Are Multinational Corporations Tax Dodgers??

Tax, it’s that dreaded sum taken out of each months wage slip, but as individuals we accept that its part and parcel of earning a wage and being part of society. From a company perspective however ‘tax avoidance’ can and is viewed as a strategic implement to minimize tax and increase shareholder maximisation. However does this make it right? Do companies not have a duty of corporate social responsibility? I think it is very much a personal opinion and companies should consider the ethics of dodging the taxman.

Some may argue that it’s a vicious circle, high corporate tax within the UK forces multinational companies to look elsewhere to become more ‘tax efficient’. Whilst at the same time these taxes contribute towards recourse benefiting society like the NHS, public transport etc. etc and therefore lowering corporate tax will detrimentally affect theses public services.

Many companies that operate within the UK rely on customer expenditure to keep them strategically competitive and prospering within the market. Therefore do they not have an obligation to give something back, by contributing to their ‘fair share’ of tax responsibility?

Lets face it; companies like Tesco would not be as successful as they are without customers spending ‘£1 in every seven’ (Guardian, 2012) within their store.  Yet The Times (2008) reported that they transferred ownership of over 80 UK stores to joint ventures in the Cayman Islands. Whilst totally legal the company managed to shirk responsibility of £500m in tax and justified their decision by arguing they were trying to become ‘tax efficient’.  

Tax and taxation regimes can have major impacts on: long-term strategic planning, long and short-term cashflow and investment/ project portfolios. The above most probably contributes to the ultimate strategic decision of creating and maintaining shareholder maximisation. Does this mean that shareholder maximisation takes precedence over a fairer tax regime?

Within the FTSE 100, 98 companies base their operations in territories where there is low or no tax (Sky News, 2012). Furthermore the four biggest British banks have 1,649 ‘tax haven’  (e.g. Bahamas, Switzerland, Monaco) companies between them (Sky News, 2012).  Whilst there is a lot of opposition from foreign governments towards these ‘tax havens’, unless home governments reduce their tax rate this legal abuse is not going to end.

The topic of tax is certainly controversial and ethically disputed. However I believe that as long as tax avoidance is a legal strategy nothing is going to persuade multinational companies otherwise. Unfortunately this means that when multinationals avoid paying their fair share, it is the ordinary people who are left to pick up the deficit.

Loss or Top Leader??

In order for companies to become listed they have to go through rigorous checks, have a substantial mount of capital and maintain and endure demanding rules at the time of flotation and in subsequent years. However once listed the options and networks available for companies become endless. The London Stock Exchange for example in 2010 had around 3,000 companies from over 70 countries, with £20.8 billion being raised and traded on their market (London Stock Exchange, 2012). Whilst the decision to ‘go public’ should not be taken lightly the reasons for a company becoming listed are clear.

The hard work however doesn’t end there; many companies are then faced with issues of ‘How are we going to finance our operations’?

A primary source is through external sources: Equity finance, issue of new ordinary shares and Debt finance, variety of loans and debt securities. Both of these sources are risky, debt finance is much cheaper but can become a burden whereas in financial difficulties companies are under no obligation to pay dividends but equity finance means a dilution of company control.

In order to entice investment, companies need to offer returns to shareholders; equivalent to the risk they are undertaking. Therefore many companies have adopted a mix of both equity and debt to finance their activities, this is known as the ‘Weighted average cost of capital’ (WACC).

This begs the question ‘why do companies sometimes have projects, offers, products or services which are referred to as ‘loss leader’, with a return below that of the WACC’??

For example the Bugatti Veyron is one of the world’s most rare, expensive and fastest cars.  With a two-year waiting list and a UK price of £850,000 it is Volkswagen pivotal product. However incredibly, development of the supercar is rumored to be in excess of £2million per car and sold at a loss.

I ask myself why make it then, especially when I wouldn’t otherwise associate Volkswagen as a premium brand?

However Volkswagen argues that thanks to the supremeness and status of the Veyron, it has helped raise the group’s profile. Whilst this may seem like a drastic and expensive corporate strategy, if it is positively impacting and stimulating profitable sales in the Volkswagen group then it is an effective and seemingly feasible strategy.

Therefore I believe that sometimes companies need to adopt the strategy of ‘loss leaders’ in order to raise their profile and increase their external finance options.

Stock Market Efficiency - Fact or Fiction?

Stock markets are crucial for the economy to survive, as stocks represent ownership in a company. The recession in 2008 was arguably caused by the stock market crashing, which in itself reflected a lack of investor confidence in the future earnings of companies. This is still a present day problem with the economy flat lining; in order for things to change, investor confidence needs to be restored.  This can be viewed as a ‘win win’ situation as companies need investors in order to raise capital for future growth strategies and investors can enjoy the high returns, whilst everyone else enjoys the general benefits of a booming economy.

The assumption of a ‘win win’ situation is based on the stock market being ‘efficient’, meaning all new information revealed about the company will rationally and quickly impact and become incorporated into the share price (Arnold, 2008).  However in an ‘ideal and fair’ world if this was the case investors would not be presented with the opportunity of making a huge return on their investment that was any greater than the risk associated with it in the first place . . . . . unless by chance! Therefore is this concept of stock market efficiency ‘fact or fiction’?

A proficient stock market gives everyone equal opportunities, but unfortunately like every day life this is just not realistic. Economists like Fada (1970) defined three levels of efficiency according to the information available. They are: ‘Weak-form efficiency’, ‘Semi-strong form efficiency’ and ‘Strong-form efficiency’ (Arnold, 2008), however I am going to focus on ‘Strong-form efficiency’ in relation to the supermarket giant Tesco.

Tesco had a hugely disappointing UK Christmas trading period whereby the Company saw over £4billion wiped off its value and shares plunging 16pc (Telegraph, 2012).  But what is most significant is the Company’s chief operating officer, Mr Robbins, selling 50,000 shares a week before the supermarket group announced the biggest profit warning in 20 years. Furthermore earlier in the year two directors sold off shares, all in all resulting in over £2million shares being sold (Telegraph, 2012). Whilst in the scheme of things this may seem insignificant compared to the £4billion wipe off, this is a perfect example of ‘Strong-form efficiency’. In my opinion and assumption it is highly likely that all three employees had the relevant and ‘private’ information needed to trade their shares and take advantage prior to the normal investors receiving the new of Tesco’s poor performance.

The question therefore remains ‘should the CEO have prevented Mr Robbins from selling his shares, prior to Tesco announcing its ‘Big Price Drop’? I believe the answer to be yes. Mr Robbins should not have been permitted to sell his shares, as chief of operations selling his shares prior to a big announcement of poor profits does not encourage investor confidence within the Company. Furthermore it is questionable whether Mr Robbins was abusing his ‘insider’ information in order to benefit his own purpose.

Tesco defended Mr Robbins saying he was not in possession of any ‘price sensitive’ information, so are we to believe it was just a coincidence? But coincidence or not, with or without ‘price sensitive’ information Mr Robbins as someone highly involved in the running of Tesco UK would have had a  fairly comprehensive picture of its trading performance by January 4, when he chose to sell his shares. Robbins defended his actions saying he sold his shares for personal reasons, however as the Telegraph (2012) says ‘Robbins could, and should, have borrowed the money he needed from the bank, saving himself and Tesco a great deal of embarrassment’.

Therefore when companies such as Tesco can’t even govern their own internal controls, how can the stock market be expected to control and operate effectively and efficiently? This leads me to the conclusion that stock market efficiency is fiction.  

The Rise and Fall of Nokia

In 1991 on July 1^st the Finnish Prime Minister, Harri Holkeri, made the world’s first Global System for Mobile (GSM) communication call, using Nokia equipment. 1992 then saw the launch of Nokia’s first digital handheld GSM phone, the Nokia 1011. Early and heavy investment into the GSM technology saw Nokia propel itself into the industry of telecommunications and gain first mover advantage.

It is therefore hard to believe that as Europe’s biggest technology company and the global market leader, by volume at least, for mobile handsets, Nokia find themselves to be in such a parlous state. Their products have been all but squeezed out at the top end of the market by Apple, HTC and Samsung. Their inability to equal and surpass their competitors through innovation has seen the once $300billion corporation plummet their market value by 77% to $25.6billion since Apple introduced the first iPhone in June 2007.

The problem lies in Nokia struggling to find their marketing niche. Apple is dominating the high-end market and the Google Anroid has taken over the mid-market. This has left Nokia battling it out with Chinese manufactures in emerging markets where consumers are looking for cheaper alternatives. 

So why and how did Nokia allow for their once thriving empire to become stagnant and outdated? Furthermore how has this impacted on shareholder maximization?

From 1992, the new CEO Jorma Ollila steered the company into a golden age. Nokia dominated mobile phones throughout the Nineties, and helped create the GSM standard for voice and data. However it was their cheap and reliable handsets that were the real hit.

Between 1996 and 2001, Nokia’s sales increased almost fivefold, to reach $29.7 billion. Basic handsets were being sold in emerging markets whilst in Europe and U.S. Nokia could focus on upgrading and constantly evolving their handsets to keep up with the ever-demanding market. Furthermore their success was pinned by its unique British operating system and its creator, businessman David Potter.

In 1997 Nokia merged with Symbian hoping to create the perfect match. Together they created a new class of device and for a while they seemed to be way ahead of all other competitors in the development of smartphones. However things started to go wrong when there was an invasion of businessmen and engineers, who took over highly sensitive design areas. Their was a feeling of corporate arrogance as they lead Nokia to a string of bad decisions. The company's visions, strategies and education were being violated by those without the track record, education or passion.

The rapid growth of Nokia resulted in the company’s capabilities becoming misaligned as communication broke down. They bought anything and became so big and so self-congratulatory they lost sight of their roots.

In 2007 Apple introduced their revolutionary iPhone. Nokia tired to compete and adapt to the changes created by Apple. In 2003 they created a ‘gaming phone’ however this failed miserably and the concept of a gaming phone was only realised with the arrival of the iPhone and iTunes Store. Ovi, Nokia’s answer to the iTunes Store, was a disastrous launch and furthermore they refused to add touchscreen to their high end products.

Rather than sticking to their philosophy of ‘simple is successful’ Nokia have tried their hardest to compete with the high technology and innovative iPhone. Their biggest decision to date has been to drop Symbian, used by 400 million phones worldwide and sign up to Windows Phone 7 software (used by 4 million people), made by Microsoft.

Both shareholder value and the finances of Nokia have taken a battering over the years. Cash reserves of $5.6bn, were down from nearly $7bn last year and the share price plummeted to an all time low of just $3.98 in June 2011, compared to 2000 when the share price was $61.

2012 will be a real test for Nokia.  The integration with Microsoft will make or break Nokia’s desire to crack the smart phone market and compete with the likes of Apple and Google. The link below gives an incite into whether Microsoft can save Nokia.

http://news.bbc.co.uk/1/hi/programmes/click_online/9626628.stm

It is clear that Microsoft is key to Nokia’s success however a lack of investor confidence is affecting Nokia’s capability to move out of the rut they have created for themselves. Therefore the creation of shareholder value needs to be emphasized and present in order for Nokia to successfully move forward.