The BEPS project and PEs (not permanent establishments)


This article isn’t about permanent establishments but price /earnings ratios. I’ve been surprised by the fact that there has been little coverage of the impact of BEPS changes to PE ratios and hence share/stock prices.


Lets assume a group has a tax rate of say 15% (which is low by anyone’s standards) and a PE of 20 (which broadly applies to the sector its in). Under a robust outcome from BEPS one might expect that tax rate to increase as the benefits of hybrid mismatches, etc decrease and let us assume that the tax rate increases to 25%. What is the impact on the Group’s pe ratio and share price? Well if earnings are currently forecast to be 170 (200 with a tax charge of 30) then earnings will decline to 150 (200 with a tax charge of 50). So earnings will decline by 12% and if the PE ratio is not affected then the share price will fall by the same amount.

This might not seem a large amount, but for a Group with a market cap of say $10bn it’s the not insignificant sum of $1.2bn.


Now this is a gross oversimplification of course. However, what surprises me is that investors do not appear to be focussing on this and realising that a proportion of earnings from Groups with low tax rates might be more flaky than they were, if BEPS has a significant outcome.


So who is going to economically bear the cost of increased tax as a result of BEPS changes? Will it be the investors or the Group’s consumers?


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