08/31/16   Global Tax Risk

Editor’s Corner

Ron Rowland

If you think U.S. tax laws are complex, be thankful you are not a global corporation subject to the tax whims of various countries and taxing authorities around the world. I’m not trying to say that U.S. citizens have it easy—quite the opposite. The U.S. tax code is 74,608 pages long. Assuming double-sided printing on standard paper, where a 500-sheet ream is 2 inches thick, a printout of the code would stand more than 12 feet high. The U.S. Department of the Treasury expects taxpayers to comply with that 12-foot stack of rules and regulations every year.

This growing pile of regulations has not escaped the attention of politicians. I cannot remember a presidential election where simplification of the tax code was not part of at least one major candidate’s platform. Although talked about endlessly, nothing ever seems to come of it. Instead, the tax code grows larger and more complex every year.

Granted, not all pages affect everyone, but it’s still a daunting task to figure out which sections do apply to your personal situation. If you happen to be a business owner, then you also get to “enjoy” the corporate, partnership, payroll, and Social Security provisions of the code. Once you have that mastered, then there are still all of the state tax codes to contend with.

Yesterday, Apple (AAPL) was confronted with a tax problem that makes all other tax issues appear minuscule. The European Union (“EU”) is claiming that Apple owes Ireland 13 billion euros (about 14.5 billion U.S. dollars) in back taxes. To put that number in perspective, it is a larger figure than the annual GDP of 74 of the 189 countries tracked by the International Monetary Fund. EU regulators claim that the tax treatment Ireland extended to Apple in 1991 (and 2007) is a violation of its rules that forbid companies from acquiring a competitive advantage through government help or assistance.

With $14.5 billion on the line, all sides can afford armies of legal help, so you should expect this issue to exhaust all possible appeals before any final resolution is achieved. Apple’s stock performance over the past couple of days is comparable to the broader market, so it does not appear investors are assuming any short-term impact. Besides, the amount is chump change compared to the $215 billion of cash on Apple’s books. However, the fact remains that all stocks are subject to a multitude of risks, including political and tax risks.

Interestingly, the U.S. Treasury is the party claiming foul. It believes it is the entity entitled to those tax dollars, although it is not in a position to collect until Apple brings its foreign profits back inside U.S. borders. The real battle here is between the United States and the European Union. Apple and Ireland both seem to be pleased with the current arrangement, and the pair is looking like a couple of reluctant pawns in a much larger chess game.

Changes in the sector rankings were subdued this past week with Technology remaining at the helm for a fourth week. Financials was the big upside mover, jumping from fifth to second thanks to edgecharts-2016-08-31strong gains in the banking and insurance industries. Materials and Industrials held steady, but Energy fell three spots to take the place of Financials. Contributing to Energy’s decline, crude oil fell back below $46 a barrel after pushing above $49 about two weeks ago. Real Estate lost momentum but still managed to climb two spots. Consumer Discretionary held steady, while Consumer Staples slid two notches. Health Care tumbled three places lower and is now in danger of slipping into negative territory. Telecom and Utilities are still the only two categories with negative momentum, and this week they slipped further into the red.

All style categories lost momentum, but the current environment still favors smaller-capitalization stocks. Small-Cap Value, which has topped the style rankings in five of the past seven weeks, leads the quartet of the smallest-capitalization segments. Micro-Cap moved ahead of Small-Cap Blend and Small-Cap Growth, and this elite group now has a substantial lead over the rest of the field. In the middle, Mid-Cap Value moved two spots higher, Mid-Cap Blend didn’t budge, Large-Cap Value climbed one, and Mid-Cap Growth gave up two spots. However, they all remain tightly bunched with only one momentum point separating the four, suggesting the relative order is not significant. Among the laggards, Mega-Cap moved off the bottom and Large-Cap Growth fell the final step to last place.

All global categories are posting lower momentum scores than a week ago, although the three developing market categories still have a substantial lead over developed markets. China tops the list for a second week, as Latin America settles into its new role of just being second best. Emerging Markets rounds out the trio at the top. Japan and Canada swapped places, with Japan gaining the advantage this week. In the lower half of the rankings, World Equity climbed a notch, the U.S. moved two places higher, and the Eurozone improved a spot. The downside movers included Pacific ex-Japan (falling two) and EAFE (dropping from eighth to 10th). The U.K. sits on the bottom for a fifth week.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“At its root, the commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.”

Tim Cook, Apple CEO


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