Tax 'avoiders' feeling heat
By Jonathan Weisman
Washington Post
There's been a shift in the political landscape of corporate taxation.
Corporations that once saw no downside to moving — on paper — to offshore sites such as Bermuda are now finding that Sept. 11 has put patriotism at a premium.
When Stanley Works Inc., the New Britain, Conn., toolmaker, proposed in February to reincorporate in Bermuda, the issue exploded.
"What has happened on this issue is part of the much larger issue of corporate accountability," said Rep. James Maloney, D-Conn., who has made the issue a centerpiece in his re-election campaign. "Whether it's Enron abusing partnership rules, WorldCom abusing expensing rules or Stanley Works abusing the tax code, the public sees corporate abuse."
Last summer, the Bush administration pressured its allies in the 30-nation Organization for Economic Cooperation and Development to drop the group's campaign to force offshore tax havens to end special tax breaks for foreign companies and investors. Now, politicians who once made tax cuts and Internal Revenue Service-bashing their stock and trade are tumbling over each other to crack down on corporate tax avoiders.
"The companies are right from the standpoint that they're not doing anything illegal, but I take a position that it is immoral and unethical," said Sen. Charles Grassley, R-Iowa, the ranking Republican on the Senate Finance Committee, who co-wrote legislation to thwart tax-haven reincorporation. "Some companies are willing to stay and pay. Other companies dash and stash the cash. And that makes the former into a sucker."
Reincorporation — also known as corporate inversion or corporate expatriation — has been around for decades, but the accounting maneuver has become increasingly popular as economic conditions lower the costs and raise the rewards.
At least 25 major corporations have reincorporated or set up shop in Bermuda or the Cayman Islands in the past decade, 11 of them since 2000. Treasury Department officials decline to estimate how much those reincorporations have cost the government in lost tax revenue, but the congressional Joint Committee on Taxation estimates that legislation to combat flight offshore would reap between $1.5 billion and $8 billion in revenue over the next decade.
The benefits to reincorporation are stark. The United States, with its 35 percent corporate income tax and its byzantine rules for taxing worldwide profits, is not a particularly friendly tax environment, especially compared with Bermuda, where there is no corporate income tax. Under U.S. tax law, a company can be based in Bermuda even if its presence on the island consists of a file drawer and a lawyer. European and Canadian companies would have to move their head offices — or "central mind and management" — to the Caribbean to pull it off, said Brian Arnold, an international corporate tax expert and emeritus professor of law at the University of Western Ontario.
By creating a foreign "parent" corporation in Bermuda, a U.S. company can greatly reduce its taxes on foreign sales. More importantly, it can sharply reduce taxes on U.S. operations. Through accounting maneuvers, the parent company can shift its debt disproportionately to its U.S. "subsidiary," then deduct the interest payments from its American taxes.
Before Stanley Works announced this month that it would call off its reincorporation, it predicted that the move to Bermuda would shave about $30 million a year off its U.S. tax bill. But the company paid only about $7 million in taxes last year on foreign income. The implication: More than three quarters of the projected tax savings would have come from U.S. profits.
"That is where the real juice is on these inversions," a Treasury Department official said.
The recent wave of reincorporations began at the height of the go-go 1990s, when tax avoidance became a central route to meeting Wall Street profit forecasts. Some of the recent corporate expatriates include companies caught in the net of accounting scandals, such as Tyco Ltd., the New Hampshire conglomerate that reincorporated in Bermuda in 1997, and telecommunications company Global Crossing Ltd., which also set up shop on the Atlantic island that year and is now under Chapter 11 bankruptcy protection.
Moreover, once one company does it, rivals feel forced to follow. Stanley Works made its move after two of its competitors, Cooper Industries Inc. of Houston and Ingersoll-Rand Co. of New Jersey, bolted for Bermuda.
