Image

Off-shoring’s Logical Conclusion

May 23, 2014
The semiconductor-manufacturing industry’s Semicon West Show kicks off next month, so perhaps it’s time to point out a big mistake in the Wikipedia listing for one of that industry’s prime movers. Look up Applied Materials Inc.
The semiconductor-manufacturing industry’s Semicon West Show kicks off next month, so perhaps it’s time to point out a big mistake in the Wikipedia listing for one of that industry’s prime movers. Look up Applied Materials Inc. in the free encyclopedia and you’ll see it described as “an American corporation that manufactures innovative equipment, services, and software to enable the manufacture of semiconductors.”

Well, the “manufacturer of innovative equipment” part of the description is right. But an “American corporation” it is not, or at least not anymore. Last September, Applied Materials merged with Tokyo Electron, which, despite its name, has an entity in the Netherlands called TEL-Applied Holdings B.V. This merger makes Applied Materials a Dutch company.

The reason for this cockamamie maneuvering is strictly so Applied can pay less in corporate taxes. The actual term for this gimmick is “inversion,” wherein U. S. corporations buy companies based in more tax-friendly jurisdictions. The less-charitable phrase characterizing this kind of deal is “tax dodge.” As part of the bargain, the U. S. firms move their legal domicile to the acquired company’s country.

Firms of all stripes have resorted to this gambit. In 2012, the multibillion-dollar industrial manufacturer Eaton Corp. bought Cooper Industries, a maker of electrical products based in Ireland. The Irish domicile is weird in that Cooper was founded in Ohio in the 1800s and maintains a management center (strictly speaking, it can no longer be called a headquarters) in Chicago. But the acquisition made Eaton, long headquartered in Cleveland, Ohio, an Irish company. Crain’s Chicago Business estimates Eaton will save over $100 million annually in taxes from this shenanigan.

This move apparently surprised even stock cheerleader Jim Cramer, host of Mad Money on CNBC TV. Cramer interviewed Eaton CEO Sandy Cutler not long ago. “What is the advantage of being able to have a (press) release from Dublin (Ireland) when we know you are in Cleveland?” Cramer asked. “We are headquartered in Ireland,” Cutler replied unabashedly. Cramer usually lobs only softball questions at the CEOs he brings on. (Presumably because otherwise it would be hard finding CEOs who would agree to appear.) But in Cutler’s case, Cramer’s question seemed to have a “What-the-h....” tone to it. It was the closest to a hostile query I’ve seen on Mad Money.

Of course, there is irony here. Politicians were ready to buy the B.S. about the necessity of off-shoring when jobs and manufacturing plants were the only things in question. But the off-shoring of tax bills hits them where it hurts. No wonder, then, that legislation is now in the works that would make it more difficult to move a company off shore, particularly when it continues to be managed from the U. S.

Industry analysts claim more companies will resort to inversion tax dodges as long as U. S. corporate tax rates remain relatively high. But I’d say the lesson to be learned isn’t about tax rates. It is that nobody likes what happens when off-shoring is carried to its logical conclusion.

About the Author

Leland Teschler

Lee Teschler served as Editor-in-Chief of Machine Design until 2014. He holds a B.S. Engineering from the University of Michigan; a B.S. Electrical Engineering from the University of Michigan; and an MBA from Cleveland State University. Prior to joining Penton, Lee worked as a Communications design engineer for the U.S. Government.

Sponsored Recommendations

The entire spectrum of drive technology

June 5, 2024
Read exciting stories about all aspects of maxon drive technology in our magazine.

MONITORING RELAYS — TYPES AND APPLICATIONS

May 15, 2024
Production equipment is expensive and needs to be protected against input abnormalities such as voltage, current, frequency, and phase to stay online and in operation for the ...

Solenoid Valve Mechanics: Understanding Force Balance Equations

May 13, 2024
When evaluating a solenoid valve for a particular application, it is important to ensure that the valve can both remain in state and transition between its de-energized and fully...

Solenoid Valve Basics: What They Are, What They Do, and How They Work

May 13, 2024
A solenoid valve is an electromechanical device used to control the flow of a liquid or gas. It is comprised of two features: a solenoid and a valve. The solenoid is an electric...

Voice your opinion!

To join the conversation, and become an exclusive member of Machine Design, create an account today!