Yesterday, June 16, was Bloomsday. Bloomsday was first celebrated in Dublin in about 1954 and then in London. On Bloomsday 1956, Ted Hughes and Sylvia Plath were married, not a good omen. In Geneva, to which Joyce fled after Trieste became unsafe, and where he died, the local Bloom’s Tavern celebrated June 16 annually starting in the 1970s.
We are thinking seriously about Ireland because its attractions as a corporate headquarters is becoming notorious. Today Medtronic, a US firm from Minneapolis announced that it would buy Covidien plc, its Irish-incorporated fellow maker of medical devices for a 30% premium over Friday’s closing price. MDT will help pay this huge premium by “inversionâ€, using a foreign takeover to move to a lower-tax jurisdiction. Ireland has a 15% corporate tax rate while the US rate is 35%. The merger, according to Bangladesh-born MDT CEO Omar Ishrak, will be to allow MDT to cut costs, being nipped by hospital penny-pinching under Obama-care and new medical device taxes to fund it.
It will also give Medtronic access to its $14 bn offshore cash pile of profits kept overseas which would be taxed if it was repatriated to the USA.
Some pundits think corporate taxes should be abolished or not imposed when companies bring home the cash stash from overseas. This is not what Adam Smith wrote in The Wealth of Nations. Smith argued that governments charter companies in return for revenues and fees. Governments must control and and supervise their operations. Smith worried about the disconnect between shareholders and the company managers fearing managers would waste money. He wrote that if companies become too large, they would distort markets with monopolies or resource mis-allocation. To stop this, he wanted government regulation.
Smith thought taxes were used too often to protect the rich and subsidize monopolies, the basis for his anti-tax positions. Taxes and regulatory intervention can keep competition working against companies that grow too large.
Neue Zuericher Zeitung reporter Christiane Hanna Henkel wrote today (my translation) that these inversion deals may not survive for long, although I think she is deluding herself.
“Only last week the EU Commission said it was examining whether supposedly Irish subsidiaries of Apple are include ‘prohibited state aid’ [under article 85 of the founding Treaty of Rome]. And in the US corporations engaging in aggressive tax ‘optimization’ have come under attack. CEO Tim Cook was summoned before a Congressional Committee to explain the tax consequences of its Irish arm.
“If an agreement on tax reform is reached in the US Congress, the window for inversions could close. In late May a group of Democrat Senators proposed a bill which would impose a 2-year moratorium on inversions.â€
Covidien and its spunoff Mallinkrodt (MNK, sold) which also parlayed its Irish site of incorporation into a deal, both relics of Tyco, grafted together by Dennis Kozlowski. Kozlowski’s shower curtain and solid gold umbrella stand surely are what Adam Smith meant by “negligence and profusionâ€. The firm was divided into three. A successor, Swiss Tyco International, did an early inversion deal withBrink’s Home Security which merged into its ADT division which NZZ’s Ms. Henkel did not mention.
