Wow, as much as I often admire Barack Obama, it is sometimes difficult to understand where he’s going… I mean in theory it is probably impossible to argue for tax havens. But in practice, even talking about this in such tough times is probably not the best incentive for companies to send money to their US businesses or to invest more broadly in the US.
Tax Havens have been becomming a lot more complex year after year as clever accountants and fiscal specialists find smarter and smarter ways to avoid paying taxes in countries with higher margins by reporting their income in other countries. There really is no limit to the ways to do it and talking with someone in the field for an hour or two will blow you away.
I think that most people oversimplify the issue and simply say that Tax Havens are used by cheaters. Turns out that it is not quite that clear. In fact, over 80% of the largest US companies have a base in a tax haven. Here is a simple example:
-A plane company based in Canada builds a piece in Mexico that costs 100$. This piece will be sold to a Canadian client for 1000$, a 900$ profit.
If the company simply buys the part from its Mexican subsidiary, it will be paying taxes on 900$ of taxes. At a corporate rate of 20%, that would be 180$.
-Now let’s imagine a different scenario, one where the Mexican company sells the piece to a company based in the Cayman Islands for 100$. The Cayman Islands company then sells it to the Canadian company for 900$.
In this case, the Cayman Islands company has a profit of 800$ (900$-100$) and the Canadian company has a profit of 100$ (1000$-900$). If the tax rates are very different from one place to another, this can have a major impact on the taxes paid. Confusing? Imagine if you start doing this for services or pieces that are difficult to price for the Canadian government. It becomes very very difficult for the government to act. And in this case, the Canadian government would have a tough time going after the Canadian company as it will need proof that the transaction was legitamate.
This is just one of an almost infinite amount of schemes that can be developed. I’m not saying these should not be looked into, I really am not. But I somehow think that right now this should not be a priority but rather Barack Obama should be looking into further stimulus for the economy, not further taxation that could drive away some business…
Stress Tests are out..sorry Bank of America (BAC), you need $35 billions
The results of the tests performed on 19 companies revealed they should get $75 billions in additional capital in order to be ready for a possible downturn. The biggest loser of course was Bank of America which was declared to be out by $33.9 billions, almost half of the amount needed by the whole system. Of course, I don’t want to brag but do you remember when I discussed how investing in Bank of America was like investing in a casino? Of course it’s ironic to see that the stock is up about 200% since that point as well, as investors now think BAC will surely survive this crisis and probably even profit from investments such as the purchase of Merrill Lynch.
With these tests, do you think that investing in financials is now the right thing to do? It’s unclear but at IntelligentSpeculator we still consider US banks to have a lot of possible downside. And in any case, we still consider that the banks have so much unknown priced in that it is very difficult to value. Playing an economic rebound? Then sectors such as technology look a lot more attractive, no doubt about it.
Even BAC, the one company that is deemed to require massive reinvestment has openly commented the results as very positive and as proof that the company is healthy and doing well. I’m not sure how needing $35 billions means that everything is well and running smoothly but I guess in a way that is exactly what Bank of America is saying.
The one thing that these results does bring is more certainty and knowledge for investors about the state of the financial sector, something the investment community had been desperately seeking for over a year now. Institutions like Citibank, Goldman Sachs, and many others are now able to point to an external report that gives a detailed analysis of their capacity to tolerate losses and thereby their capacity to sustain important losses without the fear of going under…