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US Government losing $1billiona year in Bermuda
The US government is losing $1 billion ayear in tax revenue because of companies reincorporating to Bermuda,a tax analyst claimed.
Robert Willens predicted the figure wouldincrease as companies moved offshore to avoid paying taxes.
His comments come amid renewed debate about"corporate inversions", the phrase used to describereincorporations. Also yesterday:
Democratic Senator Max Baucus, chairmanof the Senate Finance Committee, vowed to crack down on companymoves. He said it was important to protect the "AmericanDream."
USA Today said it was wrong to lay the blameon Bermuda. The challenge was to reform tax laws to make companieswant to remain based in the US.
Mr. Willens, who since 1987 has been a managingdirector and tax accounting analyst at Lehman Brothers and formerlya tax partner with KPMG for 15 years, spoke out in an interviewwith financial publication Barons.
He said there was a huge benefit to companiesincorporating in Bermuda and said the first company to do it wasHelen of Troy in 1994.
He told Barons: "A shell company orholding company is created in Bermuda, and that company then issuesits stock to acquire the stock of the US company from its shareholders.Helen of Troy Ltd., the new company created in Bermuda, issuesstock to the shareholders of Helen of Troy Inc., the US company,and they in turn give their stocks to Helen of Troy Ltd. The UScompany then becomes a subsidiary of the Bermuda company."
Mr. Willens said the IRS got upset whenthis happened and decided they would police these types of transactionsin an attempt to deter them by creating a "toll charge"which was levied on shareholders.
Mr. Willens said the IRS went after shareholdersas they thought this would be deterrent enough, and for a whileit worked.
However, he said Tyco's 1997 merger withADT Ltd. changed everything. Even though shareholders had madelarge profits on Tyco stock, and management admitted shareholderswould be hit with hefty taxes - including former CEO Dennis Kozlowskipaying some $10 million - they justified the cost to shareholdersbecause of the potentially huge corporate tax savings over severalyears.
The move saved Tyco approximately $400 millionin taxes a year. Mr. Willens added: "It was an importantevent, because once other companies saw the numbers and realisedhow much in corporate tax savings could be realised by movingto Bermuda, they had to go."
He said the break in the market meant fewershareholders had profits in the stocks they held. This meant thetoll charge had less effect.
Would he recommend reincorporation in Bermuda?Mr. Willens told Barons that it clearly saves companies money,but it wasn't for all companies as consumer-products companieswould suffer more in terms of image and goodwill than it wouldsave in taxes. "So we were really surprised when StanleyWorks announced their plan," he said.
Mr. Willens said post September 11 it wasclear that patriotism would be a prevalent issue and said: "Itwas just shocking they (Stanley Works) wouldn't have anticipatedthe uproar."
Ignoring insurance companies, Mr. Willenssaid the 20 to 22 companies in Bermuda cost the US Governmentabout $1 billion a year in tax revenue, which he said was a lotof money but "not a great deal in the scheme of things."
He said this figure would increase as companiesmoved offshore to avoid paying taxes on foreign earned income.
He added: "But as people have gottena little more sophisticated - and greedy - they have figured outways of also reducing US taxes on their US income, as well. Itis now more than simply a revolt against the way the US taxesmultinational companies."
When asked where the situation currentlystands, Mr. Willens said some companies were unable to reincorporatebefore the March 20, 2002 "wire", the effective dateof legislation proposed to terminate the practice. Some companiesjust made it such as Ingersoll-Rand, but others failed to makethe deadline and their cases are pending.
Mr. Willens was asked about Halliburton:"I don't think we will be hearing Halliburton is moving offshoreanytime soon," he said.
USA Today ran two opinion pieces yesterday,one by Democrat Senator Max Baucus who is also chairman of theSenate Finance Committee, as well as USA Today's view entitled:"Don't fault firms for fleeing cumbersome US Tax code."
Sen. Baucus said the US system of Governmentand enterprise was the best in the world, but came at a cost.He said Americans had given their lives to protect the "AmericanDream" of owning their own business and empowering themselves,family and employees economically, but said taxes were collectedto "support our country's infrastructure, build a militaryand maintain the American Dream for future generations."
Sen. Baucus said every American was obligedto "protect the integrity of our economic system," andhighlighted the need for executives to adhere to honest and accurateaccounting.
He also said there was an important aspectof corporate integrity: "being honest about where a companyestablishes its legal residence."
Sen. Baucus said: "Recently, however,a number of businesses have chosen to locate their headquartersin low-tax nations where they have no operations, own no realestate and have no employees. The executives still enjoy the privilegesafforded and paid for by honest US taxpayers while they, in effect,renounce their US citizenship just to cut taxes."
Sen. Baucus said this was permitted underthe US tax code but added: "These actions are wrong."And he said this is why he and Senator Charles Grassley introducedlegislation to "crack down" on these companies. "Corporationsshould not be able to avoid US taxes on their US profits earnedby US operations built with US capital. And the federal governmentshould not be permitted to sign a contract with companies thatdo," wrote Sen. Baucus.
Following some rhetoric about "momand pop" hardware stores who pay their fair share in taxes,Sen Baucus concluded: "Our hardworking Americans are countingon Congress to make sure that corporations pay their fair share.I am committed to protecting the American Dream that our small-businessowners represent."
In USA Today's view, the newspaper highlightedthe debate over the plans of Stanley Works to reincorporate butsaid: "The concern, while understandable, is overwrought."
The newspaper pointed out that the practicehas been around for nearly two decades and just two dozen of thethousands of publicly traded US companies have relocated offshore.
"Nor are these firms skipping out onpaying taxes on profits made in the USA. Mostly, they save taxeson profits earned by overseas operations because the US Government- unlike most other countries - taxes profits made on foreignearnings. US job losses from corporate moves are minimal, too,since the firms "relocate" on paper only." saidthe newspaper. According to PricewaterhouseCoopers, from 1998to 2000, in three fourths of mergers involving a US and foreignfirm, the resulting company choose to locate headquarters in theforeign country, said the newspaper. The Treasury Department hasalso said more companies are choosing countries outside of theUS as a home base.
"...when companies that operate aroundthe world become more reluctant to establish US headquarters,a nation that prides itself as the leader in global commerce needsto re-examine its tax rules," said the newspaper. USA Today'sview concluded: "Punishing companies that relocate to Bermudaby withholding contracts plays well with the public, but doesn'tconfront the reality of today's competitive world economy. Thechallenge for Congress is to reform the tax laws so most companieswill want to remain US-based. That's a harder task than deploringthe few that leave."