U.S. Companies File in Bermuda to Slash Tax Bills

by DAVID CAY JOHNSTON for New York Times Tuesday, Feb. 19, 2002 at 11:31 AM

in light of the whole enron thing...


U.S. Companies File in Bermuda to Slash Tax Bills


growing number of American companies,
encouraged by their financial advisers,
are incorporating in Bermuda to lower
their taxes sharply without giving up the benefits
of doing business in the United States.

Insurance companies led the way, but now
manufacturers and other kinds of companies are

Stanley Works (news/quote), for 159 years a
Connecticut maker of hammers and wrenches,
is among the latest with plans to become a
corporation in Bermuda, where there is no
income tax. The company estimates that it will
cut its tax bill by $30 million a year, to about $80

Tyco International (news/quote), a diversified
manufacturer with headquarters in Exeter, N.H.,
says that being a Bermuda corporation saved it
more than $400 million last year alone. Other
companies that have incorporated in Bermuda or
plan to do so include Global Crossing, a Beverly
Hills, Calif., telecommunications company; Ingersoll-Rand (news/quote) and Foster
Wheeler (news/quote), both New Jersey industrial manufacturers; Nabors Industries
(news/quote), a Texas company that is the nation's largest oil well services
company; and Cooper Industries (news/quote), a Houston manufacturer of industrial

Becoming a Bermuda company is a paper transaction, as easy as securing a mail
drop there and paying some fees, while keeping the working headquarters back in
the United States.

Bermuda is charging Ingersoll- Rand just $27,653 a year for a move that allows the
company to avoid at least $40 million annually in American corporate income taxes.

The company is not required to conduct any meetings in Bermuda and will not even
have an office there, said its chief financial officer, David W. Devonshire.

"We just pay a service organization" to accept mail, he said.

Kate Barton, an Ernst & Young tax partner, said that incorporating in Bermuda "is a
megatrend we are seeing in the marketplace right now." Many corporations that are
planning the move have not yet announced it, she said.

In a Webcast to clients, Ms. Barton cited patriotism as the only potentially troubling
issue that corporations consider before moving to Bermuda, and she said that
profits trumped patriotism.

"Is it the right time to be migrating a corporation's headquarters to an offshore
location?" she asked. "And yet, that said, we are working through a lot of companies
who feel that it is, that just the improvement on earnings is powerful enough that
maybe the patriotism issue needs to take a back seat to that."

The White House has said nothing about these moves and their effect on tax
revenues. Mark A. Weinberger, chief of tax policy in the Treasury Department, said the
moves to Bermuda and other tax havens showed that the American tax system might
be driving companies to make such decisions. "We may need to rethink some of our
international tax rules that were written 30 years ago when our economy was very
different and that now may be impeding the ability of U.S. companies to compete

But others have expressed concern about the trend. Senator Charles E. Grassley of
Iowa, the ranking Republican on the Senate Finance Committee, expressed alarm.
"There is no business reason for doing this, other than to escape U.S. taxation. I
believe the Finance Committee needs to investigate this activity."

There is no official estimate of how much the Bermuda moves are costing the
government in tax revenues, and the Bush administration is not trying to come up
with one.

A Bermuda address is being recommended by many legal, accounting and
investment advisers. Stanley Works, for example, relied on Ernst & Young for
accounting advice, Skadden Arps Slate Meagher & Flom for legal advice, and
Goldman, Sachs for investment advice.

Ingersoll-Rand's top tax officer, Gerald Swimmer, said all of the major investment
houses and accounting firms had presented the idea to his company.
Ingersoll-Rand expects its worldwide income taxes to fall to less than $115 million
from about $155 million annually.

Many companies looking for tax havens abroad are choosing Bermuda because it is
close, its political system is stable and it uses a legal system similar to that of the
United States. But some, like Seagate Technology (news/quote), the California
maker of computer disk drives, have gone to the Cayman Islands and other places.

Insurers have also flocked to Bermuda to escape most insurance regulations,
including how much money they must hold in reserve to pay claims.

Since companies that move to Bermuda usually keep their main offices in the United
States, they continue to have all the security provided by the American government,
the legal system and the courts.

But by moving to Bermuda, their income from outside the United States becomes
exempt from American taxes. Also, when the American company borrows from its
Bermuda parent, the interest it pays creates a deduction that reduces U.S. taxes, but
there is no tax on the interest earned by the Bermuda parent.

These companies say they are moving because their worldwide tax rates are higher
than those of foreign competitors. Stanley Works expects its worldwide tax rate to fall
to 23 percent to 25 percent of profits, down from 32 percent now, said Gerard J.
Gould, Stanley's vice president for investor relations.