August 30, 2016

On Tuesday, the S&P 500 fell 0.2% while Toronto was about unchanged.

Agrium was a big gainer, up 7.3% on news it may merge with Potash Corporation. I would wonder if the competition Bureau of Canada would allow this merger. Kevin O’Leary stated today that the price of potash in Canada is set on world markets. If that is true then perhaps there will be no issue. I am not familiar with whether or not there are duties on potash imports or if the cost of freight on imports makes for a made-in-Canada potash price. The farmers who buy potash in Canada may oppose the deal if they believe it will raise prices through lower competition. The Saskatchewan Premier indicated he would be okay with the deal as long as jobs are not reduced in Saskatchewan. Well, that is probably wishful thinking. The main benefit of doing the deal is likely to reduce duplication and jobs. That is called efficiency and productivity. Another possible benefit of doing the deal is to raise prices but the companies will not be admitting to that.

The European Commission ruled today that Apple has to pay some $14.5 billion U.S. in additional tax┬ádollars to Ireland. This because Apple had been able to “move” most of its non-U.S. profits to Ireland. I believe this was achieved through transfer pricing and by locating its intellectual property (which is intangible”) in Ireland. They faced a tax rate around 0.5% in Ireland due to an agree ment with Ireland. That country does not want the money. They want to honor their low tax rate. The European Commission wants the taxes paid at normal tax rates.

I have absolutely no sympathy for Apple for several reasons. First, as a citizen and taxpayer, I believe that corporations should pay their fair share of taxes and that countries should not compete to attract companies with artificially low tax rates. Second, I think the accounting that results in moving the profits to Ireland are gimmicky and without real substance.

In addition, as an investor, I take it as a negative sign when I see aggressive tax avoidance. I figure that the management that tries to cheat the tax man today may cheat the share owners tomorrow. Last August, one of the negatives I noted about Valeant was aggressive tax avoidance. Years before its demise I saw it as a negative that Sino Forest paid no cash taxes and had dozens of subsidiaries in the British Virgin Islands (known tax havens). Just last week, I sold most of my Element Financial shares after they were unable to answer my questions about their income tax reporting and situation. Element may be fine, we shall see.