April 5, 2019

Breakingviews: Altaba’s $11 bln tax will be a gift widely shared

by Breakingviews.

In a world where companies are regularly accused of failing to pay their fair share of tax, Altaba is a reassuring counterexample. The listed investment company formed out of internet group Yahoo is liquidating, with a view to paying what’s due on its large stake in Chinese e-commerce company Alibaba. That’s an equitable outcome. It also gives other tax holdouts reason to stop dawdling and pay up.

Yahoo’s 2005 investment of about $1 billion in Alibaba, giving it 40 percent, was one of the better venture capital bets ever made. Today such a stake would be worth $187 billion. But with huge profit came a huge potential tax bill, which Yahoo and later Altaba – formed when Yahoo was dismantled in 2017 – has spent years trying to minimize. Now Altaba plans to sell $50 billion worth of Alibaba shares, take a final big tax hit, and wind up operations.

Along the way, various advisers floated schemes to avoid paying that tax – some absurdly complex. One was for Alibaba to buy various assets, add some cash and inject this along with some of its own assets into a new subsidiary of Yahoo in return for Alibaba shares. The brightest tax minds in the world tried to find a magic bullet. As Altaba Chief Executive Thomas McInerney said in a call on Wednesday, it turned out there wasn’t one.

Shareholders have lost little by waiting. Altaba’s stock previously traded at a sizeable discount to the value of its assets, even considering probable taxes due. Various measures such as share buybacks and exchanges have allowed Altaba stock to outperform Alibaba and largely close the gap. After an estimated $11 billion tax charge, the company’s assessment of its liquidation value is now pretty close to its share price.

Other firms facing big tax hits from massive gains on investments – such as South Africa’s Naspers, which owns over $140 billion of another Chinese internet company, Tencent – would probably do well to not spent too much time and effort trying to avoid the taxman. The lesson for them: Focus on finding promising new investments, pay what’s due, and save a whole heap of time.


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