If the U.S., foreign governments and many state governments have their way, it seems that many multinational companies are going to start paying more taxes and soon. The tax avoidance issue that I have been writing for a while now is turning into an avalanche and from the looks of things, many things are about to change and investors better keep their eye on the ball.
To begin with, there are many reports coming out of Ireland that there is pressure on the Irish government to do away with the loopholes in the double Irish tax scheme. As the Irish Examiner and Reuters tell us, a spokesperson from the Irish department of finance refused to comment on reports that Ireland was to bow to international pressure and end the practice of allowing companies to have dual residency for tax reasons. "The only way to effectively tackle this is at international level through the OECD. for example." said a spokesperson for the department. And indeed, the OECD will be the main driver in persuading many countries around the world to do away with such loopholes and soon.
Obviously those most affected from the double Irish loophole are Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Both companies funnel most of their sales through Ireland and pay almost no tax on their international profits. But the tax damage for many governments around the world is not limited to Google and Apple. Microsoft (NASDAQ:MSFT) for example uses both Ireland and Luxemburg to lower its tax bill. The U.K.'s Sunday Times reported that:
MICROSOFT is channelling online payments for sales of its new Windows 8 operating system to Luxembourg as part of a scheme that avoids UK corporation tax on more than £1.7bn a year of revenue. The Sunday Times has established that a small office in a Luxembourg business park with just six staff handles hundreds of millions of pounds from online Microsoft sales in the UK and the rest of Europe. The bulk of the money is transferred to Microsoft's European headquarters in Ireland. Profits can then be routed to Bermuda without UK corporation tax being paid.
Amazon (NASDAQ:AMZN) is another high profiled company that has been grilled by U.K. authorities lately. It is reported that Amazon booked £4 billion is U.K. sales but only paid £2.4m in taxes. Obviously companies pay taxes on profits and not on sales, but then again, Amazon like so many other companies use Ireland and Luxembourg specifically for this purpose and one has to wonder if they didn't, what their tax bill would be.
Europe as I have noted in past articles is officially on the war path to collect more taxes on revenue and profits recorded in Europe. The main topic of discussion in a recent E.U. Summit was energy policy and tax coordination. French tax officials already raided the offices of Google in 2011 and have demanded as much as 1.7 billion euros in back taxes. I have not followed this story since then, but there is a chance that many companies will suddenly find themselves defendants in tax court.
But U.S. multinationals are not the only ones coming under close tax scrutiny. Germany's Spiegel noted that a whole host of German companies are using similar techniques, among them the chemical group BASF (OTCQX:BASFY). In fact the company's tax bill for 2011 was only 2.6% of profits. German companies use a similar Irish style tax loophole, but out of Belgium and the Netherlands'. The Belgian central bank reported (according to Spiegel) that Bayer's Belgium subsidiary paid only 10.8 million euros in taxes on a re-tax profit of 254 million euros.
The Netherlands is another big tax-avoidance center like Ireland, but in the middle of Europe. While the Netherlands' don't have Ireland's 12.5% tax rate, it has something similar to the double Irish scheme. When someone sets up a Dutch offshore company, license fees are tax free. In this manner, the parent company reduces its profits in its home country and pays fewer taxes. OECD figures for the Netherlands' state that the country received $3.5 trillion in foreign investments in 2012, of which only $573 billion flowed into the real economy, while the rest went to shell companies. There are an estimated 23,000 of these firms in the Netherlands.
Nokia (NYSE:NOK) is another high flying company with tax troubles. Just today the WSJ tells us that Nokia's tax troubles are getting worst, not better. Indian authorities are demanding that Nokia pay about 2.09 billion rupees ($37.53 million) of taxes that it alleges the Finnish handset maker didn't pay claiming an exemption given on software exports. Also, in January Indian tax authorities raided Nokia's phone-manufacturing facility and ordered its local unit to pay 20.80 billion rupees ($380 million) of income tax and other fees. The case has yet to be resolved .
With more than $14 billion in taxes that Apple (conservatively) has managed to avoid paying, according to the recent Senate hearing, it's no wonder that even the U.S. government is interested in taping this tax income stream. But in additional to federal taxes, the is also a case for state taxes.
Apple and many other companies are using some of the same techniques that they use to lower their international tax bill on U.S soil. The NY Times reported a while ago that even though Apple is located in California, where the tax rate is about 8%, it has set up an office in Reno Nevada and thus avoids paying state taxes in California and 20 other states. I am not a tax lawyer by any means, and I am sure all this is legal, but I am also sure that many state governments around the country are looking into this issue and weighing their options on how to get a bit more of these tax dollars.
The bottom line is that international tax avoidance techniques are coming under close scrutiny and many of these loopholes will be non-existent in the future. An avalanche of change is coming our way and investors better take notice, because these tax loopholes will be done away with sooner, rather than later. And with markets already having rallied quite a bit over the past year, this issue might just be a good excuse for a correction.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.