The Federal Tax Code makes it possible for companies to avoid millions of dollars a year in taxes — simply by setting up a paper office in one of more than a dozen international tax havens like Bermuda or the Cayman Islands.
In the new post-Enron, post-Tyco world, recognition of how many companies had or were planning to use this loophole has stirred an angry debate, and a Congressional stampede to change the law.
"The overwhelming majority of the American people play by the rules every day, and they pay their taxes," Rep Jim Turner, D-Texas, said at a House of Representatives debate last month. "I cannot explain to those folks why in the world an American corporation can relocate in a tax haven overseas with just a post office box and a corporate certificate and avoid paying any taxes."
"If a Bermuda-bound company does not have to pay taxes on some of its income, of course it can underbid those who stay loyal to America," Rep. Lloyd Doggett, D-Texas, said at the same debate.
The debate was over Rep. Rosa DeLauro's, D-Conn., push to bar companies that reincorporated in tax havens outside the United States from doing business with the Department of Homeland Security.
"These companies have abandoned our country at a critical time in our history," DeLauro said. "They should not be rewarded with contracts from the very department charged with securing our security."
Running From a Stereotype
During the debate, Republican House Leader Dick Armey, R-Texas, tried to head off Democrats with what has been the GOP's traditional argument.
"This issue has nothing to do with homeland security, Mr. Speaker," Armey said. "That is just one of the burdens of our current tax code."
When votes were first counted, DeLauro's motion had carried by 210 votes to 205. However, by the time Republicans finished switching their votes for the final record, the tally had grown to 318 for and just 110 against. Days later, the Senate passed a similar motion to ban off-shore tax-avoiders from contracts with the Defense Department.
Behind the stampede, says veteran Washington political analyst Charles Cook, is a stereotype — of Republicans as the "party of the rich, the friend of big business."
"Both sides have negative stereotypes," Cook said. "So when an issue comes up like this one, it plays right into that for Republicans, it plays right into the negative stereotype. And I think once the Republicans started realizing how this issue was going to look from a distance, they started saying, 'Hey, wait a second, this isn't what we want to do.' And they started backing off as fast as they could."
The issue of what is called "inversion" or "reincorporation," — by which an American company, by signing a few papers and setting up a mailing address in Bermuda or the Cayman Islands, can shed millions of dollars in Federal tax obligations, also has been the subject of recent public protests.
"Brothers and sisters, Stanley Works is the poster child for corporate greed," AFL-CIO leader John Sweeney said at a recent rally against a proposed move to Bermuda by the New Britain, Conn., manufacturer best known for making tools.
"We're not here to protest what Stanley is doing," said Rep. Jim Maloney, D-Conn., at the rally. "We're here to stop what Stanley is doing."
And they did. The combination of public rallies, newspaper editorials, and the threat of Congressional action convinced Stanley to reverse engines and call off its plans to reincorporate in Bermuda.
Stanley CEO John Trani has said he decided against taking his company on the mail-drop-in-Bermuda route because he's now convinced Congress is going to reform the tax code and level the playing field between stay-at-home companies like Stanley and competitors like Cooper Industries and Ingersoll-Rand, who have reincorporated in Bermuda.
Trani declined comment to Nightline for this report.
Plan to Punish Offshore Firms
California State Treasurer Phil Angelides plans to force firms who have moved offshore to pay a price.
"The policy we've adopted said, first of all, that we won't invest in any of the companies that are expatriates, and secondly, that, as contracts expire, we will not enter into any new contracts with the companies that have chosen to go off-shore," Angelides said.
This could mean that several of the largest institutional investors in America will be divesting themselves of stocks from Angelides' blacklist of firms with off-shore tax hideouts.
"We send a very powerful message across the marketplace when we say that we expect a standard of conduct in the marketplace, and that we will not do business with companies that play games to avoid taxes," Angelides said.
However, says Laurence Cohen, a political analyst with the Yankee Institute of Public Policy, "Most of the nations do not tax business profits outside their borders. The United States is the odd duck here."
Cohen sees two problems — the current U.S. Tax Code, which he says works against some exporting companies, and that sentimental idea that corporations should be good citizens.
"They don't promise to be nice," Cohen said. "They don't promise to be lovable. They don't even necessarily promise to be patriotic. They promise to make me more money tomorrow than they made me today. That's what they're best at. That's what we should let them do."
Bush Changes Tune
Even President Bush — who as a director of Harken Oil in 1989 ultimately approved setting up a Cayman Islands subsidiary to protect what proved to be non-existent foreign earnings from American taxes — seems to have changed his tune.
"I think we ought to look at people who are trying to avoid U.S. taxes as a problem," Bush said on July 31. "I think American companies ought to pay taxes here, be … good citizens.
Both the Senate and the House still are working on their solutions to the problem of off-shore tax havens. But one thing seems certain: Their work won't stop until a bill slowing down future reincorporations and penalizing firms who have already made the leap has stampeded all the way to the president's desk.