WASHINGTON -- Well-known U.S. companies like Stanley tools and Ingersoll-Rand are sharply lowering their tax burdens by setting up shop in Bermuda. Congress and the Bush administration are raising questions.
Creating a shell corporate entity in Bermuda, which imposes no direct taxation, is legal but could be costing the U.S. treasury tens of millions of dollars, critics say. Several members of Congress have introduced legislation to prevent U.S. corporations from using the essentially paper transaction to escape taxation.
"It's simply outrageous that there's this corporate rush to put up a shingle in Bermuda and still put a USA stamp on their products," said Rep. Richard Neal, D-Mass.
The Treasury Department is rushing to complete a study of the issue that will focus in part on whether U.S. corporate tax laws are driving companies to take drastic steps to stay competitive. Treasury Secretary Paul O'Neill is an ardent critic of the tax system, which is under attack from pro-business groups because it taxes U.S. companies for income earned worldwide unlike European countries.
"When major companies are moving their operations overseas, it's our responsibility to take a look at it," said Mark Weinberger, assistant treasury secretary for tax policy. "In relatively short order, we're going to be able to come back and see if there are any flaws in the law."
The Stanley Works, a toolmaker based for decades in New Britain, Conn., hopes to complete its new Bermuda incorporation by mid-2002. Under such a "corporate inversion," as the deals are known, stock for the U.S. company will be exchanged for shares in the new one.
Aside from this transaction, the new Stanley Works Ltd. in Bermuda won't be doing any actual work.
The move will lower Stanley's effective tax rate from 32 percent to as low as 23 percent, saving about $30 million a year in U.S. taxes, according to a company statement. While Stanley will continue to pay about $80 million a year to the federal government from its U.S. operations, the statement makes clear that tax savings is a chief reason for the move to Bermuda.
"Today, the company pays an excessive amount of tax relative to our foreign competitors," the statement says. "If the company is not competitive, there are no taxes and no jobs."
Tyco International Ltd. and Ingersoll-Rand Co., both diversified industrial companies, are other high-profile names that now call Bermuda home. Paul Dickard, an Ingersoll-Rand spokesman, said lowering the U.S. tax burden will "facilitate the movement of our global capital."
"The international provisions of the U.S. tax laws put U.S. corporations at a disadvantage," he said. "We believe it's a sound business decision."
At Tyco, executive vice president Brad McGee said the company's Bermuda address was the result of a 1997 merger with ADT Ltd., a British firm based there, and not a paper transaction aimed at reducing taxes.
"We're not a U.S. company," he said. "It is not a shingle."
On Capitol Hill, the Bermuda trend is gaining notice just as the demise of Enron Corp. has focused attention on corporate ethics and use of offshore tax shelters. Also incorporated in Bermuda is Global Crossing, the fiber optic builder that has also filed for bankruptcy amid questions about its accounting practices, as well as the Accenture consulting firm that was spun off from the Arthur Andersen accounting company -- which advised Enron.
Neal, a member of the tax-writing House Ways and Means Committee, has introduced a bill with 25 co-sponsors, including two Republicans, that would require companies to continue paying U.S. taxes if they reincorporate in a foreign country and its stock remains substantially in the hands of its former shareholders. A similar approach is being pushed by Rep. Scott McInnis, R-Colo., also a member of the Ways and Means panel.
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