Posted on 04/20/2002 12:50:10 PM PDT by Action-America
(It's starting - The media finally takes notice of IRS induced capital flight / my title)
By NELSON ANTOSH
Copyright 2002 Houston Chronicle
Five Houston companies are racing the clock to move their places of incorporation to a pair of offshore tax havens.
The companies -- four in the oil and gas service business and one a manufacturer, Cooper Industries -- see reincorporating in Bermuda or the Cayman Islands as a way to cut their income tax bills, which rewards shareholders and makes the companies more competitive.
Cooper has predicted that the move would increase its cash flow by $55 million a year by cutting its tax rate from 32 percent to the 20 to 25 percent range.
While the companies argue that they need to be able to compete with firms based in countries with more favorable tax rules, the rush offshore has drawn a hostile response in Washington.
In addition to Cooper, the Houston companies looking to change are Nabors Industries, the nation's largest driller of oil and gas wells on land; Noble drilling, a major offshore contract driller; Weatherford International, a provider of oil-field services and equipment; and Veritas DGC, a seismic company, whose services help find oil and gas.
All of a sudden, the firms, which will still have their headquarters in Houston, are on politically perilous ground. The politicians see this as an unpatriotic move that could sap the country's tax base at a time when deficits are again looming.
A bill with bipartisan support, which was introduced April 11 by the Senate Finance Committee, is designed to eliminate the tax advantages these companies are hoping to achieve.
Ranking committee member Chuck Grassley, R-Iowa, and Chairman Max Baucus, D-Mont., want to stem the reincorporation tide by amending the federal tax code.
"These expatriations aren't illegal. But they're sure immoral," said Grassley.
They want to stop reincorporations retroactive to March 21, when the senators warned companies thinking about moving to tax havens that they would do so at their peril. Their bill, known as the Reversing the Expatriation of Profits Offshore Act, would not reverse transactions completed prior to that date, however.
Despite concerns about lost tax revenues, the trend to moving offshore is accelerating, involving big industrial firms such as Ingersoll-Rand and Stanley Works.
Some Houston oil-field companies got in ahead of the deadline. Transocean Sedco Forex, the world's biggest offshore driller, became a Cayman Island company in May 1999, when it was still just Transocean Offshore, said spokesman Guy Cantwell.
GlobalSantaFe, the second-largest, became a Cayman Island company last November through the merger of Global Marine with Santa Fe International, which has been incorporated in the Cayman Islands since 1990, said spokeswoman Stephanie Price.
Those that are still trying to get to get their domicile moved must win the approval of shareholders. The actual reincorporation takes only a few days. They are hoping to be in Bermuda or the Caymans before the end of this quarter.
Oil-field companies are at the forefront because so much of their business is already offshore, and that percentage promises to grow as the reserves in the United States are gradually depleted.
They say they need to cut taxes to keep up with competitors based elsewhere, and even with at-home competitors who enjoy the tax advantage.
A "me too" scenario emerges. Noble needs to do it because Transocean and GlobalSantaFe already have, said John Rynd of Noble Drilling.
While countries such as Bermuda have no income tax or capital gains tax, the companies incorporated there still must pay taxes on their profits earned within the United States.
"The United States is the only place in the world that taxes corporations and individuals on income no matter where it is generated," says financial analyst Jim Wicklund of Banc of America Securities.
This means they pay tax in the Middle East or Brazil, if that is where the rigs are working, and again pay tax on that income in the United States.
This amounts to double taxation, said John Breed of Cooper Industries, a major manufacturing company whose products range from Crescent wrenches to Halo lights.
The proposed law would eliminate the tax advantages of reincorporating by telling the IRS to do a "substantial business activity test."
The company would have to answer the question: Does it have significant assets, employees or real property in its new corporate home, or is it just a manila folder in a filing cabinet? If it flunks the test, it would be considered a U.S. company for tax purposes.
The lawmakers call reincorporation an inversion, in which the U.S. corporation forms a subsidiary in a foreign tax haven. Then the subsidiary becomes the parent, thus "inverting" ownership.
Next, the shareholders of the U.S. corporation exchange their shares for shares in the foreign subsidiary.
Such transactions to level the playing field historically have not been an issue, said Jack Allender, a tax lawyer for Fulbright & Jaworksi. The ability of some foreign companies to go beyond that is what has got everybody's attention, he said.
One way to do this is by using the overseas operation as a bank -- lending capital to the U.S. operation and thereby creating deductible interest expenses that wouldn't have been available if they hadn't made the move.
The proposed law calls such finessing of the tax code "income stripping," and would require IRS approval for a period of 10 years on such things as third-party interest deductions, transfers of intangibles and cost-sharing arrangements.
Shareholders have the last say, but nobody knows of a reincorporation that was voted down.
Weatherford International will vote on moving its place of incorporation to Bermuda shortly after the annual meeting on June 26, said spokesman Don Galletly, who sees little sign of shareholder opposition.
"I think the vast majority see this as a long-term benefit to the company," he said. Almost 65 percent of the company's income now comes from outside the United States and that trend is expected to continue.
Cooper Industries is one of the few companies to furnish numbers on what there is to gain from reincorporating, because this has become a political issue.
Since it is impossible to predict what will happen with the legislation, the company decided to press ahead on Bermuda, said spokesman John Breed.
Having started the process last June, Cooper Industries should have been in Bermuda by now but for the delay caused by a takeover offer from Danaher Corp. last August. The vote is scheduled for May 14.
Moving requires a review by the Securities and Exchange Commission. U.S. accounting standards and disclosure regulations must be complied with in order for shares to be traded on the New York Stock Exchange.
Nabors Industries decided to move to Bermuda on Jan. 2 and completely missed its target date of April 15, mainly because the SEC is making such a lengthy review, said spokesman Dennis Smith.
The SEC randomly selects some applications for a more extensive review than others, he said. Nabors is now tentatively planning for a shareholder vote on June 13.
Noble Drilling had about 60 percent of its assets in, and derived 70 percent of its revenues and 80 percent of its net income, from international markets during the first quarter, said spokesman John Rynd. Its vote on moving from Delaware to the Cayman Islands will be held during the annual shareholder's meeting on Thursday.
Veritas DGC, which is in the process of merging with Petroleum Geo-Services to form the world's second-largest seismic company, chose the Cayman Islands as a sort of compromise, said Mindy Ingle of Veritas.
The definitive merger agreement probably won't be signed until the end of April, and a date for voting on reincorporating can't be scheduled until after that.
The media is finally beginning to take notice of the IRS induced native capital flight that has been on the rise for years.
This was one of the headline articles on the Front Page of the Houston Chronicle today (Saturday). How long will it take before the rest of the media jumps on this big time? When that happens, you can expect to see IRS induced capital flight by wealthy individuals and corporations really take off.
Sen. Charles Grassley (R-Iowa) calls these moves immoral. But, what is immoral about a company doing everything it legally can to provide their stockholders the greatest return on their investment? In fact, doing anything less, in our litigious society, would be grounds for removal of the board. Similarly, what is immoral about an individual doing everything that he legally can to protect his hard earned wealth from confiscation by an increasingly aggressive IRS?
Rather than attacking those who pay the majority of the bills (top 1% pays more than 1/3 of taxes) with laws that discourage them from staying, they should be passing laws that encourage them to stay (or even to return), by insuring them protection from confiscation. When wealthy corporations and individuals leave, as demonstrated in this article, it disproportionately reduces the tax base, forcing those poorer people who remain to pay higher taxes, just for the government to stay even.
Notice also, that even the passage of new laws designed to punish companies and individuals that leave, is not slowing down this capital flight. In fact, as this article shows, increasingly, companies are willing to risk these reprisals by the US government, to get out now, before it gets even worse.
This article is only about Houston companies and only companies in one market. How many other companies are taking similar steps all across the United States. Count on it - the number is not small. Otherwise, you would not see both Republicans and Democrats supporting disgraceful legislation like the Reversing the Expatriation of Profits Offshore Act. But this isn't even new. The 1996 Health Insurance Portability and Accountability Act claims the right of the US government to tax the income of individuals that have renounced their citizenship for 10 years after they have renounced US citizenship and taken foreign citizenship.
These and other such oppressive laws show that our lawmakers are seriously worried about losing the power that they have over these wealthy corporations and individuals. The wealthy are leaving. The problem is, that our legislators are attempting to discourage the wealthy from leaving instead of encouraging them to stay and that tactic is actually making matters worse.
Action America has been writing about this IRS induced phenomena and the threat it represents since 1994. See the "Tax and Economy" section of Action America for more info on IRS induced capital flight.
But wouldn't it be great if the tax code were reformed?
And, contrary to what Grassley says, there's nothing "immoral" about maximizing profits by avoiding taxes.
*Loral Aerospace: We don't make Communist Chinese Intercontinental Ballistic Missiles, we make Communist Chinese Intercontinental Ballistic Missiles better!
Excellent analogy. Wonder how to open people's eyes?
The tracking of the medical matrix of Bin Laden gets pretty murky in the offshores!
If anyone comes up with nfo on "NICRIS", "INNERCITY HOLDINGS","WELLCARE", please ping me!
The Milan tower crasher Luigi Fasulo supposedly has a company in Panama called "Eurotex"
Ruppert Murdoch, the owner of FOX Cable News has saved millions and millions of $$$$$$$ by doing the island thing!
The funny part about this entire issue is that what the Houston companies are doing isn't even necessary.Ever since the income tax was introduced, companies have been paying "consulting fees" to foreign parent firms. Those fees can reduce profits to zero. No profits, no taxes.
Of course, the same people may own those foreign firms, so they get to reap all of the profit and pay no taxes at all.
This is called "upstreaming," and the U.S. Supreme Court has already ruled that it is legal.
The companies will start screaming soon enough. Look for the words "anti facism" in the news reports.
So, you incorporate in a forign tax freindly country, then do business here in the good ole USA, pat yourself all of the profits as a overseas consultant and reduce your tax liability here in the good ole USA to zip?
Now, let me ask you a question, which tax haven is the friendliest for a company making say 250 K a year in profits?
Mark
It would make even more sense for the federal government to stop using the income tax for social engineering. The whole system is crazy. A tax on profits is equivalent to a fine on profits. Ergo, they are making profits disappear. Each time Congress and the IRS play with the tax code, they distort the economy by making a businessman do something he normally wouldn't do. They should sit back and let the market sort itself out.
We need to stop taxing "profits" or "income". What we need is a simple tax on sales; then it doesn't matter where things are made, where you do business, or where you incorporate. It's a lot simpler and everyone can understand all the rules. You buy it, you pay the tax.
"The funny part about this entire issue is that what the Houston companies are doing isn't even necessary."
No. It isn't necessary today. What they are doing is actually preemptive.
They are getting out while they still can.
They can read the writing on the walls and can infer what is likely coming down the line. Nobody knows when the US government will actually attempt to shut down all non-approved international monetary transactions. It may not happen. But, the direction of wealth punitive legislation of recent years suggests otherwise. Certainly, large companies and wealthy individuals don't want to take a chance on being here, should it happen. That's why they're getting out while they still can.
I have been reporting on IRS induced capital flight since 1994 and I can assure you that what you are seeing here has been going on for over 10 years. Every time one more of these wealth punitive laws is passed, another large group of wealthy taxpayers leaves. The only difference is that now the major media is beginning to take notice, which means that it may be getting worse much faster.
That's why these companies are leaving now.
"Now, let me ask you a question, which tax haven is the friendliest for a company making say 250 K a year in profits?"
Check out Escape Artist at http://www.escapeartist.com/
They have country profiles on all of the favored tax haven countries. Each company and each individual has different priorities, so there is no one easy answer. You might want to talk to a good offshore attorney, after you narrow down the possibilities. They will be aware of the latest changes in the laws.
Another good site is Sovereign Society at http://www.sovereignsociety.com/
They have a great free newsletter to help keep you up to date. They also have a very extensive list of links having to do with expatriation, second passports, offshore finance and offshore living in general. To get to the links, go to http://www.sovereignsociety.com/vmembers.php?sec=osres.
Good Luck!
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