Dutch disaster, so Hardie's off to Ireland

JAMES Hardie Industries will move its legal domicile to Ireland after effectively admitting that the building products group's 2001 shift from Australia to The Netherlands had been a disaster in almost every way.

James Hardie chairman Michael Hammes and CEO Louis Gries

Chief executive Louis Gries conceded it was "unfortunate" that previous management had taken the 120-year-old company "off course", but noted that current management was not prepared to sit and do nothing tochange an "unsustainable" situation.

The new move was caused by changes to Dutch and US tax laws between 2004 and 2006 that caused a long-running dispute between Hardie and the US Internal Revenue Service surrounding the issue of whether the company had a "substantial presence" in The Netherlands.

Hardie was forced to choose between making management spend more time in The Netherlands to keep the tax bill down, thus reducing its ability to operate effectively in the US, and risking an annual fight with the IRS by keeping the executives stateside in apparent defiance of a 2006 US-Dutch tax treaty.

Hardie's tax claims were challenged in 2006 and 2007 by the IRS. Hardie subsequently had them overturned, but Mr Gries said the issue was going to arise every year. He also noted that there were a number of Dutch tax concessions, offered when the company first moved to Amsterdam in 2001, that would expire on December 31 next year.

Controversially, the move has negative short-term implications for the company's ability to add money to the Asbestos Injuries Compensation Fund. The fund was set up by the NSW government in 2006 to help victims of asbestosis and mesothelioma after James Hardie's move to The Netherlands, publicly for tax reasons, left its asbestos compensation fund critically underfunded.

Chief financial officer Russell Chenu said the worst case scenario was a reduction by $US20million ($25m) of payment in the 2009-10 year. The overall costs of the move are estimated at between $US51m and $US71m, based mainly on whether the company was compelled to pay $US20m or $US30m to export its intellectual property from its current base in Amsterdam.

But management is confident that the move will help long-term profitability by allowing senior managers to spend more time in the US, where the vast majority of Hardie's fibre cement building products are sold. Currently, they spend one week in every quarter in Amsterdam, whereas the main markets are in the US sunbelt and California.

Hardie is contracted to pay 35 per cent of its free cashflow into the AICF when that flow exceeds certain levels, which it currently does not. There is a catch-up provision that guarantees the money is paid later when economic conditions improve, which will be when the US housing market finally starts to recover.

The move to Ireland will require board meetings and company meetings to be held in Dublin but it will free up full-time managers to spend most of their time in the US, most probably in Chicago, without looking over their shoulders at the tax consequences.

The company will keep about 16 people in Ireland, a similar number to its Amsterdam office, but the staff there will not be so senior as those now based in Amsterdam, such as Mr Gries and chief financial officer Russell Chenu. 

Mr Gries said Hardie had looked at various options to move its legal domicile since 2006, including moving back to Australia or to the US, but in both cases Dutch law required a formal takeover bid accepted by 95 per cent of shareholders. That high threshold risked leaving the company with two corporate structures, he said, with a consequent increase in costs.

He said Ireland had a "welcoming" corporate environment but its other benefit was that, as part of the European Union, it would readily accept the transfer of a new type of company -- called a Societa Europaea and devised in 2007 -- which Hardie now planned to create.

Mr Gries said the move, which requires shareholder acceptance through a process to begin in August, would be "pretty seamless" in having no adverse capital gains tax consequences for Australian shareholders. The shares will still be listed in Australia, with American depositary receipts continuing to trade in the US. The first meeting, which requires 75 per cent shareholder support, will be in Sydney on August 18.

Management hopes to complete the move by March next year. Hardie has no immediate plans to move into the European fibre cement market, but Mr Gries mentioned work on a new product for the European building market that was "three to four years away".