Taxation games in the F1 world

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.

21 thoughts on “Taxation games in the F1 world

  1. The key to Corporate taxes is that corporations do not really pay taxes!

    They just pass those costs along to the consumer, just like any other expense.

  2. One gets the impression that a journalist that prides themself for their close connection to Mr E is doing all they can to derail the sale of F1 by CVC to CVC, with articles on tax, competion, loss of race venues etc. One may draw conclusions as to why that is I suppose.

  3. Hmmmm…………..

    But the public aint going to see it that way, are they, when the ordinary man in the street has no choice about how much tax they pay when they see it automatically docked out of their pay, and large organisations such as Google, Starbucks, Amazon, and Vodafone just seem to be able to walk between the raindrops regarding tax. F1 now seems to be part of that brigade and now in the publics perception will probably be lumped in with them and will be associated with tax avoidance.

    I’m not passing any judgements about the rights and wrongs or morality of it – after all, it’s been going on for goodness how long and it’s how the business world goes round not just now but long in the past. But there is an image and perception problem with the public concerning this. These practices are not winning the hearts and minds of the paying public. And it’s the paying public that is putting money in their pockets.

  4. And of course, an important missing entry in the list of alternatives to Swiss registration is the US state of Delaware where you can hide all sorts of corporate structures and beneficial ownerships behind Delaware General Corporation Law – the dirty little ‘secret’ in any discussions criticising so called ‘tax havens’. Wikipedia has a not-insignificant page on the topic.
    Over 50% of publicly traded corporations in the United States and 60% of the Fortune 500 are incorporated in the Delaware.

  5. Indeed. Anyone who thinks Liberty took a punt is seriously deluded.

    Post Brexit, Theresa May could choose to create a very attractive environment for corporate investment and indeed for private investment too. It could be so attractive that the current posturing over passporting is negated by the tax-savings under such a regime.

  6. At present (and for the next 7 months) the Liberty/CVC transaction is undergoing Max Q, or maximum structural load. Many moving parts have to synchronize, like regulatory approvals and shareholder agreements, or the possibility of a material adverse event could become a probability, resulting in the transaction cratering and Liberty being left at the altar, an 18.7% passive investor with a highly Illiquid investment on it’s hands.

    Or in other words, exactly what Mr Ecclestone wants.

  7. The latest number (2014) for percentage of corporate tax in the U.S. as a percent of tax income is 9% and the effective corporate income tax rate was 14%. Yes, the statutory rate is 35%, but no one pays that, they all have their sweet deals; Trump the billionaire pays no taxes at all.

  8. A very accurate summing up, and which illustrates the folly of some elements of the political spectrum which would have it that taxing corporations at ninety per cent would solve all of our problems and is the only way to go.

  9. So is it right that a large corporation can get the government to build roads specifically to their new premises without paying any tax? It’s been proven that letting the rich pay little or no tax doesn’t contribute a trickle down effect. They simply maintain the minimum presence to sell in that country whilst using the cheapest labour available elsewhere to actually manufacture products. So what happens is that the taxation burden passes to those least able to afford it. Either that or sevices and welfare have to be slashed to cover the taxation shortfall.

    1. Nothing wrong with tax-avoidance per se but of course it costs money to do so and ensure it cannot be interpreted by others as tax evasion.

  10. When you write about the financial goings on of F1 I often wonder why the American Nascar doesn’t have the same problems. I know you have mentioned that race promoters are treated better but how else is it different – and is it better? Is it something that F1’s new owners should be looking to copy? If you ever get a moment to compare, I would appreciate that. Thanks

  11. Dangerous turf, Joe. Tax. The world is actually getting very good at feretting out abusive structures (think the OECD’s BEPS, EU tax initiatives) and the low substance structures (few or no key people in the applicable jurisdiction) are actually being dismantled before the transparency requirements kick in. Nobody is waiting around for tax audits to materialize and having to accrue for them…

    Also – please don’t knock Switzerland because most structures are actually quite robust. It’s a great place to live with low income tax rates to boot, getting the C-suite to spend their lives there is not hardship (actually on the People front – London could be considered just that).

    Re low corporate rates – check out Hungary, they are going to 9 percent. Should be interesting.

  12. Much more boringly than that, Liberty is a publicly traded company in the U.S., so ultimately pays tax there whenever it repatriates its profits. All the big American companies that use tax havens are ultimately only deferring the bill.

  13. There’s another issue here, which is the question not of how much tax is paid but what benefits accrue from those taxes.

    So it’s an issue not just of morality – the idea that everyone (organisations and individuals) should contribute something to the society from which they benefit – but also that companies benefit directly from the state’s investment in infrastructure, in education, in sickness benefits etc. They should pay taxes because they derive benefit from them.

    Many companies in the UK complain that they can’t find enough skilled workers – and then try to minimise their tax outflow. But those two things are related: taxes pay for education and if there’s not enough cash to pay for it, well, you have to ask the question.

  14. So, by the rules of Berniewatching, something else entirely is going on. Either his typemonkey has gone rogue, or Bernie has a good reason to cause upset. I would imagine that the deal with Liberty is pretty well sealed for Bernie to take a risk upsetting them, so the target would be something else. Regulators? Tax people?

  15. And of course, an important missing entry in the list of alternatives to Swiss registration is the US state of Delaware where you can hide all sorts of corporate structures and beneficial ownerships behind Delaware General Corporation Law – the dirty little ‘secret’ in any discussions criticising so called ‘tax havens’. Over 50% of publicly traded corporations in the United States and 60% of the Fortune 500 are incorporated in the Delaware.

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