Markets, taxes & falling commodities

Markets, taxes & falling commodities

Friday 28 November 2014 - Ammar Thair

The raging bull of commercial awareness: when it all happens at once, it’s worth taking note.

Companies have long found ways to save money, however their recent dealings to save on taxation, particularly the much-publicised efforts of Starbucks, Amazon and Google have raised age-old questions surrounding the ethics of a corporation’s financial activity. Clearly much of this is chained within legal frameworks and regulations, to which of course the highest significance must be placed, however, one should not underestimate the effect of public condemnation as a mere stiff upper lip and furrowed brow; sometimes enough of these can be deadly.

Burger King in particular engaged in a deal over the acquisition of Canadian coffee firm Tim Horton’s known as a tax inversion over the past few months, a move which caused much controversy from the general public towards those involved, sparking a staunch defence from the famed Wizard of Omaha himself, investor Warren Buffett, and not to mention the ire of the United States government, whose anger at the deal translated directly into the collapse of a later attempt by US pharmaceutical company AbbVie to purchase UK based Shire for around $54billion. Clearly Burger King ‘had it their way’; unfortunately the rest weren’t so lucky.

A tax inversion is a process whereby a company buys another company in a lower tax domicile, with the aim of then moving its headquarters to that jurisdiction. This is obviously controversial in the same way that companies, who utilise such exotic places as the Cayman Islands, haven’t exactly been keen to share their holiday snaps. However, given that the US government has now shown its willingness to intervene in such deals, it’s clear that public and private outrage has done the unprecedented- permeating through the realm of civil discontent, shaping state legal policy along the way.

Moreover, the Financial Times reports that a knock on effect is that Shire’s share prices fell around 11% immediately after the acquisition deal fell through. Thus, as argued, it’s clear that concern regarding companies avoiding taxation translates from a disappointment of the general public, to a genuine pain of lasting financial consequences.

The dollar meanwhile has recently rocketed to heights not seen in seven years. After a time when the U.S Federal Reserve ended its experimentation with QE- an aggressive bond-purchasing scheme- the Bank of Japan, empowered by Prime Minister Shinzo Abe’s special brand of economics, nicknamed ‘Abenomics’, did the exact opposite, and increased their already aggressive bond-purchasing scheme. The reasons for this are primarily to benefit exports and strengthen the Nikkei 225 Index. The resultant effect was a massive upsurge in the value of the dollar against the yen, and for the S & P 500 to reach its highest point in many years.

At the same time, commodities such as oil and gold fell sharply. Oil for instance fell to around $80 per barrel just months after it was sitting comfortably at $100 a barrel. The fact is that although this seems like a good deal for the consumer, the low trading price for oil potentially has a knock on effect as serving a purpose in what some have perceived to be a so-called proxy war between the United States and Saudi Arabia on one side, and Russia and Iran on the other- each not least unaware of the cold hard truth that each oil producing nation has a bench line price at which it must sell, per barrel, in order to at least break even. Press reports in certain nations had already alluded to the events in question, their fears at least understandable if a little sensational. Indeed, the USSR was bankrupted by Saudi Arabia’s decision at the time to increase production of oil to such an extent that the USSR simply could not keep up, or break-even. Ultimately all sit with the knowledge that he, who can hold out the longest, can win both ‘the battle’ and ‘the war’.

The nature of markets and the world of business are inherently unpredictable. They exist, continually shaped by factors ranging from international conflicts, to the investing confidence of single individuals. However, some things for the moment anyway are for sure. The Bank of Japan, for the time being, has conveyed its commitment to the future of Japan’s economy as residing within its markets and exporting capacity, at the expense of its currency. On the other hand, this interplay of events led to the strongest position of the dollar as seen for a long while, illustrating the truly dynamic nature of the financial markets, from both a national to global stage. Meanwhile, on a universal level, corporations are beginning to realise that avoidance of adequate taxation will not just risk harming their reputation, but pose a real threat to their health also.

Cover image from Youth Village (youthvillage.co.nz).

About the author

Author: Ammar Thair