groups and public-interest organization are asking regulators to do something about this.
Investment Funds Asking Questions
The Financial Times (FT) notes that this massive amount of tax dodging poses real risks to people who buy stocks, and investment funds are starting to ask questions. Their report, “Aggressive tax avoidance raises risks for investors,” explains:
The terms double Irish and Dutch sandwich are used by accountants to describe a popular strategy used by multinational companies to reduce their tax bills by rerouting profits through the Netherlands and Ireland, which can be managed offshore due to a quirk in Ireland’s tax laws.
This and other similar manoeuvres [sic] are used by some of the world’s largest companies including the technology companies Apple, Microsoft and Alphabet, Google’s parent company…
… So far, investors have remained on the sidelines of the debate. But after the European Commission, the EU’s executive body, handed Apple a €13bn bill for unpaid taxes this summer, some began to question whether aggressive tax planning could pose a risk to them in the future.
Europe is cracking down on corporate tax-dodgers. FT describes a letter from an investment fund, “written to a number of companies, including Alphabet and Apple, to warn that pressure from regulators and governments has increased overall risk for investors.” The letter asks these companies to start disclosing these risks to investors.
But wait there’s more, From the FT article:
…four UK fund houses representing almost £1tn of assets have written to the board of Alphabet to raise concerns about its tax arrangements.
Legal & General Investment Management, the country’s largest asset manager, the Local Authority Pension Fund Forum, which represents 71 public pension funds, Royal London Asset Management, the £88bn London-based manager, and Sarasin Partners, the investment boutique, all signed the letter Mr Schmidt.
“Our point about tax was not just the obvious ‘are you avoiding it’, but also ‘have you really properly considered the implications for brand value and your license to operate in society?’,” said a senior executive at one of the investment companies.
He added that taxes pay for public infrastructure such as the roads on which Google is hoping to deploy its driverless cars. “They can’t expect everybody else to pay for the road and they just supply the driverless car.”
In other words, the value of brands like Apple, Google and the rest are considered to be part of what keeps their stock prices as high as they are. This “brand value” of these companies could suffer when the public realizes what’s going on and gets mad, which would drive the stock price down even as the realization of their massive tax liabilities is hitting that price.
Apple, For Example
Apple might be the best-known company stashing cash in tax havens to avoid paying US taxes. A year ago ArsTechnica noted that If Apple didn’t hold $181B overseas, it would owe $59B in US taxes. Apple’s overseas cash stash has now reached more than $200 billion, with a corresponding in crease in taxes withheld from our country.
Apple’s 2015 annual report states, “As of September 26, 2015, the Company had deferred tax assets arising from deductible temporary differences, tax losses and tax credits of $7.8 billion and deferred tax liabilities of $24.1 billion.” The company uses very complicated calculations that obscure the different between “management’s expectations” of up to $24.1 billion owed and the potential of up to $59 billion tax liability should the US government tell them to just pay it.
Apple is, of course, not the only company doing this. The total of corporate profits being held outside of the US is now estimated to be more than $2.6 trillion, representing up to perhaps $900 billion in tax revenue that could be used for infrastructure, teachers, health care and so many of the country’s needs.
Tax Group Asks SEC To Do Its Job
Last week Americans for Tax Fairness issued a press release, ATF Urges SEC Disclosure Updates to Include Annual Country-by-County Requirement, explaining that thousands of Americans had signed a petition asking the Securities and Exchange Commission to require U.S. corporations to include annual country-by-country reporting on activities in foreign countries.
“Without this improved transparency, corporations will be free to continue their massive use of tax havens. And such corporate tax dodging means you and I are forced to pick up their tab,” said American for Tax Fairness Executive Director Frank Clemente. “If this rule gets approved, for the first time it would provide true transparency about this massive tax-dodging scheme. And that will provide momentum to end the use of these offshore tax loopholes once and for all.”
US corporations have trillions stashed in tax havens, being kept away from taxation and shareholders. At some point our government should just make them pay what they owe so we can fix our infrastructure, improve our schools and do the rest of the things government does to make our lives better. The public is going to figure this out and get mad and make our government do it. Our regulatory apparatus should prepare investors for this.