« October 30, 2005 - November 05, 2005 | Main | November 13, 2005 - November 19, 2005 »
My latest in Slate, on copper's lengthy bull run.
Posted by dan at 09:53 AM
The front page of today's Financial Times "Companies & Markets" section should more accurately be titled: hobbled giants. Witness the headlines: "GM shares slip to 13-year low." "Fannie Mae discloses fresh accounting errors." And "Intel board approves $25 bn share buy-back programme." News about the disappointing quarter of another hobbled giant, Dell, was relegated to the inside pages. There's always a bull market somewhere. But it's definitely not in the non-oil companies with annual revenues of $50 billion or more.
Posted by dan at 08:54 AM
Generals always fight the last war, and CEOs always try to avoid the last debacle. Julia Angwin and Kevin Delaney report in the Wall Street Journal on the reluctance of Time Warner executives, who were burned in 2000 by accepting a .com's currency in a deal, to accept another .com's currency for a deal.
"Talks between Time Warner Inc. and Yahoo Inc. over Yahoo's possible purchase of a stake in the America Online Internet division foundered on a series of issues, including Time Warner's desire not to give up majority control of AOL and its unwillingness to accept an Internet stock as payment for a stake, according to people close to the discussions."
If you're trying to sell a gigantic internet business but you won't want accept the stock of an internet company as currency, you're going to have a tough time striking a deal. The Journal reports that the remaining bidders appear to be Microsoft and Google, which, if memory serves, is some kind of internet company.
Posted by dan at 08:49 AM
The Investment Company Institute has released its latest shareholder survey, which always makes for interesting reading. One key takeaway: most of the growth in the ownership population has come from people who invest in employer-sponsored retirement plans like 401(Ks) --i.e. people who don't pay taxes on capital gains and dividends.
Posted by dan at 08:44 AM
Yesterday, the Census Bureau reported a record trade deficit for September of $66.1 billion. Earlier this week, we received our first reading on the budget deficit for fiscal 2006, with the release of the October Treasury monthly statement. We shouldn't read too much into one month's results. But for what it's worth, the deficit was $47.2 billion in September 2005, down from $57.3 billion in September 2004. Revenues were up 9.1 percent and spending was up 1.3 percent.
Posted by dan at 08:38 AM
Great article by Gary Rivlin in the New York Times about labor shortages in New Orleans:
"Ten weeks after Katrina, government officials and business leaders worry that a scarcity of able-bodied workers is hampering the area's recovery. In their desperation, they are using a variety of tactics to attract workers."I'd say I'm paying two to three times as much as I would in normal circumstances," said Iggie Perrin, the president of Southern Electronics, a supplier in New Orleans, who has offered as much as $30 an hour when seeking salvage workers on Canal Street.
Is it any wonder, then, that Donald T. Bollinger Jr. is jittery about the local economy as he peers into the future? Mr. Bollinger is the chief executive of Bollinger Shipyards, the country's third-largest shipbuilder, with 13 sites along the Gulf Coast.
Mr. Bollinger recently turned away $700 million in contracts, though he had devoted a good share of the previous two years trying to secure them. He says he just will not have the workers he needs to meet the deadlines. As it is, he says he is 600 employees short of the 2,500 he needs to meet contractual obligations on deals made before Katrina. . . .
Joseph C. Canizaro, a bank president and retired real estate developer, said: "I think we all believed there would be more happening than is happening right now. One of the key problems is jobs. You look at the housing situation, and the schools situation, and you wonder where businesses are going to find the people they desperately need to get things going." . . .
Virtually every New Orleans business confronts the same conundrum: In a city without a functioning school system and with vast stretches that are still uninhabitable, where will they find the employees they need to begin the long recovery? Everyone from bank presidents to restaurant owners to the Port of New Orleans are approaching the task like a nurse in an emergency room performing triage on patients based on the most immediate need."
Posted by dan at 08:32 AM
Well, this is a big shocker. Halliburton management screwed its workers. Mary Williams Walsh reports in the New York Times:
"A federal investigation of Halliburton's pension plans has uncovered three violations of the law, including charging some costs of Halliburton's executive pension and bonus plans to the workers' pension fund, correspondence from the Labor Department shows.The Labor Department concluded that Halliburton's actions violated federal pension law prohibitions against self-dealing and using pension money for the benefit of the company, as well as the requirement to handle pension money with "care, skill, prudence and diligence."
To correct its violations, Halliburton was required to pay more than $8.6 million. The company replenished funds that were improperly withdrawn from the pension fund, made the affected individuals whole and paid an undisclosed tax penalty, the documents show. Two of the violations began while Vice President Dick Cheney was the company's chief executive. But the third, which involved the largest amount of money, took place after he resigned in the summer of 2000. . . .
In the largest violation, the Labor Department determined that Halliburton was supposed to distribute several million dollars in cash and stock to pension participants but instead kept the money for itself. . . .
Halliburton used pension money to pay the legal, actuarial and other costs of its executive pension and bonus programs from June 1, 1999, through Jan. 1, 2004, spending about $2.6 million in total. In August 2004, it put the $2.6 million back into the pension plan and paid a penalty to the Internal Revenue Service. . . ."
Posted by dan at 08:28 AM
We may have a massive trade deficit. But some of those dollars we're sending abroad to pay for expensive oil wash back ashore. Charles Bagli of the New York Times has the goods on the latest tide of cash flowing into Manhattan trophy buildings. Apparently Dubai's royal family is paying $1.1 billion the Essex House and the Helmsley Building on Park Avenue in midtown.
Which brings up yet another irony of global capital flows. Cash paid to rent out the Essex House for high-end Bar Mitzvahs and Jewish weddings will now wind up in the Gulf.
Posted by dan at 11:50 AM
Bankruptcy lawyers generally aren't known for their wit. But Jack Butler of Skadden, Arps, reveals himself to be a font of levity in an interview with the Financial Times.
See, he says, bankrupt companies like Delphia aren't clients of soulless law firms like Skadden. They're like family.
Bernard Simon reports:
"[Delphi CEO Steve] Miller hired Skadden Arps less than two weeks after taking the reins at Delphi in early July. Mr. Butler says he told Mr. Miller right away: "It is important that you think about this as us adopting the company. This becomes sort of a second family."
Family? Yeah. The kind of family where dad charges you $800 bucks an hour for shooting hoops with you, mom bills you $35 for the brown bag lunch she packs, and big sister charges you $1.00 for each page you print off her computer.
Posted by dan at 10:34 AM
Mark Mulligan and Tobias Buck of the Financial Times report on what's fueling the aggressive acquisition activity on the part of Spanish corporate blue-chips like Banco Santander and Telefonica.
"Spanish companies, by far the biggest foreign investors in Latin America during the privatisation wave of the 1990s, have in the last few years turned their attentions to Europe.Flush with cash and cheap credit, and keen to reduce their exposure to the often unpredictable economies of former colonies, banks, construction groups, utilities and service companies have been seizing opportunities wherever they arise in the European Union.
The heavy premiums being paid for these acquisitions and concessions have raised analysts' eyebrows and left competing tenders or possible counter-bidders on the sidelines.
The £13bn ($22.6bn) in cash and shares Banco Santander stumped up for Abbey of the UK a year ago was too rich for HBOS to respond. Similarly, Deutsche Telekom said yesterday it couldn't afford to match Telefónica's £17.7bn agreed bid for O2, in which the German telecommunications group had also expressed interest.
However, according to an emerging band of critics, Spanish boldness owes as much to tax breaks at home as to a determination to diversify. Thanks to modification to the country's tax code, from January 2002, Spanish companies buying foreign companies and concessions are allowed to set amortisation of goodwill against annual tax liabilities.
If the goodwill element of an acquisition price were calculated at, say, €1m ($1.2m) and allowed to amortise over 20 years, then €50,000 would be deducted annually from taxable income over the life of goodwill or other intangibles. This, in effect, makes an acquisition premium tax-deductible, say the critics. . . "
Posted by dan at 10:31 AM
Where will the housing boom/bubble end? At the top, as wealthy people shopping with inflated currency from selling their overpriced homes get off the merry-go-round? Or at the bottom, where highly leveraged consumers find higher interest rates make entry-level homes too expensive?
Toll Brothers' recent announcement of slumping demand suggests it might start at the top. So does this article by Motoko Rich in today's New York Times.
With close to 16,000 units being built in Manhattan alone this year and next, and another 23,700 planned, according to Yale Robbins, a real estate publishing company in New York, there is much to choose from, especially at the high end, where a disproportionate amount of building is going on.The plentiful options mean that buyers can now return to a sales office repeatedly to examine floor plans before writing a deposit check. Where some buildings might have sold three or four apartments in a day, now developers are happy to sell that many in a month. And some buyers even feel bold enough to offer less than the asking price, though few developers are biting.
"I just feel like people are waiting to pull the trigger," said Ariana Meyerson, project manager at 225 Fifth Avenue, a 192-unit building with $1 million one-bedroom apartments. "They are waiting to see where the market goes."
Some brokers predict that sales will slow more as newer apartments, often with fancier amenities than the building down the street, come on the market. "I do think that there is going to be product sitting on the market a year from now," said Michael Shvo, a broker who markets new developments.
Posted by dan at 10:26 AM
The latest group of self-serving citizens to absorb higher energy costs and save the rest of us from the ravages of inflation are. . . Pepsi's shareholders and workers.
Andrew Ward reports in the Financial Times ($ required):
PepsiCo yesterday announ-ced plans for a series of cost-cutting measures to help the snack and drinks group cope with high commodity prices. Investors were told the measures would involve a $65m-$85m restructuring charge in the fourth quarter, reducing full-year earnings below previous expectations. . . .Record energy prices have increased the cost of fuel and packaging, including the chemicals used to produce plastic drinks bottles.
Damage caused by hurricane Wilma to Florida's citrus fruit groves has further increased costs for the group's Tropicana juicebusiness. .
PepsiCo said it was still finalising details of the cost-cutting plans. The only specific measure announced yesterday was the scrapping of 200-250 US jobs in the group's Frito-Lay snackbusiness.
Full-year earnings guidance was revised to $2.38-$2.39 a share, down from $2.41-$2.42.
Posted by dan at 10:16 AM
Are condos and Mcmansions the new cars? Maybe. Dealers of both products are finding that they now have to offer significant incentives in order to clear inventory.
Kemba Dunham and Ruth Simon report in the Wall Street Journal:
As the housing market's red-hot sales pace shifts to a slow burn, some home builders and developers are beginning to offer buyers a richer array of incentives.Faced with rising inventories of unsold homes and reluctant buyers in many markets, a number of builders and developers are ratcheting up their promotional efforts. One developer is offering as much as $10,000 toward closing costs, while a home builder is throwing in golf-club memberships. Some incentives are available to any buyer, while others are tied to the buyer making use of a builder's preferred mortgage lender. Builders also are pitching higher commissions or special bonuses to real-estate agents.
Other deals are more creative: A Miami developer is offering to buy back its condo-hotel units at a premium after 18 months. Another builder, taking a cue from last summer's auto makers' deals, is offering "employee pricing" discounts in certain markets.Builders often use various types of incentives to help sell homes, even during the strong market in recent years. This practice typically picks up late in the year as companies become eager to close sales and get properties off their books before the end of the year.
But some analysts say incentives have gotten more generous, as rising mortgage rates and elevated home prices have slowed sales. Traffic to new-home communities is down, waiting lists are disappearing, and inventories are inching up, analysts say. Ivy Zelman, a housing analyst at Credit Suisse First Boston, says builders' incentives typically work out to be 2% to 3% of the sales price. In some markets, incentives currently are running as high as 5%.
Posted by dan at 10:12 AM
It's tempting to regard the elections in New York, New Jersey, and Virginia as nothing more than status quo elections, in which incumbents of both stripes generally were returned to office.
True. But underneath the headlines, it's possible to discern another trend: continuing Republican erosion in high-income regions. And that doesn't bode well for the shrinking but still crucial core of moderate East Coast Republican Congressmen in New Jersey, New York, and Connecticut.
Consider: in New Jersey, as Richard Lezin Jones reports in the New York Times :
"Buyoed by Jon S. Corzine's election as governor on Tuesday, New Jersey Democrats expanded their majority in the state-s 80-member Assembly, giving their party its biggest majority in three decades. . .The Democrats hold 49 seats in the Assembly after a net gain of two on Tuesday."
Then there's this headline from the Times: "Democrats Gain on Long Island, a Onetime G.O.P. Bastion." Michael Cooper reports:
Now the era of Republican hegemony on Long Island is over, and the implications for statewide politics as the 2006 elections for governor and United States Senate get under way are profound. Republicans can no longer count on Long Island for huge vote margins to push their candidates into office, officials in both parties said yesterday.The shifting center of Long Island politics was underscored this week by a string of Democratic victories across the Island. In January, Democrats will simultaneously take control of Nassau and Suffolk Counties for what officials say is the first time. Both counties will still be run by Democratic county executives, and, thanks to the legislative seats that Democrats picked up in Suffolk County on Tuesday, Democrats will have a majority in both legislatures. The vaunted Republican machine of old is just a memory."
And that leaves guys like Republican Rep. Peter King in an increasingly difficult situation.
Cooper, again:
A decade ago, Mr. King noted, he and his fellow Republicans held four of Long Island's five Congressional seats. Now Mr. King is the lone Republican in the Island's delegation.Democrats, meanwhile, are closing their enrollment gap on Long Island. Nassau County was once to Republican machine politics what Chicago was to Democratic machine politics. New arrivals almost always registered as Republicans, and the machine provided everything from immaculate parks to plentiful county jobs to summer jobs for children. Those days, though, are long gone.
Less than a decade ago, registered Republicans outnumbered Democrats in Nassau County by more than 100,000 voters. Now their edge has slipped to a little more than 38,000 voters. And in Suffolk County, the Republican advantage has slipped to 65,000 voters, down from nearly 110,000 in 1996, according to state records.
As the Republicans have lost their edge, the number of voters unaffiliated with any party has grown.
In the New York metro area, the Republicans have long since lost their footholds in high-income areas like the Upper East Side and Westchester. Now they're losing Fairfield County, Ct., and Long Island. And it's not because these regions are becoming poorer. Most of them have, in fact, grown more wealthy in recent years. It's because more and more of the high-earning professionals that live and work in these areas are Democrats.
Posted by dan at 10:00 AM
Banks concerned about short-term profits (which is to say all banks) may yet rue their aggressive championing of the new bankruptcy law, which pushed huge numbers of people to file for bankruptcy sooner rather than later.
Robin Sidel reports in the Wall Street Journal:
NEW YORK -- J.P. Morgan Chase & Co. warned that a new federal bankruptcy law will take a slightly bigger bite out of profits in the fourth quarter than had been anticipated.The bank said it expects to record $2.3 billion in bad credit-card loans in the fourth quarter, up $700 million from the $1.6 billion posted in the third quarter. The $700 million increase is more than the $500 million estimate last month by James Dimon, the bank's president and chief operating officer.
The new figure was disclosed in a quarterly filing with the Securities and Exchange Commission. J.P. Morgan is the nation's third-largest bank, based on market value and assets, after Citigroup Inc. and Bank of America Corp.
Separately, Bank of America Corp. said it expects an increase in net charge-offs, or loans it expects to write off as bad debt, of $400 million to $500 million in the fourth quarter, related to the rush to bankruptcy. The Charlotte, N.C., bank reported net charge-offs of $1.145 billion in the quarter ended Sept. 30.
In recent months, the banking industry has been hit with a big jump in the amount of so-called charge-offs due to a flood of bankruptcy filings. The new federal law, enacted Oct. 17, makes it more difficult and expensive for people to write off their debts while in bankruptcy proceedings. As a result, a wave of bankruptcy filings were made before the law took effect.
It's possible that the rush to bankruptcy in October was simply borrowing filers that would have filed later, and that the higher charge-offs in this quarter will lead to lower charge-offs in future quarters. That's possible. But given what's going on with interest rates, wages, and the economy, it's also possible that consumer bankruptcy filings will continue at high levels.
Posted by dan at 09:56 AM
One of the great things about the new (old) generation of hedge fund/shareholder activists is that schlumps like you and me can theoretically invest alongside big shots like Carl Icahn and Kirk Kerkorian when they loudly take positions in well-known companies. Then you can watch and cheer as the hold the CEOs' feet to the fire and shake things up. In some instances, it works. Following Icahn's lead at Kerr McGee was a smart move. But buying GM at about $31 when Kerkorian was buying may turn out not to be a smart move. And following Carl Icahn into Blockbuster--well, that would have just been a disaster. Check out this two-year chart. Blockbuster reported another poor quarter yesterday.
Posted by dan at 05:11 PM
For the past couple of years, economists have been worrying about just how and when the higher cost of energy and other commodities might start getting passed through to end users.
In the vast construction busienss, that time may be know. Jennifer Forsyth reports in the Wall Street Journal:
The rising cost of everything from land to diesel fuel to gypsum products is causing U.S. real-estate developers to delay or cancel construction of some office buildings, according to industry insiders.Fewer new buildings mean less space available to rent. That could be good news for landlords, who could raise prices and bad news for businesses that lease office space.
Higher costs are showing up at all levels -- in labor, in land and in the price of supplies and raw materials, such as concrete and drywall. When developers total these costs, they are shying away from building -- at least in some markets, these real-estate insiders say.
In one case, Prudential Real Estate Investors postponed the 250,000-square-foot second phase of its Quiet Waters Business Park in Deerfield Beach, Fla., because of rising construction costs, said Theresa Miller, a Prudential spokeswoman.
Landbank Investments, a commercial-investment and development company in Menlo Park, Calif., said it has put off projects in Silicon Valley and instead has been buying existing properties, which are selling for less than it would cost to build them. "Current rents don't justify the cost of new development," said Scott Jacobs, Landbank's executive vice president.
Posted by dan at 04:48 PM
Initially, I had suspected that Jon Gertner's New York Times Magazine cover story on luxury home builder Toll Brothers--in which the executives granted the access, and expressed the unabashed exuberance typical of a bubble-era company about to burst--would herald something of a top for the company and the McMansion trend it has exemplified.
I just didn't suspect the top would come so soon. Yesterday, the company announced its earnings, which were quite good, but ratcheted back expectations for next year.
"Because we have fewer selling communities than previously anticipated, and because we delivered some homes in FY 2005 that we had projected would be delivered in FY 2006, we now estimate delivering between 9,500 and 10,200 homes in FY 2006 versus our 8,769 deliveries in FY 2005. This compares to our previous guidance of 10,200 to 10,600 home deliveries in FY 2006."
Ouch. Here's the ugly five-day chart, showing a 20 percent loss.
Posted by dan at 03:56 PM
If you cut spending on social services by $35 billion over five years and call it significant deficit reduction, as Republicans in Congress are, what do you call it when you propose to cut taxes by $70 billion over the same time frame. A doubly significant deficit expansion?
Posted by dan at 03:53 PM
You really have to wonder what goes on in the executive boardrooms of General Motors. The company is losing money hand over fist, it's suppliers are going bust, and it's worried about. . . .bragging rights for the Chevrolet brand.
John Stoll of Dow Jones newswires reports:
"As the clock ticks down on a difficult year for General Motors Corp., the company's Chevrolet division finds itself on the cusp of doing something it hasn't accomplished in nearly two decades: overtake Ford Motor Co.'s Ford nameplate as the No. 1 brand in the U.S. market.Chevrolet has played second fiddle in terms of sales and market share in its home market to its rival for the past 18 years. But through the first 10 months of this year, the two brands each had 15.7% of the U.S. market for new cars and light trucks, amid heavy discounting and market-share losses to Asia-based auto makers like Toyota Motor Corp.
Executives at GM are hopeful that the company's year-end clearance will enable Chevrolet to come out on top, potentially energizing Chevrolet dealers as it launches its GMT-900 line of pickups and sport-utility vehicles.
GM and Ford are in the process of restructuring their North American operations, which have posted billions of dollars in losses in recent months as the companies contend with high cost structures, changing consumer preferences and competition from foreign car makers. Bragging rights may seem trivial at such a time, but executives say market leadership in the U.S. is critical.
"To be the industry leader would be a great thing," said Ed Peper, general manager of GM's Chevrolet division. "For us the products themselves have to stand on their own merit [and] leadership is a consequence of our success doing that."
Huh? Why not worry about making money on the number of cars you can sell at a profit rather than selling the highest number of cars you can at a loss?
GM and Ford keep their sales high through incentives that wind up either sharply reducing profits or causing losses. And once you discount it's hard to charge full freight. Joseph White writes in today's Wall Street Journal of Ford and GM's efforts to reduce incentives (read: discounts):
"Consumers' reaction to GM and Ford's efforts to raise prices? They stayed away from showrooms in droves. The two detroit giants suffered 26% declines in their U.S. sales compared wiht October 2004. Chrysler fared better: Its sales fell by only 3% compared with a year ago. . . But Chrysler also showed consumers more money than either of its Motown rivals, spending $3,075 per vehicle to GM's $3,062 and Ford's $2,820, according to Autodata."
By comparison, Toyota's incentives per car in October were $723.
Posted by dan at 11:48 AM
Usually, litigation starts when divorce proceedings commence. In mergers gone bad, the recrimination and nasty lawyer letters start before the nuptials. Guidant demands that Johnson & Johnson consummate the deal.
Posted by dan at 11:47 AM
If you exclude food and energy, inflation is under control. Now I guess we should start excluding some financial services, like insurance.
Patrick Jenkins reports in the Financial Times:
Munich Re has pushed through premium increases of at least 400 per cent in oil rig reinsurance since Hurricanes Katrina and Rita tore through the Gulf of Mexico in August and September.The world's biggest re-insurer, which yesterday confirmed profit targets despite the resultant €1.1bn ($1.3bn) of losses, said: "These risks will remain insurable but only if prices and conditions are adequate. So far rates have been increased by more than 400 per cent."
Hurricane Katrina, which pummelled the US Gulf coast, causing devastating flooding in New Orleans and wrecking offshore energy installations, caused estimated insured losses of about €40bn. Reinsurers are typically able to use large catastrophes as a trigger to push up premiums.
Munich Re said the most dramatic premium increases had been in offshore energy installations, but added that future policy renewals would probably see rises of up to 50 per cent in US property cover and smaller increases in Europe.
Posted by dan at 10:17 AM
Look who else has a long tail.
Posted by dan at 07:31 AM
A great moment in diplomacy, buried in Elisabeth Bumiller and Larry Rohter's article in the New York Times on President Bush's trip to Brazil. President Bush visited with Brazilian President Luiz Inacio Lula Da Silva, and received a brief geography lesson.
"At one point, Mr. da Silva even exhibited a map of his country, which is larger than the continental United States. "Wow! Brazil is big," [Brazilian foreign minister Celso] Amorim quoted the American president as responding."
Posted by dan at 09:20 AM
Interesting article from Dow Jones Newswires on why Gulf energy production is having trouble recovering: it's not the pipelines or the pumping infrastructure, it's the spotty cell-phone service and balky internet access.
John M. Biers reports:
HOUSTON -- Six weeks after Hurricane Rita slammed ashore, key communications infrastructure in the Gulf of Mexico remains offline, contributing to the slow recovery in energy production.The biggest impediment involves the Gulf's microwave network, which provides cellular-phone service and high-end broadband connections linking rigs and other production facilities with each other and the rest of the world. Half of the Gulf's microwave network remains down due to storm damage, according to network operator Stratos Global Corp.
Energy companies are making do with the remaining telecommunications infrastructure and generally cite pipeline damage and the dearth of supply boats and other oilfield equipment as more significant factors in the sluggish revival of the Gulf. But the telecom problems have been severe enough to prompt debate on how to upgrade the system. . . . .
Posted by dan at 09:16 AM
The rationale behind the dividend tax cut was that corporate earnings are effectively taxed twice: the company pays taxes on its income, and then the recipient of the dividend pays taxes on it too. That's always been a suspect rationale for reducing the dividend tax. About half of all stocks are held in tax-free or tax-favored vehicles like pensions, endowments, and 401(Ks), so they're not being double taxed. And companies are quite adroit at taking evasive maneuvers companies take to avoid paying corporate income taxes. Like stowing your profits in Ireland, as Microsoft does.
Glenn Simpson reports in the Wall Street Journal.
DUBLIN -- A law firm's office on a quiet downtown street here houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill.The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004.
Ireland's citizens may not have heard of Round Island One, but they benefit greatly from its presence. Last year the unit handed the government of this small country of four million citizens more than $300 million in taxes.
The citizens of other nations where Microsoft sells its products are less fortunate. Round Island One provides a structure for Microsoft to radically reduce its corporate taxes in much of Europe, and similarly shields billions of dollars from U.S. taxation.
Giant U.S. companies whose products are heavily based on their innovations, such as technology and pharmaceutical firms, increasingly are setting up units in Ireland that route intellectual property and its financial fruits to the low-tax haven -- at the expense of the U.S. Treasury.
Much of Round Island's income is licensing fees from copyrighted software code that originates in the U.S. Some of the rights to these lucrative assets end up in Ireland via complex accounting rules on intellectual property that the Treasury is now seeking to overhaul. The Internal Revenue Service said it is also looking closely at how companies account for such transactions. . . .
Microsoft's effective world-wide tax rate plunged to 26% in its last fiscal year from 33% the year before. Nearly half of the drop was due to "foreign earnings taxed at lower rates," Microsoft told the Securities and Exchange Commission in an August filing. Microsoft leaves much of its profit in Ireland, including $4.1 billion in cash, avoiding U.S. corporate income taxes. But it still can count this profit in its earnings . . .
Round Island One is a key component in a drive by Microsoft to place its intellectual property and other assets into tax havens. In the past three years, Round Island has swallowed up other Microsoft units, from Israel to India, moving much of their tax liability to Ireland. Within the U.S., the rights to many of Microsoft's products and copyrights are managed by a subsidiary in Nevada, which, unlike the company's headquarters state of Washington, doesn't tax royalty income on intellectual property. The Nevada unit, Round Island LLC, is the corporate parent of Ireland's Round Island One.
It's well worth reading the whole thing. Instead of worrying about double taxation, perhaps we should focus on efforts that would tax earnings once.
Posted by dan at 09:10 AM
Old story: the U.S. has been shipping manufacturing jobs off to China.
New story: the U.S. is shipping service jobs tied to manufacturing off to China.
Andrew Ward, Dan Roberts, and Alexandra Harney report in the Financial Times:
US manufacturers and retailers are increasingly shifting warehouses and distribution facilities to China as part of efforts to make their supply chains more efficient.US manufacturers and retailers are increasingly shifting warehouses and distribution facilities to China as part of efforts to make their supply chains more efficient.
Until recently, China-made goods typically passed through US warehouses en route to their final destination.But that has begun to change, as a growing proportion of goods are sorted, packaged and labelled before leaving China. Once they arrive in America, the goods are delivered direct to the retailer or consumer, by-passing US warehouses.
“You are skipping a couple of steps in the supply chain and doing it at a fraction of the cost,” said Bill Zollars, chief executive of Yellow Roadway, a large US trucking and logistics group.
Rather than build their own warehouses in China, most US companies have preferred to use facilities provided by logistics partners, such as UPS and DHL.
Mr Zollars said Yellow Roadway was planning to offer warehouse services for its US customers in China through a recently formed logistics joint-venture.
UPS expects to have 50 warehouses in China by the end of this year and plans to open a further 10 next year. . . .
Posted by dan at 09:06 AM