Tax authorities ruling goes against Uponor

Plumbing and indoor climate solutions provider Uponor Corporation (OMXH: UNR1V) is mired in disagreement with tax officials. Within a week Uponor gave two separate stock exchange notices on back taxes ordered in Finland. In the first release Uponor said that Finnish tax authorities ordered Uponor to pay 3.2 million for adjusted 2005 taxes and a week later a taxation adjustment decision for 2006-2009 was received and it too contains an order to pay back taxes, this time at 11.4 million Euro clip, consisting of taxes, interest and surcharges.

Uponor’s and tax authorities’ dispute rises from market-based internal transfer charges to Finnish subsidiary Uponor Business Solutions Oy. Tax authorities feel that the transfer prices needed to be taxed Group-wide instantly whereas Uponor’s view is that the payment on the taxes should be scheduled over a longer time as was applied by the company in its accounts as per OECD transfer pricing guidelines: in this case when the service (Uponor Group’s common information system implementation, maintenance and development) for the payment in question was taken into use in individual Group companies.

The penalties are due in January 2012. Uponor pretty much claims it has failed to make tax authorities to understand how the issue should be handled and plans to appeal and submit a request for rectification to the Board of Adjustment. Another potential sword falling in the horizon is a possible class action suit stemming from water damages caused by allegedly faulty plumbing fittings made and sold by a now defunct related company in the USA years ago.

Uponor has traditionally paid a hefty dividend and during the past five years, dividend was larger than EPS on 4 of them and not far off in the fifth. Although this can be explained by Uponor’s extremely strong financial position in 2006, with continued weak profitability since 2009 and these potential charges, the 2009-2010 level of 0.50-0.55 cents per share dividend shouldn’t be considered automatic for 2011 despite a still quite healthy financial position.

Uponor has performed relatively well in the past 10+ days in spite of the tax ruling mainly on better than expected data from US housing market. Prior to that there was a considerable dip on some heavy selling from a larger owner, which was quickly eaten away by bargain-hunters. Uponor starts seeing improved orders with a few month delay after housing market starts to pick up. In a down-cycle, Uponor is able to offset some of the decline from renovation works. A longer-term industry wide movement from copper pipes into plastic has been working in the company’s favour.