Are Corporate Tax Havens Unpatriotic?

W A S H I N G T O N, March 5, 2002 -- This could be a fateful week for American corporations considering a move offshore to avoid taxes and please stockholders.

Rep. Richard Neal, D-Mass., plans to introduce a bill that would seek to deter American companies from moving to paper headquarters in Bermuda and elsewhere outside the United States.

" I think it's a sophisticated way of avoiding taxes," said Neal, whose legislation would redefine such corporations as American for tax purposes, meaning they would owe their full U.S. taxes anyway.

"Where we are getting ready for a $40 billion proposal to rebuild our national defenses, $13 to $18 billion for homeland security," Neal told ABCNEWS, "why should we suggest that those who are in the best position to pay [taxes]" be allowed to go out of their way to avoid them?

From Mount Rushmore to Bermuda

Ingersoll-Rand is the latest example. The corporation was founded in 1905 by the merger of two American firms in the equipment and manufacturing business. Its admirers like to point out that IR's jackhammers helped create the faces on Mount Rushmore. More recently, it has asked the U.S. government to buy its airport security devices, which are supposed to help identify suspected terrorists.

In December, Ingersoll-Rand completed the creation of a paper headquarters offshore. Now, it is represented by three British citizens sitting in an office at 2 Church Street in Hamilton, the capital of Bermuda. The paper transaction allows the American equipment maker to legally avoid about $40 million per year in U.S. taxes.

Some tax experts justify Ingersoll-Rand's action by saying it absolves them of obligations to pay taxes on profits earned by overseas subsidiaries. Ingersoll-Rand refused to comment despite repeated requests.

"The real question," says Peter Baumbusch, a tax partner of the Los Angeles law firm of Gibson, Dunn & Crutcher, "is why should the United States add its tax burden to income that had nothing to do with the United States other than the place of incorporation?"

'Who's Going to Pay for Security?'

But Rep. Neal and others in Congress see such moves, particularly after Sept. 11 terrorist attacks, as little short of unpatriotic.

"Who's going to pay for the defense buildup? Who's going to pay for homeland security?" Neal asked rhetorically. "If this were happening on an individual basis, the American people would be outraged."

Asked if American corporations are entitled to avoid what they consider unfair taxes, Neal replied: "If one desires to have "Made in the USA" stamped on a particular piece of equipment, I don't understand why they don't want to have an American corporate address."

Late last week, the Treasury Department announced it will conduct a study of the re-incorporation phenomena. Neal scoffed at it as an unnecessary delay: "The administration is following the same strategy the congressional Republicans used in 1995 to delay, and ultimately defeat, efforts to stop wealthy individuals from renouncing their U.S. citizenship for tax purposes," he charged.

But Treasury Assistant Secretary Mark Weinberger insisted there were too many unknowns to permit a legislative assault on the practice. "There's certainly been an increase in the frequency and size of the transactions," Weinberger told ABCNEWS. "It's our job here at Treasury to … look at the effect of these transactions on the economy and the individual companies."

Added tax expert Baumbusch: "I don't think it's un-American to look at your taxes and say what is the fair and reasonable way to be taxed."