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
Shareowner action at Tyco (ticker: TYC), McDermott (MDR), Ingersoll-Rand (IR),
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 SocialFunds.com. 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),
Sara Lee (SLE),
and Xerox (XRX).
In conjunction with MoveOn.org 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."