Blue chips just got riskier

A huge new trade deal – the Trans-Pacific Partnership (TPP) – grabbed headlines this week, as America and various Asian and Latin American nations finally signed on the dotted line after five years of back-and-forthing. Now, we’re all for free trade and the abolition of tariffs, and while the details of these deals usually reveal all sorts of loopholes and cop-outs and nods to special interests in one country or another, there’s enough there for us to like the look of in terms of what positives there might be for one of our favourite markets – Japan.

Any deal that can loosen the grip of the agricultural lobby “could have a significant effect on Japan”, which provides more taxpayer support to its farmers than pretty much any other wealthy country, notes Jonathan Allum of SMBC Nikko Capital Markets. Of course, the deal still needs to be ratified by the individual countries (although America and Japan are the most important signatories), so it’s likely to be a while before any impact becomes apparent.

But amid the TPP headlines you may not have noticed that another major transnational deal was agreed this week. And while you might not have heard quite as much about this one, its overall impact, both in the short and the long term, is likely to be far greater than the TPP’s. I’m talking about an agreement on corporate taxation between the G20/OECD group of major economies.

The key recommendation of the report from the “Base Erosion and Profit Shifting Project” (BEPS for short) was that companies should report their sales, profits and tax paid on a country-by-country basis. As Marcus Ashworth of Haitong Securities points out, this means it will be possible to “globally map where activities are and where tax is paid”.

In other words, it’ll make it harder for big companies to funnel profits made in one country through another with a more generous tax regime. As Ken Almand of tax consultant Baker Tilly points out, “businesses will have to ensure their activities stand up to an unprecedented level of scrutiny, and prepare for an increase in countries squabbling over their global tax take – the same slice in some circumstances”.

This is a risk that we at MoneyWeek – and my colleague Merryn in particular – have been highlighting for quite some time. At a time when governments are cash-strapped and voters are angry, multinationals stand out as an easy political target. With minimum wages rising across the globe and more scrutiny of tax affairs, it’s going to become increasingly difficult for the global blue-chips that have frequently been viewed as ‘safe’ bets for cautious income investors during the post-financial-crisis years to maintain their profit margins. That might not matter if they were cheap and this was priced in – but they’re not. Now might be a good time to check your portfolio for ‘expensive defensives’.

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