February 18, 2002
U.S. Companies File in Bermuda to Slash Tax Bills
By DAVID CAY JOHNSTON
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 (news/quote), 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 (news/quote), 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 (news/quote) and
Foster Wheeler (news/quote), both New Jersey industrial manufacturers;
Nabors Industries (news/quote), a Texas company that is the nation's
largest oil well services company; and Cooper Industries (news/quote), 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
(news/quote), 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 (news/quote), 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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