MOSL: INFOSYS (Buy)-APA agreement with US to bring down tax rate
​INFOSYS: APA agreement with US to bring down tax rate
(INFO IN, Mkt Cap USD37.1b, CMP INR1041, TP INR1200, 15% Upside, Buy)
The Development: Infosys (INFO) has announced an Advanced Pricing Agreement (APA) with the US Internal Revenue Service (IRS), under which both parties have agreed on a methodology to allocate revenues and compute taxable income of the company's US operations. The agreement covers a 10-year period from FY11-21.
The impact: Three-fold impact as a consequence of the APA would be:
- INFO will reverse tax provisions of ~USD225m that were made in the previous period and are no longer required. This is the P&L impact and will be seen in 3QFY18 earnings, driving EPS higher by INR6.7 (10.4% on FY18E base).
- INFO is expected to pay out USD233m due to the differences in payable taxes for the prior period and actual taxes paid. This is the cash flow impact that will play out over the next few quarters (exact period not specified).
- INFO's overall effective tax rate is expected to decline by 100bp up till FY21 as a consequence of the agreement. This drives a marginal upgrade of 1.4% to our future earnings estimates.
What is APA?
- An advance pricing agreement (APA) is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time. It allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement.
- For most taxpayers, certainty regarding their transfer prices is the single-most important benefit gained through the APA process. Transfer pricing examinations are often time-consuming and expensive. The APA process generally takes substantially less time to complete than a transfer pricing examination followed by a dispute resolution mechanism, which can easily last three to four years.
Infosys is a global technology services company based in India. Co. provides business consulting, technology, engineering and outsourcing services. Co.'s end-to-end business solutions include: Consulting and Systems Integration - consulting, enterprise solutions, systems integration and advanced technologies; Business IT Services - application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; and Products, business platforms and solutions, including Finacle™, which addresses core banking, mobile banking and e-banking needs of banks worldwide.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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