Corporate Tax Traitors

Statement by Charlie Cray
Coordinator, Campaign for Corporate Reform Citizen Works

July 5, 2002

It's the 4th holiday weekend, a time when most Americans take a moment out of their busy lives to reflect upon what it means to be a citizen of this country. While most citizens can be proud of the sacrifices they have made to enjoy the freedoms and standard of living this great nation provides, there are some who have decided to dodge their responsibilities even though they enjoy numerous benefits and services provided by our nation's government.

I’m referring to those corporations who have reincorporated in offshore tax havens.

Companies that have reincorporated in Bermuda include Global Crossing and Tyco International, who have already made this year's corporate hall of shame for other reasons. The list also includes construction giant Foster Wheeler, Cooper Industries, Ingersoll-Rand, Accenture (formerly Andersen consulting), Monday (formerly PriceWaterhouseCoopers Consulting), and most recently, Nabors Industries Inc., the world's biggest onshore oil and gas drilling contractor.

Some experts expect a flood of such corporate inversions, much in the same way that corporations streamed into Delaware about 100 years ago to take advantage of laws that give corporations unprecedented freedom to write their own rules.

Indeed, some consulting firms, like PwCC, have already moved to Bermuda, and can be expected to make a business out of advising other corporations on how to do the same

The general consensus is that this is a sleazy move, cheating America out of tax revenue at a time when we're facing an impending federal budget crisis and at a time when many Americans are making costly sacrifices - some even sacrificing their lives - for the benefit of the country.

Defenders of the corporate tax dodge don't deny that there will be a fiscal impact from their reduced tax payments. By itself, this is pretty shameless. But in addition, many of them receive government contracts. Accenture, for instance, has a 5-year contract with the IRS to run their web site.

What many of these companies have claimed is that the move will benefit shareholders because it will increase profits and send the stock higher.

Unfortunately for shareholders, the benefits of reincorporation are almost a total lie, which is why a number of pension funds have begun voting against such moves.

The problem for shareholders is that they are required to pay capital gains taxes when the move is made.

In addition, the move to countries like Bermuda heavily favors management and severely weakens the rights of shareholders. Under Bermuda law, shareholders have much weaker decision-making authority over fundamental changes in the corporation. The ability of shareholders to bring derivative lawsuits is also severely weakened. And there are no laws in Bermuda limiting insider trading.

So for top management, it's a great deal. They can do what they want. In addition, they don't have to take the same tax hit that shareholders take at the time of the inversion. As we know, CEOs and top management are often largely compensated through stock options, and there are currently no capital gains tax on unexercised options. When the options are cashed out, they'll be worth more now, assuming the stock rises as a result of the offshore move.

Another argument offered by the corporate tax dodgers is that an expensive and confusing U.S. tax structure makes being incorporated in America a competitive liability.

But none of the companies that have reincorporated offshore has made the claim that they are doing so for competitive reasons. In fact, as Prof. Samuel Thompson Jr. explained in his testimony to Congress, "Inversions create a real competitive problem for U.S. firms that cannot, or whose not to, engage in inversions, while their competitors pursue such transactions."

Republicans and Democrats alike agree that this trend does not benefit the United States. But they disagree on the solution.

In general, Republicans believe this growing exodus indicates a fundamental problem with the American tax system. If our tax system were more favorable to corporations, the logic goes, corporations wouldn't have to reincorporate somewhere else. Therefore, we should lower corporate taxes so there won't be a need to reincorporate offshore.

Corporations are already paying close to an all-time low in taxes as a percentage of the nation's Gross Domestic Product, just 1.3% last year, according to Citizens for Tax Justice. That's down from around 4.5% during the Truman/Eisenhower years. Never mind that our federal government is suffering a serious budget crisis in the wake of excessive tax cuts for the wealthy and a costly "war on terrorism."

In one sense, though, the Republicans may be right. These moves are symptomatic of a larger problem. But the larger problem is not that U.S. corporations are taxed too heavily. The problem is that greedy executives of U.S. corporations have lost any sense of shame.

The Democrats have a few other ideas. One bill, The Corporate Patriot Enforcement Act of 2002 [sponsored by Reps. Neal (D-MA) and Maloney (D-CT)] would tax companies that just nominally reincorporate as if they were still American companies.

A bipartisan bill in the Senate, the Reversing the Expatriation of Profits Offshore (REPO) Act [sponsored by Sens. Grassley (R-IA) and Baucus (D-MT)] takes a similar approach.

These and other bills would help solve the problem of offshore corporate tax escapees.

As we've seen with the struggle to keep Stanley Works and other companies from dodging their taxes, offshore reincorporation is the latest tool in the corporate globalizers' race to the bottom.

It's time to take this hammer out of the hands of the corporate globalizers before the rest of us get nailed.