Brexit, F1 exiting the UK ?

The fact that the Formula One group may have to pay more British tax in the future, as revealed by a journalist who prides himself on his close connection with Bernie Ecclestone, is a story that is unlikely to make life any easier for Mr E. The story reveals that Formula One pays very little tax, which is not news to anyone who has looked at how CVC Capital Partners (and similar private equity firms) operate. They squeeze money from every possible source. Profit is the heroin of the people in private equity. Perhaps in their world such a story is a source of pride, but it is unlikely to impress the people who are in the process of buying the business. They understand this stuff. John Malone and his crew are known for their complex and clever deals and their remarkable success.

F1 is a self-absorbed world which thinks that the universe rotates around the sport. It doesn’t. Nicolaus Copernicus was right. Malone and his people regularly deal with transactions which dwarf the F1 sale – and they know how to do it. Weeks of due diligence were gone through before Liberty committed to the transactions, and the goal of this work was to discover exactly what the company was acquiring, what obligations it was assuming, the nature and extent of the liabilities, difficult contracts, litigation risks, intellectual property issues and, of course, taxation arrangements. Due diligence generally includes questions being asked about tax agreements and demands to see all correspondence with tax authorities.

So the fact that the future taxation might change should not be new to a company like Liberty and having this pointed out to them in public serves no good purpose except to irritate them. Perhaps it earned the writer money to eat, but is it not going to be seen by some as an attempt to disrupt the process that is being gone through at the moment? One presumes that Mr E does not wish people to get the idea that he is doing things that might cause upset. The buyers and the sellers just want to get on and do business.

Liberty did tell analysts that Delta Topco had a very efficient tax structure, which it does, but if there is a more efficient structure then investors will be only too happy to see such changes implemented. However, until the various clearances come through, Liberty is not going to be doing anything that might cause problems with the market regulators. If/when the tax structure needs to be modified, it will be, but this can only happen after the deal is completed. Stock analysts will look at such matters if or when the company declares that they are necessary.

There are, of course, plenty of ways to solve such a problem, if indeed there is a problem. The obvious move being to re-register the companies concerned in new jurisdictions, if the current tax authorities do not wish to come to suitable arrangements with sweetheart deals, exemptions, and loopholes of various kinds. Governments do not want to lose big high profile businesses, which employ people, or are prestigious. We have seen this recently with Nissan in the UK.

Moving profits offshore is common practice in the corporate world and while governments may not like it, there is little they can do except to try to close down the tax havens. However, a lot of countries see the value in offering very competitive corporate taxation rates and do not care what the rest of the world thinks. For now, however, tax havens are completely legal if the companies are transparent in their use of them. According to surveys that have been done in recent years, American multinational corporations reported $47 billion in profits to Swiss subsidiaries in 2010 and just short of 30 percent of Fortune 500 companies have subsidiaries in Switzerland. If a Swiss registration is not deemed a good idea, there are many other options, including the Bahamas, Bermuda, Panama, Hong Kong, the Cayman Islands, Mauritius, Luxembourg, Jersey and so on. Moving businesses abroad can cause job losses. Still, it can also be very useful because it can provide the buyer with the opportunity to do away with existing structures (and people) and to build the company that they want, where they want it, rather than taking over what someone else created around different goals and strategies.

What is really interesting in the world at the moment is that there is a push going on by some governments to attract business by cutting corporate taxes. UK Prime Minister Theresa May is said to be planning to lower corporate rates from 20 percent to 17 percent by 2020. President-elect Donald Trump suggested that if he was elected, corporate taxation could drop from 35 percent to 15 percent. But, neither country will be able to compete with Ireland, for example, which offers 12.5 percent, while some tax havens have zero tax, or are willing to negotiate. 

The knock-on effect of this is that governments often negotiate as well, in order to keep the companies involved in their countries. There is, in fact, a very solid argument for corporate taxes to be cancelled altogether, as they do not contribute much to national budgets. The Organization for Economic Cooperation and Development says that the average contribution of corporate taxes in developed nations is only 2.8 percent, while both the UK and the US have even lower numbers than that. The argument is that if corporation taxes are abolished, business will boom, more people will be employed and money can be made in other ways.

In other words, Formula One could, if necessary, complete its own version of Brexit, by exiting the UK. Thus the UK government might argue that getting a couple of hundred million is better than getting nothing and losing jobs and prestige… It may not be perfect, but the alternative is clearly not better.

When it comes to investors, when the time is right, the numbers will either stack up or not. The average investor does not care whether a company is headquartered in South Dakota, Appenzell Innerrhoden or at the Sharjah Airport Free Zone, so long as the business does well and they make money. End of story.

by Joe Saward