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April 15, 2003
Back in the U.S.A.
    by William Baue

A combination of investors, activists, and congresspeople are working to make sure U.S. companies keep paying their share of taxes.

How would you like it if you could avoid paying taxes simply by relocating to Bermuda while you actually continued to live and work in the United States? Unfortunately, this practice is illegal for individuals. However, under current U.S. law it is perfectly legal for corporations to avoid taxes by expatriating to so-called tax haven countries such as Bermuda, Panama, and the Cayman Islands while continuing to operate in the United States. This practice is coming under fire from both Congress and institutional investors, who are conducting shareowner action to convince companies to repatriate to the United States.

Corporations with a large percentage of their earnings from foreign countries find it attractive to reincorporate in Bermuda because their income from outside the United States becomes exempt from American taxes. U.S. companies argue that their worldwide tax rates are higher than foreign competitors' tax rates, which puts U.S. companies at a disadvantage.

However, the expatriate issue has become so hot that a combination of institutional investors, activists, and congresspersons are actively working not just to stem the flow of companies to Bermuda but also to bring back companies that have relocated there.

Shareowner action at Tyco (ticker: TYC), McDermott (MDR), Ingersoll-Rand (IR), and Cooper Industries (CBE) is being led by large institutional investors such as the California Public Employees' Retirement System (CalPERS) and the American Federation of State, County, and Municipal Employees (AFSCME). These actions follow in the footsteps of negotiations last year whereby the Connecticut Retirement and Pension Funds Trust (CRPTF) helped prevent Stanley Works (SWK) from reincorporating in Bermuda.

"The Stanley Works victory really stemmed the outflow of companies because they realized how noxious it is to leave the U.S.," according to Richard Ferlauto, AFSCME director of pension and benefit investment policy. The campaign this year goes a step further, attempting to convince expatriate companies to return.

"We received a 26.4 percent vote on this resolution at Tyco," Mr. Furlauto told Tyco evaded more than $400 million in 2001 taxes. "Carl McCall, the former New York State Comptroller who is now a director on the Tyco board, is leading the review process, so we're very confident that we will get positive action there."

"And we have an agreement with McDermott that they will put up a binding resolution to reincorporate back to the U.S. at the first shareholder meeting after they emerge from bankruptcy, which we expect to be next year," said Mr. Ferlauto. "Looking ahead, any company that's reincorporated overseas for tax-dodging purposes is in danger of hearing from us."

On the political front, the Corporate Patriot Enforecement Act of 2003, introduced by Rep. Richard Neal (D-MA) and 131 co-sponsors on February 12, aims "to amend the Internal Revenue Code of 1986 to prevent corporate expatriation to avoid United States income taxes." The bill was referred to the House Ways and Means Committee, where it has languished ever since. Other Congressional action has sought to prevent companies incorporated in tax havens from receiving government contracts. Rep. Neal's website hosts a list of such companies, such as Accenture (ACN) and Fruit of the Loom (FTL).

On the activist front, Arianna Huffington, whose new book Pigs at the Trough documents the negative effects of corporate expatriation, helped found the Bermuda Project to help fight corporate flight to off-shore tax havens. The Bermuda Project website hosts a list of the most egregious corporate expatriates, including Bank of America (BAC), Halliburton (HAL), PepsiCo (PEP), Sara Lee (SLE), and Xerox (XRX).

In conjunction with and Working Assets, two political action organizations with a combined membership of over 2 million, the Bermuda Project is airing television commercials that highlight the irony of tax-motivated corporate expatriation. The commercials juxtapose the presidential request for $75 billion to support the Iraqi war with the Internal Revenue Service estimate that corporate expatriation siphons at least $70 billion each year from the U.S. Treasury.

"These companies enjoy America's many freedoms but don't want to pay their fair share to support schools, law enforcement, and homeland security," said Ms. Huffington. "They desert the country for Bermuda's beaches, even as our young men and women are putting their lives on the line in Iraq's deserts."


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