M&A activity by US multinationals in technology sector likely to increase, says expert
Cash reserves held outside the US for tax reasons by US multinationals are “likely to fuel a big increase in M&A activity over the next year”, said Eloise Walker a tax expert at Pinsent Masons, the law firm behind Out-law.com.30 Jan 2015
Corporate Tax Corporate tax International tax M&A Advanced Manufacturing & Technology Services Europe Asia Pacific
Apple, the US technology company, has reported the biggest quarterly profit ever made by a public company. It reported a net profit of $18 billion in its fiscal first quarter. According to Standard and Poor’s, this topped the $15.9bn profit made by ExxonMobil in the second quarter of 2012.
Apple’s figures also show huge net cash reserves of £142bn. Eloise Walker said “The reason why multinationals like Apple are sitting on so much cash may be because of the way the US tax system operates”.
The US is unusual in having a ‘worldwide’ tax system which taxes companies’ profits wherever they arise – even if they are earned overseas. If profits are earned overseas, the tax can be deferred, but only so long as the profits are kept out of the US. If the profits are repatriated to the US they will be taxed at the normal US rate – which at 35% is one of the highest rates of corporate tax.
“There is therefore a massive incentive for US multinationals to keep their foreign profits out of the US. This leads to the crazy situation where groups like Apple borrow money in the US to fund returns of value to their shareholders, despite having huge cash reserves elsewhere in the world,” said Walker.
She said that “US multinationals will be looking for a home for these cash reserves and this could fuel an increase in European M&A activity, particularly in the technology sector, where many of these multinationals operate.”
“The fact that the pound and the euro are both low against the dollar adds to the attractiveness of European investments for US companies; making UK and other European investments look cheaper than they were before,” said Walker.
“Although there are international moves afoot to clamp down on the avoidance of tax by multinationals, it is likely to be some time before there is a fundamental change in the international tax system. Any changes proposed are unlikely to have much practical effect in the foreseeable future on the cash mountains already held by US multinationals, which are currently available for investment”.
The Organisation for Economic Co-operation and Development (OECD) is looking at ways to prevent base erosion and profit shifting (BEPS). BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid. Following international recognition that the international tax system needs to be reformed to prevent BEPS, the G20 asked the OECD to recommend possible solutions. However, according to Eloise Walker, such solutions “are unlikely to impact the US position in the short term”.
In July 2013, the OECD published a 15 point Action Plan and the first formal proposals dealing with seven of the 15 specific actions were published in September 2014. The remaining actions are due to be published in September 2015.
The European Commission is also investigating the favourable tax rulings given by some EU countries to multinationals. In September 2014 the European Commission said that advance pricing arrangements (APAs) agreed between the Irish tax authorities and Apple may have given the company unfair advantages incompatible with EU state aid laws.
