Havens Can Wait
High-tax countries don’t go after profits that have fled to tax-havens. Instead they chase profits in other high-tax countries.
If both a neighbor and a thief from another town steals something from you, who do go after? The neighbor or the other thief? Probably the neighbor, because it’s easier: he’s next door, you don’t have to travel, and you know him. Similarly, countries, when it comes to fleeing profits (and the tax proceeds they could generate), don’t go after those profits that have been shifted to low-tax countries. It’s too hard and complicated.
This is one of the observations of a study from the National Bureau of Economic Research. According to the study, the Missing Profits of Nations, almost 40% of MNC profits get moved to low-tax countries every year. In 2015, that equaled $600 billion. But countries did little to chase after it.
“We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens,” the authors of the study write. “They instead focus their enforcement effort on relocating profits booked in other high-tax countries—in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the high costs involved for high-tax countries.” Read more here.
Also this week, lenders continue to push back against borrowers who end up moving their collateral to subsidiaries and mostly out of the reach of the borrower. A long list of companies has pursued the tactic over the last few years, including Claire’s, PetSmart, Toys "R" US, Hilton, and iHeartMedia. The pushback began in 2015 when J.Crew sent a proposal for a distressed debt exchange to its payment-in-kind lenders and later transferred intellectual property to a subsidiary that was not a part of its loan agreement. Read more about it here.
Back in May, NeuGroup peer group leader and iTreasurer contributor Anne Friberg moderated a panel discussion on rising interest rates at EuroFinance in Miami. One question that came up was whether now was a good time to refinance. Since rates are rising, the answer might seem like a solid “no.” However panelist Pradipto Bagchi from Allergan noted that although the yield on 10-year US Treasury notes had moved up about 100 bps in the last year or so they are still about 500 bps lower than in the late 1990s. “This is not the end of the world,” he pointed out. What’s more, predicting interest rates is not something that should be expected of a treasury, especially since it’s not a profit center (at most MNCs). What treasury should focus on is (a) enunciating a rate-risk strategy and (b) executing the strategy well by taking advantage of tactical opportunities when possible. Read more here.
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