Dealing with Corporate Risk and Multinational Tax

Global economy prospects have driven so many companies to penetrate international market, grabbing their tastes and sway them to lay eggs inside their businesses. As the result people can see organizations such as Coca Cola, Mercedes Benz, Shell, Visa, Haagen Dasz and Ernst&Young are everywhere became highly multinational as instead of managing single local market, they strategically taking advantages from the broader target market to satisfy their shareholders.

 

 

In this doings- transactions between more than one country are going on, furthermore I am really sure that foreign transactions these days are as well increasing due to the exports and imports where it creates interdependence between countries. However, with regard to it, given that each country has such standard which is their currency, input and output have to be generalized with exchange rates accordingly. This has been agreed by whole multinational companies even that sometimes they suffer huge amount of foreign exchange losses (rather than gains) owing to its sensitivity to fluctuate.

 

 

Take example of Mercedes Benz (Daimler Company). Mercedes Benz is a European Car Company which Euro(€) currency is its basis to finance their main operations (e.g. Euros for manufacturing expenditures), yet have to deal with heaps of US Dollar(US$) including instance when they export their vehicles to China from European region. In addition, they said that UK pound sterling(£) also take considerable role against the Euro currency. Through this case I can perceive that it is very hard for Daimler to determine the real effective methods to battle this jeopardy, nevertheless you can realise here, that one of the ways treated by Mercedes Benz up until this time is by using external hedging to swap the currency to US dollar and also third currency which is pounds to actually neutralise the risk for the exchange rates.

Some others could be about forward foreign exchange contracts, currency options and natural internal hedging such as pushing their management to increase cash outflows with match the currencies as well as their group’s Foreign Exchange Committee (FXCo) that assists to reduce future impact of risk mentioned. Those are truly great! but………………......it is necessary for them to asses each strategy, valuing them and be careful because exchange rates of the chosen currencies may become bad source of input. See current information about UK pounds. It presently lost in value against Euro. For example if they receive payments in pounds, it’s worst! They are experiencing an increase in costs of generating revenue as they will see inadequacy to cover costs which use Euros when pounds are converted.

Moving to multinational tax. Should you consider that multinational companies extended their operations in others’ territories; but then again authorities acquired by multinational companies to dominate some portions of its countries’ market, anyway, goes to responsibilities. In addition to risks appeared from foreign exchange, whole companies who transact otherwise receive benefits from countries other than where they belong to; have to take consideration towards tax risks.

Tax refers to the monetary collection imposed by government on which has to be paid on individuals or corporations’ earnings, goods and such activities. Saying this, quite often people sense the complexities of how it would be dealt over time as in some points, greater effort means greater tax. Normally this is unfair, right? During my previous study, I also noticed that people won’t be able to control external business environments such as government and the taxes itself. Well, but is it impossible to get rid of it? From this time I know it’s not, especially to multinational corporations, it is always possible.  The reasons are just because they are operating in more than one country, also, thinking through the acknowledgement of double taxation treaties, in fact companies only required to pay for tax in one country. As the result companies can get rid of the income taxes that they have to pay in as I believe they can choose their best.

 

 

There is term called tax avoidance (not evasion or fraud), done through methods like transfer pricing and channelling which are totally great for SWM. Legal and many large businesses such as Starbucks, Amazon, Google, Apple, Cadbury, Ebay, Topman&Topshop performed them recently referring to these facts:

-“Starbucks’ head of finance, Troy Alstead, was forced to portray his company as a perennial commercial flop, in order to account for its peculiar failure to record a taxable profit in the UK for 14 out of the last 15 years.”-£8.6m paid

-“He was followed by Amazon's Andrew Cecil, who was reduced to stuttering when he was accused of being "pathetic" for his inability to disclose something as basic as how much of his firm's European sales came from the UK last year.”

-“ Yes, of course Google minimises its tax bill, by operating in Bermuda and Ireland.”

-“Apple paid less than 2% corporation tax on its profits outside the US, paying $713m (£445m) on foreign pre-tax profits of $36.8bn"

-“Milky Chocolate, Cadbury avoided £60m tax bill by moving HQ to Switzerland”

-“Ebay avoided £50m in tax by channelling funds via Luxembourg”

-“Billionaire boss avoided a £300m tax bill”-(Topshop,Topman)

Indeed, they looks embarrassing but actually I’m quite agree to their actions to deal with taxes since in nature multinational tax management can be reflected as a business expense that we can reduce with correct planning. Moreover some countries have taxes that are too high, therefore in order to balance shareholders’ value and tax responsibilities, it is necessary to manage both. Bill Dodwell (head of tax policy from Deloitte) additionally mentioned that there are more opportunities for multinationals to make locational decisions. Hence, I will put much in believe that if I have business later, I’ll treat them as ‘a-pretty-charity’. Pay fair amount of tax and still pay deep attention to my shareholders. Cut taxes prudently because surely, I may build alternative responsibilities such as by having CSR and non-job cutting as it helps countries’ development too.

It’s better than pay too low or too high right? Don’t be greedy but be collectively responsible ;)

Raising Finance?

Yes businesses do and indeed they have to. When talking about sustainability, foods concerns with humans’; then finance with the businesses’. These are all should be supporting each other so that they can build capacities to take advantages from the publics. I believe that quite a lot of sources of finance such as overdraft, bank loan, stock and bond (debt and equity finances) have been acknowledged by many commercials and most of them are taking those availabilities to obtain value and wealth maximisation. Perpetuity, however, cannot be established in this competitive era by only putting capital inside the company. You should consider also that it is entirely about long term strategic issues which may derive from accessing the management to know on how to twist their finances through effective and efficient systems. Up until this time, I realized number of approaches which businesses can attempt, in particular to raise their capital besides using the sources itself.

This is begin with the cost of finance (specified in International Accounting Standard 23) which is the inducement created by firms in the form of rate of return, given to parties once they grasp a financial security from them. Minimize overall cost of finance is one of the ways to do so. Company will want to recognize that the lower the better because it enable them to provide higher retained earnings to develop the business instead of giving shareholders personal wealth; however different perspectives appear when it comes to the shareholders; they want as much as returns to reward  their investments. Back to my first blog post, I also mentioned that shareholder wealth have to be maximised as to increase values. However since cost of capital can impact on organizations’ whole strategic choices, companies need to greatly show ‘good-balancing’ in apportioning them.  Some facts on the other hand justified that in order to reduce the cost of finance; debt will be dominating to be used as it will require certain level of interest and it is also tax deductible while equity finance is non-tax deductible and owners needs to pay high dividends on a part of their high profits.

In contrast, the second way that I want to discuss is by combining both raising finance through debt as well as equity because it will lead to cheaper yet effective finance in the end. I won’t agree if company use either only debt or equity finance or too many debts compared to equity although some organizations such as Europe Central Bank experienced net profit boost by over a third because of debt finance (bond issue).  Take Beazer Homes USA, Inc. as the case in point. They currently involved in a risk of bankruptcy because of high level of debt while in fact its market seems so charming these days.

Besides, Deutsche Annington Immobilien AG, largest residential business from Germany, reported by Fahmy & Callanan (2013) finally considered that equity finance is needed to help them paying off their €1 billion ($1.3 billion) debt this year. They therefore planned to issue commercial mortgage backed security (CMBS) so that finance can be raised and management may continue their IPO decision in the fourth quarter. You can see from here that debt cannot be the only reliance that companies have; moreover Deutsche Annington here created strategic choice to balance their equity and debt finance on which believed it can sustain their business progress. Based on the news as well, I found that any dividends are going to be paid by the company after their obligation to settle up the debt is fulfilled; thus it seems that business need to truly be cautious when increasing debt as it will cut the margins that the shareholders may receive as well as their value accordingly.

Another issue from cost of capital mentioned above is theory called WACC or Weighted Average Cost of Capital. To give further clarification, this overall cost of capital should be calculated by particular formula seen in this link http://macabacus.com/valuation/dcf/wacc. It will result to the greater amount of money (at this point is from investment return) obtained by the companies. As the motive is that sometimes cost of capital can be not strategically used causing the return is not as high as it is firstly bought, hence in order to cover it up, you should consider WACC allows businesses to take view on ‘worth’ projects. You will agree that it can finally raise finance, won’t you?

Last but not least, another thing that companies may have to consider is seeking for finance internationally in addition to the local debt and equity finance. Likewise Base Resources that I discussed on last week’s blog, they entered the UK market for this. Another example can be seen from UK electricity which is extending their effort to overhaul US and Europe’s. In my view, entering those marketplaces enable them to attract more investment players to outdo its isolated condition, and bringing better impacts for the business in long term period (if it is well-managed). To boost it up, UK electricity should make this strategy supported by smart tender offer to actually raise the most money as well as value for the business!

Practical Merits from Capital Market and Associated Issues

 

Capital market is generally one of the great channels for general public, company or government to raise finance; where inside this market, financial securities such as bond and stock are traded to be sold and bought by those potential parties around the world. That is why range of stock exchanges (e.g. London Stock Exchange and New York Stock Exchange) is existed to satisfy consumers mentioned. However, I ever realized that how they take advantages from capital market may be different even though mainly it is to raise finance. Seeing general public, they will definitely only rely on capital market to provide them with dividend through investment that they made personally. Business typically use capital market to have benefits such as corporate ‘advertisement’ and business solvency, finally government sometimes emphasize on economic growth instead of only raising capital for environment.

 

When we see company like Base Resources whom act as the Australian iron ore company, they are currently became newcomer in London Stock Exchange (reported on January 28/2013) - seeking for groups particularly UK societies to help them raising capital internationally for their Kwale Project in East Africa concisely saying. In this case I consider that capital market then help them to increase their publicity through announcement and promotion from internal member as well as opening access or opportunities for investors to put interests in the company and the project.

 

Yet, the question here is “Will they continue to enjoy the practical merits from capital market?” In terms of this, I may just say perhaps. Why? Because entering capital market does not really mean users take its practical merits afterwards. People would likely to argue as unpredictable conditions always happen and anything will be back to their selves. As to consider, capital market has wavy nature following some factors such as value of each company and how they handle hovering information in public zone (we may reflect this in stock market efficiency philosophy). Internal resources from Base Resources are now grinding capital to give best possible output for investors; nonetheless the imperative issue that I want to say will be the share price should be above the given line ‘today’. This could be by approach commencing the decent production initiation of which thus let the share price can be higher than before. Based on my research, this company has targeted that their production will begin in the second half of 2013, which is imminent.

In my perspective, Base Resources will be continuously receiving benefit from capital market as long as they are able to cope with its entire business performance and share price movements. Rationally thinking, if they done so, in addition to the increase in status, potential investors will be attracted to invest in it since it will give personal advantages to them; hence more and more capital can be received. Likewise this will enable general public and government who bought its shares with low price to sell it with higher price (or either it can be maintained if they feel the price will be higher later). Since it turned out to be high, these investors will become pleased as there are chances to obtain earnings.

The endorsement in terms of the practical merits for them is also in the form of dividend payments. The greater the company’s performance, the more profitable they will be and dividend payment could be higher. Beside Base Resources’ point of view, therefore this indicates that both general public and government in this case should be picky in choosing which company to be invested in. Investigation of financial performance from profitability, liquidity, investor analysis, company’s background, including benchmarking may help them to grab advantages from capital market. This concludes that capital market indeed take role to be financial intermediary, but the incentives itself mostly realized and taken by the users. Be aware that not only seeing people using capital market to gamble for uncertain things however places to have good gambling (range of companies listed in stock exchanges)and how they gamble affect the most!

The Concept of Shareholders' Value

It is companies’ aim to bring a rise in organizational capabilities, where they seeks the management of significant decisions as for giving whole potential investors and shareholders confidence to position as well as preserve interest in it. One single representative that is accounted here is the maximisation of shareholder value through wealth generation, which will be very advantageous for the company in the long term period. An agency theory according to Jensen and Meckling (1976), determines that there should be contingent within the principle’s concentration with the agent (manager) whom the principle trusts to; this therefore may provide the meeting point to the corporate objectives and unfold smooth business undertaking to promote the compliance of shareholder value enhancement, for instance the increasing of company’s share price.

Nonetheless, selfhood of the manager or principle itself might create agency problem. Strategic approaches can be disregarded due to it since own goals are the only attentiveness that will concern this person (e.g. investment done is not company’s best interest) - as the result value may be cut by investors to a lower amount. Not like a sole trader, WorldCom comprehend stakeholders and shareholders in their business which they should have been treated into sovereign individuals. Firstly, this is the case where mistreatment of the concept of value can be contemplated.

WorldCom is identified as a telecommunications company that provides a wide range of products around the world such as data, Internet, telephone communication, teleconference services through video, through the sale of prepaid telephone cards for international calls. Companies with stock code Wcom on the Nasdaq stock exchange has 73,000 employees spread across the world and a total of 8,300 employees of whom are living in Europe, the Middle East, and Africa (WorldCom, 2007). Seeing justified fact, I believe that shareholders in this company have been valued as they successfully developed the organisation till they were able to serve global market with its wide-ranging resources. On the other words, satisfactions were brought and funds could be accessed to make attractive progresses.  

However, as there were agency problem, unwanted issues occurred. WorldCom scandals sticking out after the company claimed to boost its profits up to US$ 3.9 billion in the period January 2001 and March 2002. In 2001 and early 2002, it is reported that WorldCom included US$ 3.9 billion which is the normal operating costs of investment into the post. Financial executives at WorldCom exercised various methods of hiding expenses for a period of more than two years between 2000 and 2002. They delayed reporting some expenses and misrepresented others to give investors the appearance of growth during its secretly hard times. As in the outcome, this allows the company to reduce costs during many years. With the loss of the operational costs of this post, then posted profits became larger because of the cost of which should reduce the gain. Hence, with the advantages that looks great, it will show that WorldCom's performance was very good. In the end, WorldCom shares are listed on the stock exchange in 1999 at a price of US$ 62.

In addition, to begin modestly in mid-year 1999 and continue at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Comptroller) and Buford "Buddy" Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stocks.

Indeed, the top level of management here aimed to show good prospect and create values within company and existing shareholders and even potential investors; however I can barely say that WorldCom could make a stand in the long run though its market value increased significantly. It is the financial executive’s self-interests which will endanger the course of the business and did not confront with goal congruence of the entire organisation. And this is true, WorldCom’s action finally discovered and no more value could be treated in this company as shareholders wealth were down beyond expectation as they received negative response from the market. Their share price immediately plunged 94% since January 2002 due to that scandal emerge that is really inappropriate with the agency theory.

I am certain that in order to achieve organizational excellence, both creation of values as well as strategic performances including risk avoidance need to be balanced. Moreover, Jensen (2010) suggests that values then need to be built by keeping relationships within whole stakeholders such as customers, employees, regulators and even environment. The reasoning behind this is that hesitation might be appeared if company follow WorldCom decision to ‘greatly’ add wealth or value creation in the business. Thus, strategic financial management such as monitoring and selecting best purchases are some examples to possibly construct shareholder value maximisation.