Power Integrations is a pure-play manufacturer of integrated power conversion components. Unlike traditional power conversion solutions requiring dozens of components, the company’s integrated solutions reduce the bill of materials and the size of the integrated circuit board. Power Integrations has strong market positions across a range of end markets including industrials and renewable energy, and a leading position in consumer appliances.
Objective
For the company to stop including the tax rate as part of the company’s financial model.
Background/issue
Power Integrations’ products offer the ability to significantly reduce households’ idle load electricity consumption and the company’s leading position in gallium nitride (GaN) technology enables strong growth prospects. However, most of its international sales go via the Cayman Islands, one of the most widely known tax havens. As we believe that this represents a risk to the management quality of the business, which is otherwise good, understanding this strategy has been a priority for us. We initiated an engagement with the company on this topic in Q4 2021 in order to question the responsibility of reporting sales in the Cayman Islands.
This resulted in a lengthy discussion, including a call with the CFO, in which the company indicated no plans to change its reporting practices unless the benefits of reporting in the Cayman Islands are removed. Ultimately, none of the arguments that the company presented will protect it from increasingly stringent rules of corporate tax, such as the OECD’s proposed minimum corporate tax rate or the US’s proposed increased tax rate on foreign earnings.
The discussions helped to build a foundational relationship with the company, which was new to the portfolio as of Q3 2021, though this engagement remained open, requiring further efforts.
Actions
In June 2022, we were invited to speak to Joel Achramowicz of Shelton Group, who Power Integrations hired in preparation for their first-capital markets day. We took this opportunity to reiterate our belief that tax structuring is unhelpful for society and that it is not differentiating.
We set out our expectations that the company should not include the tax rate in their target financial model and instead should focus on their differentiated technology, intellectual property, markets and operational execution. In addition to tax, we also suggested improved impact and ESG reporting.
Outcomes
Unsuccessful
We have since spoken to the company’s Investor Relations and CFO again on tax, but they remain clear that they have no intention of changing the structure. We will continue to pursue this with the company and escalate as appropriate.