So this is the current equivalent of the share buybacks on the previous decade?
A company involved in round tripping passes fictional money in a circle and every company that touches it claims both revenue and expenses simply for passing it along.
What does this mean? What's the trick?
The trick is essentially to buyback your own shares and destroy them. That effectively redistributes the value you bought to other shareholders, much like a dividend would.
How is that better you may ask? two reasons:
- Most investors prefer to accumulate rather than receiving cash. If you post dividends, they are immediately subject to withholding tax, so you get taxed before reinvesting.
- In a lot of cases, capital gains tax and withholding tax are different, the former being much lower than the latter. This is especially the case for funds with foreign UBOs, which incur 2x15% WH tax at the source.
- Buybacks are just more flexible, those that want cash can sell, those who prefer to accumulate are happy to stay, there's no real downside.
Well we can argue on the meaning of trick I guess.
Share buybacks are essentially a way to achieve the same effect as dividends, but in a non-obvious way, which has the benefit of avoiding taxation. That's a "trick" in my book, but I guess terminology doesn't matter that much.
> They'll still pay tax on it when they sell it.
Not but it's not _equivalent_. The tax paid on capital gains is not the same as the withholding tax. And paying tax _after_ compounding is not the same as paying it _before_.
Share buybacks are _effectively_ a trick to circumvent withholding tax for investors not willing to divest.
But why? Minimising tax legally is...legal, and not a trick. That's all tax avoidance is.
> The tax paid on capital gains is not the same as the withholding tax.
That seems totally fine - if the rules are different then that's up to the people who write the rules. It's not a trick to choose to be paid via one method or another.
I think we are lost in translation here. I am not a native English speaker, so there may be a subtle implication in "trick" that you see and I don't.
I meant "trick" as in "trick of the trade", a clever/crafty way of achieving something that may not be obvious for less experienced individuals.
Re-phrasing my original comment for clarity: "Share buybacks are just a technique to lower WH tax, why do you see this as anything related to round tripping as related in this article?".
Some of this is paying for barely useful assets using inflated stock, or with cash borrowed with inflated stock as collateral for the cash.
Slightly offtopic: If a company does a stock buyback because they think its undervalued, what happens next? Does the stock go up and they're satisfied? Does the stock go up and then they sell it?
If they're selling it to realize profits, I say that it tantamount to pump-and-dump. If they sell it just to hike the price, why not distribute dividends with their excess cash reserves?
The reason this is often done instead of a special dividend is that dividends create an immediate taxable event for all investors, which is considered less flexible than the capital gains tax associated with a stock buyback.
Besides the tax treatment difference, it's mostly a signalling/communication choice: share buybacks increase EPS which is a nice story, whereas dividends signal reliable profits.