Tax Avoidance And A Tan
It's official: I've decided to move this column to Bermuda. But don't worry about getting me a house-warming present, because I'm not really going anywhere. I'll still live in America, earn my living here, and enjoy the protection, technology, infrastructure, and all the other myriad benefits of the land of the free and the home of the brave. I'm just changing my business address. Because if I do that, I won't have to pay for those benefits -- I'll get them for free!
It's all perfectly legal. Dubbed "tax motivated expatriation" -- which has a nicer ring than "sleazy tax-cheating loophole" -- it's the latest megatrend in corporate America, with more and more U.S. companies reincorporating offshore as a way of slashing their tax bill by tens, and sometimes hundreds, of millions of dollars.
You see, Bermuda, along with sparkling turquoise water, beautiful pink sand beaches, a deep-water lagoon, and those picturesque policemen with the white hats, also has no income tax. None. Pop that into your Quicken and see how fast it fattens your wallet.
And setting up shop on the sunny island couldn't be easier. A company "moving" to Bermuda doesn't actually have to move. It doesn't even have to have an office or hold any meetings there. It just needs a PO Box and someone to pick up the mail. Or it could just let the mail pile up and forget about having someone pick it up. There's another cost savings, right there.
It's a, yes, sleazy -- and highly profitable -- accounting trick. This kind of paper relocation saved Tyco International, a New Hampshire-based manufacturer, over $400 million last year. And Ingersoll-Rand, a venerable American company that made the jackhammers that helped chisel Mt. Rushmore, avoids paying more than $40 million a year in U.S. taxes by slipping into its Bermuda shorts.
But the tax savings don't stop with sheltering overseas profits. Many companies that move to Bermuda also open a corporate beachhead in that financial mecca of the Caribbean, Barbados, where, thanks to the alchemy of modern accounting and a sweetheart tax treaty, profits earned in America can be shipped abroad and magically transformed into a tax write-off.
And the benefits of this offshore shell game extend well beyond a corporation's bottom line. Formerly red, white and blue companies now sporting a Bermuda tan are also suddenly and conveniently immune to judgments against them in U.S. courts, less accountable to their shareholders, who are unable to file class action suits, and freed from a whole host of annoying government regulations. No wonder insurance companies have been among the most avid tax expatriates.
Nobody is sure precisely how much this corporate exodus is costing us, but the IRS estimates that it's siphoning off at least $70 billion each year from the U.S. Treasury. And that number doesn't include the billions in taxes that corporations avoid paying by creating offshore subsidiaries. Enron, for example, had 881 of them and paid no taxes in four of the last five years. That's right, if you paid one dollar in taxes in those years, you paid more than this longtime fixture on the Fortune 500.
Even more galling is the fact that many of the same companies that are giving the taxman the finger as they shield themselves with their Bermuda zip codes think nothing of holding out their hand when Uncle Sam is shelling out government contracts. Ingersoll Rand had more than 200 such contracts in 2001, while Foster Wheeler, another corporate émigré, is currently raking in $600 million in U.S. taxpayer-provided funds.
And how's this for irony: among the more than $1 billion in federal contracts held by Accenture, which relocated to Bermuda in 2001, is a five year deal to redesign the IRS web site. I wonder if it will include a special portal for those eager to avoid paying their fair share.
Also showing a flair for self-parody is Tyco International, which established its Bermuda mail drop in 1997, and which over the last year has also taken in $1 billion at the public trough -- including $100 million for helping provide terror-related emergency response services. Very post-9/11 patriotic. But patriotism is the last refuge of the scoundrel, right? So when forced to choose between patriotism and profits, Tyco quickly charted a course for Bermuda.
Kate Barton, an Ernst & Young tax partner, doesn't see any problem with this: "The improvement on earnings is powerful enough that maybe the patriotism issue needs to take a back seat to that." So why not sell arms to Al-Qaida, while you're at it? They've got lots of money, and anything that creates a "powerful improvement on earnings" is presumably OK.
Of course, it's not just tax revenue that's being lost. Because of convoluted laws that allow profits funneled offshore to be invested in foreign countries without being taxed (as opposed to money that's brought back into the U.S., which is subject to taxes,) we're also losing American jobs to cheap-labor havens like China and Mexico.
It all adds up to a pretty neat trick. Unfortunately, this tax dodge is not available to you and me -- only to corporations. Just try telling the folks at the IRS that you're planning to relocate to Bermuda and would like to sign up for the zero tax rate and see how long it is before they stop laughing -- and then lock you up. Even if you tell them you don't like paying taxes because they get in the way of "improving your earnings."
Despite the billions being lost to these offshore tax havens, however, the Bush administration has shown little ardor for closing the loopholes. On the other hand, if you're receiving the traditional sort of welfare, the meager check that arrives once a month for needy individuals, the president is determined to wean you from your bad habits. He doesn't want anybody getting a free ride from the government without accepting the responsibility that comes with it. At least anybody who's not a CEO. Call it a "two love" track: unconditional love for corporations, tough love for people.
The best effort to put an end to this corporate larceny has come from the bipartisan duo of Senators Max Baucus and Charles Grassley, the Democratic chairman and ranking Republican on the Finance Committee, who have introduced the Reversing the Expatriation of Profits Offshore Act. The bill, which would force the IRS to stop winking at on-paper-only corporate moves, is slowly working its way through committee. Too slowly. Plugging this ridiculous loophole is urgent -- especially in a time of war, when patriotism must come before profits.
The Bush White House has not been shy about playing the patriotism card. Well, Mr. President, don't stop now -- here's an instance where it is actually called for.