Tax avoidance

Tax avoidance means the corporations using the tax law to gain a tax advantage to reduce tax liabilities. It is merely another term for tax reduction. As usual, the businesses will minimize a tax bill but avoid deliberate deception. However, it is considered as contrast to the spirit of law. So, using ways not predicted by the law, tax avoidance will relate to the exploitation of loopholes and gaps in tax and legislation. In general, avoidance is regarded as actions within the law.

One of the most common schemes of tax avoidance is transfer pricing where all goods and services are shifting within a network of subsidiaries of the same multinational company, but different jurisdiction. The primary benefit of transfer price is multinational corporations will move their profits to tax havens in order to avoid tax in some developed countries. Tax Havens are countries where the tax is either very low, or zero. Follow that, the vast profits of these companies usually are reported in tax havens such as Switzerland, Luxembourg, Cayman Islands and Ireland. However, if the company moving to a tax haven, it will requires a lot of planning, research, and overcoming various problems.    

Facebook is a typical example regarding tax avoidance in UK, specifically in transfer pricing. According to the Guardian, this company reported lower sales figures than predicted and Facebook also sets up its European headquarters are based in Ireland in order to obtain the advantage from lowered tax incentives for corporations. Besides, Facebook provided information about its U.K. revenue approximately $32 million, however according to estimation of analysts, profit that the firm actually made around $280 million. And follow the arrangement between Facebook and Ireland, the social network was able to paid taxes only 11 percent of its total U.K. sales. On the other hand, the reason for setting its headquarters in Ireland that Facebook reported the Guardian and the public is due to good local recruitment.

In this case, Facebook can gain many benefits when implementing transfer pricing. Firstly, regarding internally of this corporation, it can reduce significant amount of tax for them which leads to increase profitability. Another positive note is the new transfer pricing system will bring a resource of motivation. Facebook have a chance to implement new strategies on their business operations and transactions. Base on   organizational structure of each subsidiary, acquisition method, the way to invest or different policies about taxation in different countries, they can give suitable and flexible planning for a whole corporation.  However, although tax avoidance is legal but it is considered as immoral under ethical view. The press and the public detected misconduct of Facebook and it will affect the reputation of the company. Tax contributions are considered as an indicator about the concern of any company with society and environment around them. So, the strategy about tax avoidance of Facebook can make bad image with public and lose the trust of customers. The consequence is to decrease the number of users as well as profits also going down.

Raising Finance

Raising finance is considered as essential activity with any business if they want performs effectively. In my opinion, the most difficult step is the company must decide which kind of financing method best suit with their business. Base on the nature and size of the business, the managers have to determine the total amount of financial needs. As a result, the right choice puts business on a firm financial footing, avoiding risks and increasing financial returns. There are two methods to raising funds in business: equity financing and debt financing. Each method is implemented in many different ways and has advantages as well as disadvantages for business.  

Firstly, equity financing is a method which gains money from investors through exchange for an ownership share in the business. The most common way to raising capital through equity financing is issuing ordinary shares. The primary advantage of equity financing is that the business is not obligated to pay back the capital.  However, the shareholders and investors expect to receive positive result about financial situation of company to guarantee that their investment develops effectively. But, one of the main disadvantages of this method is that the investors will hold a part of share and become partial owners of the business. Therefore, the owners of this company can lose some control and decisions rights in each activity. From that, the managers have to face with problem that they would lose autonomy in operating the company. Besides, if the business applies equity financing method, they must spend much money in different cost to issue shares and satisfy shareholders.

In terms of debt financing, the company can raise capital through many ways such as borrow banks or government agencies, bonds, etc. Financing business activities through debt financing allows business owners to take control of the entire business operation. Moreover, the interest rate that the company must pay would be considered as valid expenses and tax-deductible. This deduction is part of the profits of company and helps them to reduce the amount of taxation. However, if the business does not pay the loan on time, the credit rating of the business will be affected. It makes business difficult when loans in the future, or may not be allowed to borrow. In addition, with new businesses, commercial banks may require business owners must mortgage personal property. This means that if the company is not operating effectively, the owners will lose all personal property which used mortgage. The business mobilizing business loans as much as the higher risk of bankruptcy.

For example, on 14 February 2013, American Airlines and US Airways have confirmed plans to merge, in order to form the world's biggest airline. The merger will bring an estimated market valuation of $11bn. The shares of the new company will be owned by American Airline creditors, who will have 72% of the company and the new business will use the American Airlines brand. However, the chief executive will be the current US Airways boss, Doug Parker. This merger could be considered as one of the ways of equity financing. When merging, the company will attract more investment opportunity from wider ranges of investors. Therefore, the supply of equity capital is more abundant while the company no need to waste any direct costs to issue shares. It helps to improve value of long-term shareholders and company performance in the near future.

Week 2: Stock Market Efficiency

Stock market efficiency is a market in which stock prices reflect fully and immediately all the information currently available on the market. The price increases or decreases due to market response to new information. And in random walks theory of Kendal (1953), he also suggested that the share prices trend cannot be predicted by looking at the previous day’s price change. So, share prices just are affected and changed by new information in the market. Any prediction or analyst based on the trend of the past did not effect to this theory. According to Fama (1070), the efficient market is divided into 3 types: weak-form, semi-strong form and strong-form efficiency.

On 15^th January 2013, shares of Burberry have risen 5% after the company reported a strong increase in total sales for the final three months of 2012 (increased by 9% to £613m, up from £574m compared with previous year). The first reason for a significant increase of total sales is due to sales of coats, scarves, men's tailoring and accessories. Besides, another reason was the impact of new shop openings. However, wholesale sales of this company drop 5%, which it blamed on weak trading conditions in Europe. According to information from Burberry, retail sales saw the biggest rises across Asia Pacific, led by Hong Kong and China. While in European area, retail sales were almost unchanged. In my opinion, although wholesale sales decrease in Europe, but revenues of Burberry still gain over expectation of analyst, so the performance of this company is considered as successfully.

In case of Burberry, I think stock market efficiency belongs to semi-strong form. According to Arnold (2008), in semi-strong form, most information in annual reports, profit or dividend announcements are reflected in share prices before the announcement is made. Revenues of Burberry are published by the board of the company to all people who care Burberry’s financial situation such as investors, shareholders or speculators. Through various media channels like newspaper, internet, TV, radio, investors can access all information quickly and accurately. And then, they will immediately evaluate the performance of Burberry and make decision whether invest or not.  As can be seen, this information of Burberry will affect directly to the price of shares in market.

However, I still consider about the accurately of information in these situation. If the company, for example Burberry, intentionally provide fake information or mixed information to attract investors and increase value for shares of them. So, how the investors can detect and collect information exactly?

Week 1: Shareholder Wealth Maximisation

On 24^th January 2013, BBC News informed about the returns on profit of Nokia in the last three months of 2012, but there were no dividend would be paid for shareholders. According to information from BBC, this was the first time during 20 years that shareholders of Nokia have missed out dividend from the company. The reason that Nokia explained for paying no dividend is the company wanted to manage flows of cash as well as guarantee for all strategies in the future which are implemented flexibility. I guess there were incompatibility which happened between management’s decision making and shareholder interest of Nokia. Because, in this decision, management of Nokia focus more on short-term strategy, whilst the shareholders usually care about long-term benefit. In fact, Nokia made a worry for shareholders and investors when spending too much cash in order to invested in new products.

However, all figures about sales and profits of new product – Lumia phones create advantage condition for Nokia to prove that the strategy of this company operate effectively. The company sold 86.3 million devices during the quarter, including 4.4 million Lumia smartphones. This change in strategy contributes to a 70% rise in Nokia's share price in past months. Besides, the actual expense which is lower than the forecasting one helped Nokia to save costs in these new products.  In my opinion, the strategy matches with stage one of the value action pentagon “raise investment in positive spread units”. Nokia concentrates on developing and releasing more Lumia line products as a competitive advantage in the market. For example, in recent time, Nokia is releasing new Lumia 820 and 920 phones, which will use Microsoft's latest Windows 8 software. I believe the success of Lumia phones also impact upon their shareholders wealth. Because this strategy are considered as a good strategy which suitable with capabilities of Nokia and enhance the finance condition, three elements that generate shareholder value are satisfied.

On the other hand, in 2012, Nokia also announced information about 4,000 job losses at plants in Hungary, Mexico and Finland. In this case, Nokia applied the third stage of the value action pentagon “Divest assets from negative spread units to release capital for more productive use”. By disinvesting and cutting off labor in existing market, Nokia would spend more capital and enhance sources to develop in emerging market like Asia, China. Nokia will remain and develop customizing phones, while the company also moves the actual assembly to South Korea and China. The aim of this decision is placing its production closer to its component suppliers who are also based in these markets. As a result, when focusing on emerging market, Nokia would expand market easily, increase profit and enhance their capabilities. So, shareholder wealth maximization might also be ensured as a result.

In conclusion, Nokia has some positive strategies to recover the current situation and gain profit for the company, but they have to face with strong competition from Apple and Samsung. In fact, in recent years, Nokia has been losing market to rivals Apple and Samsung. Therefore, in order to create the trust of shareholders and maximize shareholders wealth as well as attract investors, Nokia must combine efficiency between strategy, capabilities and finance to perform in the best way.