Alibaba’s $21.8 Billion Inversion
Inversions are technically a financial transaction where a corporation from one country, say the United States, merges with a company in a foreign country, say Ireland.
Nothing changes in the United States from a business point of view, except that the value and financial sustainability of the corporation goes up significantly.
Why you might ask?
Without 35 percent of its profits being stripped out to pay taxes on business that doesn’t have any connection to the United States, everybody, except the politicians in Washington, wins.
The employees, shareholders, directors and officers all are beneficiaries of a more financially solid business. All the suppliers of the corporation are happier, as are the customers who enjoy not having their prices hiked 35 percent.
Taxes, after all, are not paid in profits but cash. Positive cash flow is the lifeblood of every business.
Wall Street understands that. After all, corporations are valued on their earnings per share after tax. Taxes are a cost that is built into the price of everything bought or sold.
So what happened with Alibaba?
This is the kind of inversion that is bad for the United States.
The U.S. economy only survives when capital flows into the United States. The whole push against offshore financial centers and tax havens by Washington has been to close down competition for capital and drive it back to the supposed safe haven of the United States.
No capital, no capitalism.
Wall Street in its bottomless greed just did the opposite when pawing off the Alibaba stock just to gain the quick fees and commissions. Precious U.S. capital has been inverted right out of the United States. Alibaba got our very precious money and, in return, U.S. investors got, in reality, valueless stock.
(It all makes me think of tulip bulbs for some reason.)
What the U.S. investors bought were shares in a tax-haven company in the Cayman Islands that has no assets.
Tax-haven companies may be evil and immoral, used to hide (according to Sen. Carl Levin, D-Mich.) billions of dollars in secret accounts, but apparently that doesn’t apply to Alibaba.
It’s a Cayman-based corporation owned by a Hong Kong corporation that is really controlled by the Chinese government.
No doubt the Securities and Exchange Commission has no problem with the financial statements from the Cayman corporation based on the financial statements of a Hong Kong company, based on the Chinese company’s books and records kept in Chinese with the financial statements certified by Chinese auditors working for the Chinese government.
As the Chinese fleeing China and buying all the EB-5 visas can tell you, you can own a company in China or other assets only until the Chinese communist government decides you don’t.
Maybe there is some actual benefit to the United States?
No, there isn’t. It’s just Wall Street ripping off the investing public again.
There are no Alibaba distribution centers, factories or offices in the United States. No employees, vendors or customers even. No dividends to shareholders. And Alibaba won’t be paying any U.S. tax.
What did happen is that China got $21.8 billion of U.S. cash for absolutely nothing.
There is something to be learned from this.
If Congress is going to legislate or regulate against inversions, they should leave transactions that are good for American businesses by reducing their excess tax costs and restrict inversion transactions like Alibaba, which take capital out of the U.S. economy.