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Herbalife's Mexican Tax Problem - Part 2

|Includes: Herbalife Ltd. (HLF)

As i have written previously, I believe Herbalife has a big, big tax problem in Mexico and that this problem is buried so deeply in the 10Q that regular investors have paid same little attention.

The fact that the "Analysts" have not addressed it in their reports or asked questions about Mexico Tax and also taken at face value Herbalife Corporate's standard line "The Company has not recognized a loss as the Company does not believe a loss is probable", further adds to lack of understanding for common investors as to the actual risk inherent here.

Consider the following:

From 2005 to 2013, Herbalife's own reporting indicates Sales Leaders grew from 19,055 to 78,453.

The Mexican Tax Administration Service ("MTAS") has issued assessments for additional tax only against 2005 and 2006 for $85M USD and, nine months of 2007 for $22M USD.

Between 2005 and 2008 Herbalife did not break out Mexico separately for Net Sales. However, in 2009 they did and hence were required to restate 2007 and 2008 to disclose what Mexico net sales were in these years. We learn that of the 2007 net sales of 384.6, 370.8 were attributable to Mexico (96.4%) and in 2008 of 375.2, 352.2 were attributable (93.8%). So armed with this info lets assume for 2005 and 2006 net sales were on average 95% of the reported numbers. For 2005 219.9M is 208.9 for Mexico and for 2006, 376.9M is 358.0.

So on 2005's 208.9M and 2006's 358.0M (total $566.9M) Herbalife was hit with an assessment of $85M, approx. 15%. For the 2007 year, 370.8M attracted a tax assessment for nine months of $22M, annualized $29.3M or approx. 8%.

Between 2008 and 2013 Herbalife reported $2.44 Billion in Net Sales for Mexico.

Lets assume for a moment that Herbalife's report that MTAS has cleared it for the 2011 period is correct and extract those net sales. That gives us Net Sales of $2.0 Billion that are subject to MTAS Tax Review and Audit. We know from Herbalife's disclosures that they are already currently reviewing and requesting further info on 2010 and 2012.

If we take the low tax assessment percentage from above of 8%, Herbalife potentially faces and additional $160M USD in taxes, before interest and inflation adjustments. If we take the high 15% tax assessment number from above we are looking at $301M USD in taxes before interest and inflation adjustments.

So, we have tax assessments in place and under appeal of $85M + $22M = $107M USD + potential for an additional either $160M or $301M for a grand totals of $267M to $408M USD, before taxes and inflation adjustments.

Don't you think this is something that the Analysts should have asked about?

How about a sprinkling of additional liability for PWC in not insisting the Notes in this area were not far more robust and illuminative for predictive value purposes.

Finally, how could these tax assessments ever be paid and what would that do to quarterly EPS?

Disclosure: The author is short HLF.