Productivity and innovations may be fine, but tax havens are simpler,
faster, easier.....
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U.S. CORPORATIONS ARE USING BERMUDA TO SLASH TAX BILLS
By DAVID CAY JOHNSTON
02/18/2002
The New York Times
Page 1, Column 3
A growing number of American companies, encouraged by their
financial advisers, are incorporating in
Bermuda to lower their taxes sharply without giving up the
benefits of doing business in the United
States.
Insurance companies led the way, but now manufacturers and
other kinds of companies are following.
Stanley Works, for 159 years a Connecticut maker of hammers
and wrenches, is among the latest with
plans to become a corporation in Bermuda, where there is no
income tax. The company estimates that
it will cut its tax bill by $30 million a year, to about
$80 million.
Tyco International, a diversified manufacturer with
headquarters in Exeter, N.H., says that being a
Bermuda corporation saved it more than $400 million last
year alone. Other companies that have
incorporated in Bermuda or plan to do so include Global
Crossing, a Beverly Hills, Calif.,
telecommunications company; Ingersoll-Rand and Foster
Wheeler, both New Jersey industrial
manufacturers; Nabors Industries, a Texas company that is
the nation's largest oil well services
company; and Cooper Industries, a Houston manufacturer of
industrial equipment.
Becoming a Bermuda company is a paper transaction, as easy
as securing a mail drop there and paying
some fees, while keeping the working headquarters back in
the United States.
Bermuda is charging Ingersoll-Rand just $27,653 a year for
a move that allows the company to avoid at
least $40 million annually in American corporate income
taxes.
The company is not required to conduct any meetings in
Bermuda and will not even have an office
there, said its chief financial officer, David W.
Devonshire.
''We just pay a service organization'' to accept mail, he
said.
Kate Barton, an Ernst & Young tax partner, said that
incorporating in Bermuda ''is a megatrend we are
seeing in the marketplace right now.'' Many corporations
that are planning the move have not yet
announced it, she said.
In a Webcast to clients, Ms. Barton cited patriotism as the
only potentially troubling issue that
corporations consider before moving to Bermuda, and she
said that profits trumped patriotism.
''Is it the right time to be migrating a corporation's
headquarters to an offshore location?'' she asked.
''And yet, that said, we are working through a lot of
companies who feel that it is, that just the
improvement on earnings is powerful enough that maybe the
patriotism issue needs to take a back seat
to that.''
The White House has said nothing about these moves and
their effect on tax revenues. Mark A.
Weinberger, chief of tax policy in the Treasury Department,
said the moves to Bermuda and other tax
havens showed that the American tax system might be driving
companies to make such decisions. ''We
may need to rethink some of our international tax rules
that were written 30 years ago when our
economy was very different and that now may be impeding the
ability of U.S. companies to compete
internationally.''
But others have expressed concern about the trend. Senator
Charles E. Grassley of Iowa, the ranking
Republican on the Senate Finance Committee, expressed
alarm. ''There is no business reason for doing
this, other than to escape U.S. taxation. I believe the
Finance Committee needs to investigate this
activity.''
There is no official estimate of how much the Bermuda moves
are costing the government in tax
revenues, and the Bush administration is not trying to come
up with one.
A Bermuda address is being recommended by many legal,
accounting and investment advisers. Stanley
Works, for example, relied on Ernst & Young for accounting
advice, Skadden Arps Slate Meagher &
Flom for legal advice, and Goldman, Sachs for investment
advice.
Ingersoll-Rand's top tax officer, Gerald Swimmer, said all
of the major investment houses and
accounting firms had presented the idea to his company.
Ingersoll-Rand expects its worldwide income
taxes to fall to less than $115 million from about $155
million annually.
Many companies looking for tax havens abroad are choosing
Bermuda because it is close, its political
system is stable and it uses a legal system similar to that
of the United States. But some, like Seagate
Technology, the California maker of computer disk drives,
have gone to the Cayman Islands and other
places.
Insurers have also flocked to Bermuda to escape most
insurance regulations, including how much
money they must hold in reserve to pay claims.
Since companies that move to Bermuda usually keep their
main offices in the United States, they
continue to have all the security provided by the American
government, the legal system and the
courts.
But by moving to Bermuda, their income from outside the
United States becomes exempt from
American taxes. Also, when the American company borrows
from its Bermuda parent, the interest it
pays creates a deduction that reduces U.S. taxes, but there
is no tax on the interest earned by the
Bermuda parent.
These companies say they are moving because their worldwide
tax rates are higher than those of
foreign competitors. Stanley Works expects its worldwide
tax rate to fall to 23 percent to 25 percent of
profits, down from 32 percent now, said Gerard J. Gould,
Stanley's vice president for investor
relations.
Another company, Cooper Industries, expects to lower its
worldwide income tax bill to $80 million
from about $134 million.
Robert Willens, a tax expert at Lehman Brothers, said that
''any company with a decent amount of
foreign income will see its tax rate fall dramatically'' by
moving its nominal headquarters to Bermuda.
''But the political considerations sometimes prevail,'' he
added, ''and companies are understandably
reluctant to do something like this because it will not
necessarily be properly construed in the
marketplace. It may be seen as not patriotic and in the
wake of Sept. 11, that is not a good posture for
a company.''
Mr. Willens said that he had personally presented the
Bermuda idea to some companies and that the
idea had been turned down for just that reason. ''The
companies most willing to do this are not
household names,'' he said, ''but Stanley Works is verging
on a household name.''
Mr. Gould said Stanley Works, whose products can be found
in many home toolboxes, had not
received a single complaint that it was being unpatriotic.
Only a few shareholders complained, he said,
and all were longtime shareholders who will owe taxes on
their capital gains if the deal is approved by
two-thirds of the Stanley Works shareholders.
The Internal Revenue Service has ruled that shareholders
must pay taxes on any increase in the value of
their shares between the date they bought them and the date
the company incorporated in Bermuda,
even if they do not sell the shares. The government
designed this rule to place a price on what it calls
tax-motivated expatriation.
With the stock market depressed, Mr. Willens noted,
interest in moving to Bermuda is up because
fewer shareholders would owe capital gains. And even when a
move to a tax haven occurs, the
company is not required to report to the I.R.S. on the
holdings of each stock owner. Only the integrity
of individual taxpayers ensures that the taxes are paid, as
is the case with any tax on capital gains.
''I am sure a few get missed,'' Mr. Willens said with a
chuckle.
Peter L. Baumbusch, an international tax lawyer with
Gibson, Dunn & Crutcher in Washington, said
current tax law discriminated against existing
multinational corporations with headquarters in the
United States.
David A. Weisbach, a University of Chicago professor of tax
law, said the corporate moves to
Bermuda should prompt Congress to review the American
corporate tax regime, which was established
when American companies sold primarily to the domestic
market and few foreign companies had a
major presence in the United States.
''Should we be taxing worldwide income or not?'' he asked.
''That is the really hard question.''
Representative Charles B. Rangel of New York, the ranking
Democrat on the House Ways and Means
Committee, said the patriotism question also needed to be
debated.
''Some companies flying the Stars and Stripes renounce
America when it comes to paying their taxes,''
he said. ''They choose profits over patriotism. So far, the
Bush Treasury Department has shown no
interest in stopping these corporate moves, or even drawing
attention to them. Supporting America is
more than about waving the flag and saluting -- it's about
sharing the sacrifice. That's true of soldiers,
citizens, and it should be true of big companies, too.''
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