New Alliance of Business Organizations Presses for Level Playing Field Between U.S. Domestic Business and Tax Haven Abusers
Report Estimates at least $37 billion lost Per Year to Tax Havens

Tele-Press Conference with Senator Carl Levin and Business Leaders:
Tuesday, July 20th, 2:30 ET

Washington, DC, July 20, 2010 — A new report to be released today explores the impact on smaller U.S. businesses when U.S. multinational corporations avoid taxes through overseas tax havens. It also includes a new estimate of the total federal tax revenue that is lost due to use of overseas tax havens: at least $37 billion per year. Previous estimates combined corporate and individual tax sheltering and ranged from $43 billion to $123 billion per year.

The report release coincides with the launch of a petition drive by Business and Investors Against Tax Haven Abuse, to gather signatures from the business community to urge President Obama and Congress to enact legislation that puts an end to tax havens. The petition launches with 400 initial business signers.

The report, Unfair Advantage: The Business Case Against Overseas Tax Havens, shows how when global corporations use tax havens to reduce or eliminate their taxes. It creates an unlevel playing field by shifting the tax responsibilities onto the backs of domestic businesses and individual taxpayers. The report also describes how corporate tax havens support a climate of gaming the system and enable risky investment behavior of the type that led to the recent financial crisis and the worst recession since the Great Depression.

The report may be found online at: http://businessagainsttaxhavens.org/reports.

“As a small business person, I’m incensed that other companies in our country are able to game the system and force the rest of us to take up the slack,” said Debra Ruh, Founder and CEO of TecAccess of Rockville, VA. “When they avoid their normal tax obligations, that puts more of a burden on responsible and sustainable businesses like mine.”

“Small businesses are the lifeblood of local economies. We pay our fair share of taxes, shop locally, support our schools and actually generate most of the new jobs,” said Frank Knapp, President and CEO of the South Carolina Small Business Chamber of Commerce. “So why do we have to subsidize the U.S. multinationals that use offshore tax havens to avoid paying taxes? We need to end tax havens and use that revenue to invest in growing our small businesses. That is how we create a healthy economy.”

“With small businesses still suffering from the recession, $37 billion could pay for programs to help them get back on their feet,” said Scott Klinger, a Co-author of the report and Policy Director for Wealth for the Common Good.  “We can’t afford to continue to let U.S. multinationals avoid their fair share of taxes with overseas tax havens.”

The report lists nine policies that could help level the playing field between small, responsible businesses and global corporations including:

* Block all transfers of intellectual property designed to evade taxes;
* Ban phony offshore corporations that pretend to earn profits offshore when the primary management team remains in the U.S.;
* Repeal the 80/20 Rule that allows corporations to escape U.S. taxation if 80 percent of their business occurs overseas;
* Create disincentives and penalties for U.S. Government contractors using tax havens to avoid U.S. taxes.

WHAT: The tele-press conference with Sen. Carl Levin (D-MI), will also have a small business owner, Amy Domini of Domini Funds, and the President of a major regional Chamber of Commerce.

CALL IN NUMBER: 1-(760) 569-7676 Code: 818215

WHEN: Tuesday, July 20 at 2:30 PM ET

Business and Investors against Tax Haven Abuse supports policies to end tax avoidance and evasion through offshore tax havens. The petition is cosponsored by Business for Shared Prosperity, Wealth for the Common Good, American Sustainable Business Council and Growth & Justice.

WASHINGTON (Reuters) – The U.S. government loses $37 billion per year in tax revenues because multinational corporations stash money in overseas tax havens, Democratic Senator Carl Levin and a group of small businesses said in a report on Tuesday.

Levin, who for years has pushed for a tough law to fight tax evasion among corporations, has enlisted some small businesses to back his so-far unsuccessful proposal to close loopholes letting companies legally avoid taxes by keeping income abroad.

“There are too many small businesses now paying more than their fair share,” Levin told reporters on a conference call. “It creates a very unfair competitive situation.”

Levin wants to attach some of his proposals to help fund a bill that sets up a $30 billion fund for small business. Levin has tried to attach his initiative to other bills in the past without success.

The coalition of small companies favors banning the use of overseas tax havens, which are generally unavailable to smaller firms.

“We pay our taxes and don’t run off to greener pastures,” said Frank Knapp, president of the South Carolina small business chamber of commerce.

The coalition says about several hundred businesses have signed onto a petition requesting action on legislation like that sponsored by Levin.

Policy changes sought include a ban on transferring intellectual property abroad to evade taxes, and repeal of a rule letting companies pay no U.S. taxes when 80 percent of their revenue is earned overseas.

(Additional reporting by Diane Bartz, editing by Gerald E. McCormick)

Offshore tax havens have a new critic: small businesses.

On Tuesday, hundreds of these businesses will join in the announcement of a grass-roots campaign against tax avoidance that has already drawn support from a prominent lawmaker.

The campaign, Business and Investors Against Tax Haven Abuse, is backed by Senator Carl Levin, Democrat of Michigan, who in recent years has investigated offshore tax havens and the large companies and wealthy investors that use them.

Senator Levin plans to announce the campaign with its supporters, a coalition of three nonprofit groups — the American Sustainable Business Council, Business for Shared Prosperity and Wealth for the Common Good. They will release a 25-page report that contends that American multinational corporations use havens to avoid $37 billion in federal taxes each year, a figure the groups call conservative.

“This $37 billion could be used to fund initiatives to support America’s small businesses — the nation’s biggest job creators — by increasing their access to capital, increasing their opportunities to invest and rewarding entrepreneurship,” the report says.

With that money, the report says, “we could establish a $30 billion Small Business Lending Fund to provide capital investments to small community banks (those with less than $10 billion in assets) to increase lending to small enterprises.”

Bob Keener, a spokesman for a coalition member, Business for Shared Prosperity, said on Monday that 400 executives, investors and representatives of businesses had signed a petition in support of the campaign. They included a small shoe company in Maine, a consultancy in Virginia and cleaning services, he said.

The campaign is unusual because it is the first time that small businesses have organized to combat offshore tax avoidance and evasion in a significant way.

“The Business and Investors Against Tax Haven Abuse campaign represents the first time in recent years that business people who believe tax havens are bad for business are mobilizing publicly to end the abuse,” Mr. Levin said Monday in a statement.

The Treasury Department estimated in 2009 that the international gap between taxes owed and taxes paid ranged from $43 billion to $123 billion a year for corporations and individuals.

The report calls for laws that would block transfers of intellectual property designed to evade taxes; ban shell corporations that earn profits offshore, even when a corporation’s management team is based in the United States; repeal a rule that allows American corporations to reduce or eliminate their United States tax bills if 80 percent of their business takes place overseas; and set penalties for government contractors that use tax havens.

It’s big business versus small business in a new campaign to end the abuse of offshore tax havens by U.S.-based multinational corporations.

A new coalition, Business and Investors Against Tax Haven Abuse, issued a report today that concluded at least $37 billion a year in additional tax revenue could be collected if Congress cracked down on these tax havens. This money could be used to help small businesses by creating a $30 billion lending fund for community banks, said Senator Carl Levin, Democrat of Michigan. That proposal is now pending in the Senate, where paying for things has become a major stumbling block for new programs.

The coalition calling for an end to these tax havens includes organizations composed of progressive-minded small-business owners: Business for Shared Responsibility, the American Sustainable Business Council, and Wealth for the Common Good, to name three. In all, about 20 business networks representing 50,000 business owners and social enterprises are involved in this campaign, according to Bob Keener, a spokesman for Business for Shared Responsibility.

Those numbers pale compared with the hundreds of thousands of business owners represented by the National Federation of Independent Business and other conservative-leaning business groups in Washington.

But this new coalition has a message that could resonate with small businesses, especially in this post-bailout economy, where large corporations seem to be back on their feet but the little guys and gals are still struggling.

Closing these tax havens is all about creating “a level playing field for businesses,” Keener said.

“I’m proud to be an American and pay taxes,” said Deborah Ruh, CEO and founder of TecAccess in Rockville, Virginia, a 40-employee firm that specializes in making information technology and communications available to the disabled. Ruh said she resents that large businesses aren’t paying their fair share of taxes because of these tax havens.

Levin said his efforts to “close down some of these loopholes” will be helped by the involvement of small businesses in this lobbying campaign.

“Most of our small businesses carry their fair share of the tax burden,” he said. “We’ve got too many corporations who have sheltered themselves from paying their fair share of taxes.”

Representative Lloyd Doggett, Democrat of Texas, offered up a timely villain: Transocean, the owner of the Deepwater Horizon rig whose failure resulted in the massive oil spill in the Gulf of Mexico. It moved its corporate headquarters first to the Cayman Islands and then to Switzerland in order to reduce its U.S. taxes, Doggett said.

“I never viewed Zug as being a petroleum capital,” he said.

Zug is a small town in Switzerland whose low tax rates has made it a popular home for multinational corporations.

Doggett and Levin want to change tax laws to treat companies like Transocean, whose operations remain based in Houston, as a U.S. corporation for tax purposes. Other corporations set up bank accounts in hidden tax havens or send intellectual property offshore to avoid paying U.S. taxes on them, Levin said.

The report makes a big deal about the number of foreign subsidiaries that many large corporations have. Citigroup, for example, had 427 “tax haven” subsidiaries in 2007, the report noted. But wouldn’t you expect a corporation like Citigroup, whose tentacles spread across the globe, to have lots of foreign subsidiaries? Isn’t that how business is done in the global economy?

Sorting out what’s an abusive tax shelter and what’s an appropriate strategy for a multinational corporation is a complicated matter. It should be undertaken as part of an overall reform of our tax system, not as a convenient pay for legislation that could be days away from Senate passage.

Multinational corporations by definition aren’t really U.S. companies—they belong to the world. We should get what’s coming to us, based on their economic activity here, but we shouldn’t make ourselves an unattractive place to do business.

Plus, feeding resentment toward big business could hurt small businesses in the end. We’re all in this together—businesses of all sizes need to be successful in order for our economy to flourish.

Kent Hoover is the Washington bureau chief for bizjournals.

These days, the local businesses in your neighborhood probably pay a higher percentage of their income in taxes than U.S. Fortune 500 companies.

Over the last two decades, multinational companies have taken advantage of huge tax loopholes, moving income and assets between foreign subsidiaries to dodge taxes. Responsible Main Street businesses and individual taxpayers are stuck with the tab, paying the taxes that contribute to a healthy business climate and economy.

Yet these global corporations quickly turn to the U.S. courts when someone steals their intellectual property. They’re happy to use our public infrastructure of transportation, energy and education institutions. And they’re huge beneficiaries of our country’s remarkable system of property right protections, law enforcement and taxpayer-funded investments in technological and scientific research. They just don’t want to have to pay their fair share.

One way that U.S. companies avoid taxes is by creating subsidiaries in a tax-haven country such as Bermuda, Luxembourg or the Republic of Mauritius. In the Grand Cayman Islands, more than 19,000 of these subsidiaries have set up legal addresses in one building.

These companies shift earnings and assets between these subsidiaries so that profits appear to be generated overseas, while losses are deducted from U.S. taxes. Because of the lack of transparency it’s hard to assess just how much tax revenue is lost, but estimates range from $43 billion to $123 billion per year.

Rep. Lloyd Doggett, D-Texas, a fierce advocate of tax-haven reform in the House of Representatives, said, “I always find it impossible to explain why a pharmacist in Bastrop, Texas, or a small retail store in San Marcos is having to pay higher rates on the income that their hard-working small business owners are earning than some multinational that can duck and dodge taxes in Bermuda or the Cayman Islands.”

A growing number of small businesses, however, are pushing back. “Small businesses are the lifeblood of local economies,” said Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce. “We pay our fair share of taxes, shop locally, support our schools and actually generate most of the new jobs. So why do we have to subsidize multinationals that use offshore tax havens to avoid paying taxes?”

Knapp and 400 other business owners have launched Business and Investors Against Tax Haven Abuse, a signal that Main Street is getting fed up with how porous the global corporate tax rules have become.

They argue that overseas tax havens foster an unlevel playing field where taxpaying enterprises are forced to compete against tax dodgers. For example, a local retailers selling groceries, clothing, appliances or hardware is forced to compete against a big-box conglomerate that can take advantage of subsidiaries in tax havens to reduce its taxes. A community bank that provides financing for local businesses and homeowners and pays federal taxes must unfairly compete against global Wall Street giants whose profit model is built on reducing taxes through tax havens.

Main Street business leaders argue these funds could be better used for public infrastructure and support to small businesses, which generate over 65 percent of new jobs. Recovered funds could pay for initiatives like the recently introduced Small Business Jobs Act, as well as the seed capital for a $30 billion small business lending program through community banks.

“As a small business person, I’m incensed that other companies in our country are able to game the system and force the rest of us to take up the slack,” said Debra Ruh, founder and CEO of the Virginia-based TecAccess, a small business that adapts technology to be more accessible to people with disabilities. “When they avoid their normal tax obligations, that puts more of a burden on responsible and sustainable businesses like mine.”

Many local businesses already pay their fair share of taxes. The fact that profitable multinational corporations aren’t is a standing affront to basic fairness. Taxes are the price we pay to do business in our nation.

Chuck Collins is co-founder of Wealth for the Common Good, a senior scholar at the Institute for Policy Studies and co-author of “The Moral Measure of the Economy.”

Distributed by McClatchy-Tribune Information Services

By Courtney Rubin

Hundreds of small businesses have joined the fight against offshore tax havens that they believe are bad for business.

Senator Carl Levin, a Michigan Democrat, is backing the campaign, officially called Business and Investors Against Tax Abuse and to be launched today. The group, which says the abusive shelters cost taxpayers as much as $123 billion a year, will today release a report showing that use of tax shelters has mushroomed. According to the New York Times, the 25-page report claims that American multinational corporations use the havens to avoid $37 billion in federal taxes each year, a figure three big nonprofit campaign supporters (the American Sustainable Business Council, Business for Shared Prosperity and Wealth for the Common Good) call conservative.

“This $37 billion could be used to fund initiatives to support America’s small businesses — the nation’s biggest job creators — by increasing their access to capital, increasing their opportunities to invest and rewarding entrepreneurship,” the report says, according to the New York Times. With that money, the report says, “we could establish a $30 billion Small Business Lending Fund to provide capital investments to small community banks (those with less than $10 billion in assets) to increase lending to small enterprises.”

Levin said in a statement that the campaign “represents the first time in recent years that business people who believe tax havens are bad for business are mobilizing publicly to end the abuse.”

Last year Levin – who chairs the Senate Permanent Committee on Investigations – introduced the Stop Tax Haven Abuse Act. The bill’s targets: Offshore tax abuses it was then claimed hid some $100 billion from the Treasury. Levin and then-Senator Barack Obama introduced similar legislation in 2007. Neither bill made it through the Senate Finance Committee.

The U.S. loses $60 billion in tax revenue thanks to companies’ international income shifting, according to a study published in December in the National Tax Journal. Bloomberg estimated American companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year. The total – based on filings by 135 companies – increased 70 percent over three years, up from $590 billion in 2006.

WASHINGTON -(Dow Jones)- Sen. Carl Levin (D., Mich.) said he will attempt to add sanctions for banks judged to be helping U.S. customers evade taxes to a small business bill now pending in the Senate.

Levin said the anti-tax-evasion provision would raise money to help offset the cost of small business lending provisions, including aid to states to aid small businesses that can’t get loans because the value of their collateral has dropped.

He spoke during a Tuesday conference call to announce the formation of a coalition of small businesses that support legislation targeting tax avoidance by large corporations.

The proposal that Levin wants to add to the small business bill would give the Treasury Department authority to prohibit transactions with foreign banks found to be “impeding U.S. tax enforcement.” It was part of a broader tax haven- related bill Levin introduced last year.

The small business bill has been stalled in the Senate as Democrats seek the support of one or more Republicans to unblock it.

The tax haven coalition is not just focused on tax evasion, but also on closing loopholes that, members of the coalition say, large corporations exploit to lower their U.S. tax burden.

“It’s time for tax laws that tilt the economic playing field further towards multinational businesses to end,” said Debra Ruh, chief executive of TecAccess, a Rockville, Va., firm that helps companies become more accessible to employees and potential customers with disabilities.

The group released a report claiming that U.S. companies use tax havens to avoid $37 billion per year in taxes.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@ dowjones.com

(END) Dow Jones Newswires
07-20-101615ET
Copyright (c) 2010 Dow Jones & Company, Inc.

Hurst went home with an amber bottle of Lexapro, the world’s third-best selling antidepressant. The profits from his $99 purchase began a 9,400-mile journey that would lead across the Atlantic Ocean and more than halfway back again, to a grassy industrial park in Dublin, a glass skyscraper in Amsterdam and a law office in Bermuda surrounded by palm trees.

While Forest Laboratories Inc., the medicine’s maker, sells Lexapro only in the U.S., the voyage ensures most of its profits aren’t taxed there — and they face little tax anywhere else. Forest cut its U.S. tax bill by more than a third last year with a technique known as transfer pricing, a method that carves an estimated $60 billion a year from the U.S. Treasury as it combines tax planning and alchemy. (See an interactive graphic on Forest’s tax strategy here.)

Transfer pricing lets companies such as Forest, Oracle Corp., Eli Lilly & Co. and Pfizer Inc., legally avoid some income taxes by converting sales in one country to profits in another — on paper only, and often in places where they have few employees or actual sales.

After an economic bailout in which the U.S. government lent, spent or guaranteed as much as $12.8 trillion, the Obama administration faces a projected budget deficit of $1.5 trillion this year. In February, the administration said it would target some of the techniques companies use to shift profits offshore — part of a package intended to raise $12 billion a year over the coming decade.

Losing $60 Billion

That’s only about a fifth of the $60 billion in annual U.S. tax revenue lost to thousands of companies’ income shifting, according to a study published in December in the National Tax Journal by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

The lost revenue could pay the federal government’s share of health coverage for more than 10 million uninsured Americans, such as Hurst — more than a third of the people who will gain insurance under the health-care overhaul passed in March. The administration’s proposed tax on certain financial institutions would take almost seven years to generate $60 billion.

“Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” said Sen. Carl Levin, a Michigan Democrat and chairman of the Senate’s Permanent Subcommittee on Investigations, in a statement to Bloomberg News. Levin has overseen hearings on tax shelters including those sold to wealthy people by KPMG LLP. “Now that progress has been made in addressing offshore tax abuse by individuals, transfer pricing is an issue that deserves scrutiny.”

Tea Party Signs

The anti-tax activists of the national Tea Party movement haven’t put transfer pricing on signs in their demonstrations, yet it deserves attention, said Mark Skoda, chairman and founder of the Memphis Tea Party.
“I find the issue of corporations paying no tax or little tax in the United States, when the majority of their operations are here, problematic,” Skoda said in an interview. “The problem is that this is sort of the level of micro that people don’t look at.”

The trek taken by Forest’s profits on Hurst’s $99 purchase involves a corporate structure nicknamed “the Double Irish,” registered offices that occupy no real estate and a set of U.S. rules that one tax attorney calls “unenforceable.” It provides a case study in how U.S. companies use transfer pricing to avoid paying taxes.

‘Seems Ridiculous’

“The fact the profits aren’t reported in the U.S. seems ridiculous,” said Hurst, 30, a self-employed marketing consultant, after hearing about the journey his money was undertaking. He began using Lexapro to counteract years of mood swings, including depression and anxiety he started experiencing in college, he said.

On April 15, the deadline for Americans to file their personal tax returns, the Internal Revenue Service said it would add new agents, attorneys and economists to ensure companies are following the rules for transfer pricing. The United Nations set up a panel in October to devise guidelines for the practice in developing countries.

“If multinationals cannot be prevented from shifting profits to low-tax jurisdictions, then it becomes impossible to maintain the domestic corporate tax base,” said Reuven S. Avi- Yonah, director of the international tax program at the University of Michigan Law School in Ann Arbor. If that bleeding can’t be stanched, “we might as well abandon the income tax.”

$1 Trillion Offshore

U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year, according to data compiled by Bloomberg. That cumulative total, based on filings by 135 companies, increased 70 percent over three years, from $590 billion in 2006.

While some of the offshore earnings reflect sales abroad, much of the growth results from expanding use of transfer pricing, said Martin Sullivan, a tax economist who formerly worked for the Treasury Department and Arthur Andersen LLP.

The system allows for creating paper transactions between subsidiaries of the same company to allocate expenses and profits to selected countries. For instance, when technology firms license their patents to offshore subsidiaries in low-tax countries, profits from sales overseas are booked to the foreign units, not the U.S. parents. The tax savings add to profits.

“A very significant part of this accumulation of profits offshore is the artificial shifting of profits using transfer pricing,” said Sullivan, now a contributing editor to the trade publication Tax Notes. “There’s been a significant increase in its aggressiveness over the past decade.”

Like Churchill Said

Criticisms of transfer pricing “remind me of what Churchill said about democracy: It’s the worst system — except for all the others,” said Karl L. Kellar, a partner at Jones Day in Washington, who advises companies on their taxes and who formerly worked for the IRS and the U.S. Justice Department.

Companies try to extract as much tax benefit as possible from transfer pricing to protect shareholders’ interests, proponents say, particularly in the U.S., which imposes one of the world’s highest tax rates on corporate income, 35 percent.

Frank J. Murdolo, Forest’s vice president of investor relations, declined to comment on the company’s tax planning.

The Journey Begins

It’s about 2,100 miles from the Phoenix Walgreens, operated by Walgreen Co., to Forest’s corporate headquarters on Third Avenue in New York. There, Howard Solomon, the drugmaker’s chief executive officer, became interested in treating mood disorders as he watched his son, writer Andrew Solomon, struggle with depression in the 1990s.

He led Forest to Lexapro, whose sales last year ranked behind only Pfizer’s Effexor and Eli Lilly’s Cymbalta among antidepressants, according to IMS Health Inc., a health-care data provider in Norwalk, Connecticut. Since its 2002 debut, Lexapro has generated $13.8 billion in sales, according to Gary Nachman, an analyst for Leerink Swann LLC, in New York. The drug accounted for 58 percent of Forest’s sales for the fiscal year that ended March 31.

Forest declined to discuss how much it received from the $99 that Hurst paid for his Lexapro. For top-selling prescription drugs, the retailer would keep about $12, and $2 would go to a drug wholesaler, according to Helene Wolk, a health-care distribution analyst at Sanford C. Bernstein & Co. in New York. While the amounts differ for purchases covered by health insurance, the proportions are similar, Wolk said.

To Ireland

Of the $85 left for Forest, most doesn’t stay on Third Avenue for long. It heads first to Ireland, where workers in lab coats and goggles make and test the medicine in a low-slung, off-white factory near a soccer pitch on Dublin’s north side. A rock the size of a Smart car rests beside the parking lot, inscribed with one word in bright blue letters: “Forest.”

This subsidiary, called Forest Laboratories Ireland Ltd., sells Lexapro to its U.S. parent, according to Dan L. Goldwasser, a Forest board member and an attorney with Vedder Price PC in New York.
That transaction is at the heart of transfer pricing: With each tablet Forest buys from the Irish unit, it shifts profits to Ireland, where corporate income is taxed at rates between 10 percent and 12.5 percent, compared with 35 percent in the U.S.

“Part of the object is to generate some of the profit in Ireland,” Goldwasser said.

Undisclosed Price

The company won’t disclose what it pays the Irish subsidiary for Lexapro or other medications made there. Tax accounting analysts say they can’t calculate the pill’s precise price either.

Overall, Forest’s Irish operations, which employ about 5 percent of its 5,200 workers, reported $2.5 billion in sales during fiscal 2009, the most recent year for which figures are available. That equals about 70 percent of the parent company’s $3.6 billion in net sales. Lexapro alone generated $2.3 billion in revenue in 2009, according to company filings.

Scores of U.S. pharmaceutical and technology companies have set up similar operations in Ireland, lured by an educated workforce, political stability and access to European markets, as well as low taxes, said Alan Mahon, a spokesman for the Irish Department of Finance.

“Ireland’s 12.5 percent corporation tax rate has become an international ‘brand,’” he said.

Exporting Intellectual Property

U.S. tax laws have sought to regulate transfer pricing in various forms since 1921. Treasury Department regulations in 1968 created standards for pricing inter-company transactions. Thousands of pages of rules have followed, and the tax code was amended in 1986 because of concerns that companies were shifting profits from the U.S.

For U.S. regulators, the key questions in transfer pricing are whether the parent pays too much to its offshore subsidiary or whether the subsidiary pays too little to its U.S. parent. Treasury Department regulations require “arm’s length” prices, or the amounts that would be paid between unrelated parties.

Those rules are “based on a fiction,” said Michael C. Durst, special counsel at Steptoe & Johnson LLP, in Washington, who advised companies on transfer pricing for 15 years and has emerged as a leading critic of the system.

Many of the transfer pricing transactions between a U.S. parent and its offshore units would never take place between unrelated parties, Durst said. So it’s often impossible to compare the prices paid in those deals to prices in real-world transactions between separate companies, he said.

‘Unbelievable Scandal’

“As a result of resting on this basic fallacy, transfer pricing rules have for many years been unenforceable,” said Durst, who formerly worked for PricewaterhouseCoopers LLP and the IRS.

U.S. Sen. Byron Dorgan, a North Dakota Democrat, calls transfer pricing “an unbelievable scandal.” He favors scrapping the rules in favor of a system that allocates profits as most U.S. states with a corporate income tax do. That method is based on factors including sales, number of employees and property in a particular state. Enforcement of the current rules is “impossible to do,” he said.

“It’s the equivalent of asking the Internal Revenue Service to connect the ends of two different plates of spaghetti,” Dorgan said.

Forest derived the undisclosed price that it pays its Irish unit for Lexapro from a 2001 arrangement the parent company struck with Daiichi Sankyo Co., Japan’s third-largest drugmaker, according to Goldwasser, the board member. That deal was to co- promote the hypertension medication Benicar, he said.

‘That’s Life’

“You’re attributing to Forest Ireland more bargaining power than probably it actually had, but, you know, that’s life,” Goldwasser said.

A crucial step in calculating where a drugmaker’s profits belong under transfer pricing is determining who owns a drug’s patents for tax purposes, said Durst, the corporate tax attorney. While Forest’s Irish subsidiary controls Lexapro’s patents for the U.S. market, it didn’t come up with the formula. Forest licenses the use of those patents from H. Lundbeck A/S, a Danish pharmaceutical company. The Irish unit paid for the drug’s U.S. clinical trials, Goldwasser said.

The IRS claimed in 2007 that Forest didn’t adequately value its U.S. marketing operations, allocating too much in profit to its Irish subsidiary, according to a person familiar with the matter. That person asked not to be identified because he wasn’t authorized to discuss it publicly. The dispute involved profits from another antidepressant, Celexa, in 2002 and 2003, according to the person and filings by Forest.

Rival Economists

Such disagreements sometimes grow to involve hundreds of pages of studies by rival economists over comparatively small differences in costs that cumulatively add up to hundreds of millions of dollars. GlaxoSmithKline PLC, the U.K.’s largest drugmaker, settled a transfer pricing case with the U.S. in 2006 for $3.4 billion. Since December, the U.S. has lost two court cases with Silicon Valley companies: a $24.3 million dispute with Xilinx Inc., a programmable chipmaker, and a $545 million case with Symantec Corp., a software company.

In Forest’s case, the IRS sought an additional $206.7 million in tax, according to the company’s disclosures. Forest said in November it agreed to pay an undisclosed amount that “did not have a material impact” on its results.

Beginning in 2005, the company found a way to reduce its taxes even further by sending most of its Lexapro profits from Ireland to Bermuda.

‘The Double Irish’

On advice from Ernst & Young, Forest Laboratories Ireland reorganized that year, dropping the country from its name. The newly dubbed Forest Laboratories Holdings Ltd. established a registered office in Hamilton, Bermuda, declaring the island its tax residence. This unit took control of licensing the patents.

A second subsidiary in Ireland inherited the old name. It handled the manufacturing, sublicensing the rights to the patents, according to a corporate disclosure and an internal Forest flow chart tracing the arrangement that was reviewed by Bloomberg.

The change helped the Irish subsidiary cut its effective tax rate to 2.4 percent from 10.3 percent the year before the reorganization, according to its annual reports. It did so by deducting from its taxable income the fees that went to Bermuda, which has no corporate income tax. Charlie Perkins, a spokesman for Ernst & Young, one of the so-called Big Four accounting firms, declined to comment on its work for Forest.
International tax planners have a nickname for the type of structure the drugmaker adopted: the Double Irish.

“Double Irish More than Doubles the Tax Savings,” was the headline in a 2007 issue of the trade publication International Securitization & Finance Report over an article describing the model by a pair of U.S. tax attorneys, Joseph B. Darby III and Kelsey Lemaster.

Layover in Amsterdam

Ireland faces its own budget gap after real estate values collapsed. The deficit, pegged at 14.3 percent of gross domestic product last year, represented the biggest shortfall of any member of the 27-nation European Union, according to data released in April by Eurostat, the statistics office of the EU.

To avoid another Irish tax, Forest’s profits don’t fly direct to Bermuda. They have a layover in Amsterdam.
Fees paid to the Bermuda unit pass through yet another subsidiary, Forest Finance BV in the Netherlands, according to the internal Forest document, Dutch corporate records and a person familiar with the transaction.

That route bypasses a 20 percent Irish withholding tax on certain royalties for patents, according to Richard Murphy, a U.K. accountant who worked on similar transactions and is director of Tax Research LLP. The structure takes advantage of an exemption from the levy if payments go to a company in another EU member state, Murphy said.

Passing Through

Forest established its Dutch company in July 2005, two months before its Irish subsidiary got permission from Bermuda regulators to conduct business. The Amsterdam unit operates largely as a conduit, records show. In 2007, Forest Finance collected $1.19 billion in licensing income and paid out 99.6 percent of it in licensing expense, according to its annual report.

The Dutch company lists its office at an Amsterdam building used by Fortis Bank Nederland NV, the lender nationalized in 2008 by the Dutch government. Forest has no employees there, said a receptionist at Intertrust Group Holding SA, a business that manages financial records for companies. The receptionist wouldn’t give her name. Intertrust was sold in January by Fortis Bank to a private equity firm.

The Dutch Channel

The Netherlands has more than 13,000 such entities “established by foreign multinational corporations for the purpose of channeling financial assets from one country to another,” according to published research by the Dutch Central Bank. More than 12.3 trillion euros ($15.5 trillion) flowed in and out of them during 2008, the Dutch Central Bank said.

Forest’s income tax savings from international operations almost doubled after its Irish-Dutch-Bermudan reorganization took hold. In fiscal year 2007, the company’s effective tax rate dropped by 21.8 percentage points, or $155 million, because of the effect of foreign operations, according to U.S. securities filings. In 2009, the international tax benefit lopped 18.9 percentage points, or $183 million, off Forest’s income tax bill.

International tax benefits boosted Forest’s net income in 2009 by 31 percent, according to an analysis of its tax footnotes by Robert Willens, president of Robert Willens LLC, a consulting firm that advises investors on tax issues.

‘Place of Business’

Even though Forest described its Bermuda office as the Irish subsidiary’s “principal place of business” in a 2008 court filing, it has no employees on the island. The closest it comes to an actual presence is its registered office at Milner House, at 18 Parliament Street in Hamilton, a beige building nestled among the pastel structures of the island’s main commercial area.

There, Coson Corporate Services Limited, part of law firm Cox Hallett Wilkinson, provides “corporate administrative services” for Forest Laboratories Holdings, according to Jeannette Monk, who identified herself as the company’s corporate administrator. Asked whether Forest had any employees there, she said, “This is a law firm.”

It’s also the last port of call for about two-thirds of the profits Forest derived from sales of Lexapro and its other drugs in 2009. U.S. corporations can avoid taxes on such overseas profits indefinitely, until they decide to bring the earnings back home.

The Bottom Line

Unlike most deferred taxes, future levies on most foreign earnings don’t count against income in reports to shareholders, said Michelle Hanlon, an associate professor of accounting at the Massachusetts Institute of Technology’s Sloan School of Management.

So lower taxes from earnings kept overseas go straight to the bottom line, she said, and U.S. companies rarely repatriate significant portions of that income. They’re permitted to use it in overseas operations or certain investments, or to let it sit as cash in bank accounts, Hanlon said.

An exception came in 2004 when Congress enacted a one-time break allowing companies to bring back their earnings at an effective tax rate of 5.25 percent, less than one-sixth the top corporate rate. As a result, 843 corporations brought $362 billion to the U.S., with $312 billion qualifying for the tax break, according to the IRS. Forest returned $1.2 billion to the U.S. under the legislation.

While it remains offshore and shielded from federal income taxes, most of the $1 trillion in foreign profits for U.S. multinationals cannot be used in the U.S. That doesn’t make Tyler Hurst very happy about his Lexapro transaction.

“If I’m purchasing it from Walgreens two blocks away, that money isn’t going to anything local, or anything national,” he said. “I’m giving my money to Ireland.”

Originally published on Bloomberg 13 May 2010.

The bracing reality that America has two sets of rules — one for the corporate class and another for the middle class — has never been more indisputable.

The middle class, by and large, plays by the rules, then watches as its jobs disappear — and the Senate takes a break instead of extending unemployment benefits. The corporate class games the system — making sure its license to break the rules is built into the rules themselves.

One of the most glaring examples of this continues to be the ability of corporations to cheat the public out of tens of billions of dollars a year by using offshore tax havens. Indeed, it’s estimated that companies and wealthy individuals funneling money through offshore tax havens are evading around $100 billion a year in taxes — leaving the rest of us to pick up the tab. And with cash-strapped states all across the country cutting vital services to the bone, it’s not like we don’t need the money.

You want Exhibit A of two sets of rules? According to the White House, in 2004, the last year data on this was compiled, U.S. multinational corporations paid roughly $16 billion in taxes on $700 billion in foreign active earnings — putting their tax rate at around 2.3 percent. Know many middle class Americans getting off that easy at tax time?

In December 2008, the Government Accounting Office reported that 83 of the 100 largest publicly-traded companies in the country — including AT&T, Chevron, IBM, American Express, GE, Boeing, Dow, and AIG — had subsidiaries in tax havens — or, as the corporate class comically calls them, “financial privacy jurisdictions.”

Even more egregiously, of those 83 companies, 74 received government contracts in 2007. GM, for instance, got more than $517 million from the government — i.e. the taxpayers — that year, while shielding profits in tax-friendly places like Bermuda and the Cayman Islands. And Boeing, which received over $23 billion in federal contracts that year, had 38 subsidiaries in tax havens, including six in Bermuda.

And while it’s as easy as opening up an island P.O. Box, not every big company uses the dodge. For instance, Boeing’s competitor Lockheed Martin had no offshore subsidiaries. But far too many do — another GAO study found that over 18,000 companies are registered at a single address in the Cayman Islands, a country with no corporate or capital gains taxes.

America’s big banks — including those that pocketed billions from the taxpayers in bailout dollars — seem particularly fond of the Cayman Islands. At the time of the GAO report, Morgan Stanley had 273 subsidiaries in tax havens, 158 of them in the Cayman Islands. Citigroup had 427, with 90 in the Caymans. Bank of America had 115, with 59 in the Caymans. Goldman Sachs had 29 offshore havens, including 15 in the Caymans. JPMorgan had 50, with seven in the Caymans. And Wells Fargo had 18, with nine in the Caymans.

Perhaps no company exemplifies the corporate class/middle class double standard more than KBR/Halliburton. The company got billions from U.S. taxpayers, then turned around and used a Cayman Island tax dodge to pump up its bottom line. As the Boston Globe’s Farah Stockman reported, KBR, until 2007 a unit of Halliburton, “has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers through shell companies based in this tropical tax haven.”

In 2008, the company listed 10,500 Americans as being officially employed by two companies that, as Stockman wrote, “exist in a computer file on the fourth floor of a building on a palm-studded boulevard here in the Caribbean.” Aside from the tax advantages, Stockman points out another benefit of this dodge: Americans who officially work for a company whose headquarters is a computer file in the Caymans are not eligible for unemployment insurance or other benefits when they get laid off — something many of them found out the hard way.

This kind of sun-kissed thievery is nothing new. Indeed, back in 2002, to call attention to the outrage of the sleazy accounting trick, I wrote a column announcing I was thinking of moving my syndicated newspaper column to Bermuda:

I’ll still live in America, earn my living here, and enjoy the protection, technology, infrastructure, and all the other myriad benefits of the land of the free and the home of the brave. I’m just changing my business address. Because if I do that, I won’t have to pay for those benefits — I’ll get them for free!

Washington has been trying to address the issue for close to 50 years — JFK gave it a go in 1961. But time and again Corporate America’s game fixers — aka lobbyists — and water carriers in Congress have managed to keep the loopholes open.

The battle is once again afoot. On Friday, the House passed the American Jobs and Closing Tax Loopholes Act. The bill, in addition to extending unemployment benefits, clamps down on some of they ways corporations hide their income offshore to avoid paying U.S. taxes. Even though practically every House Republican voted against it, the bill passed 215 to 204.

The bill’s passage in the Senate, however, remains in doubt, with lobbyists gearing up for a furious fight to make sure America’s corporate class can continue to profitably enjoy the largess of government services and contracts without the responsibility of paying its fair share.

The bill is far from perfect — it leaves open a number of loopholes and would only recoup a very small fraction of the $100 billion corporations and wealthy individuals are siphoning off from the U.S. Treasury. And it wouldn’t ban companies using offshore tax havens from receiving government contracts, which is stunning given the hard times we are in and the populist groundswell at the way average Americans are getting the short end of the stick.

But the bill would end one of the more egregious examples of the double standard between the corporate class and the middle class, finally forcing hedge fund managers to pay taxes at the same rate as everybody else. As the law stands now, their income is considered “carried interest,” and is accordingly taxed at the capital gains rate of 15 percent.

The issue was famously brought up in 2007 by Warren Buffett when he noted that his receptionist paid 30 percent of her income in taxes, while he paid only 17.7 percent on his taxable income of $46 million dollars.

As Robert Reich points out, the 25 most successful hedge fund managers earned $1 billion each. The top earner clocked in at $4 billion. And all of them paid taxes at about half the rate of Buffett’s receptionist.

Closing this outrageous loophole would bring in close to $20 billion dollars in revenue — money desperately needed at a time when teachers and nurses and firemen are being laid off all around the country.

Hedge fund lobbyists are currently hacking away at the Senate’s resolve with, not surprisingly, some success. And it’s not just Republicans who are willing to do their bidding, but a number of Democrats as well. Indeed, it was a Democrat — Chuck Schumer — who led the fight against closing the loophole in 2007.

“I don’t know how members of Congress can return home and look an office manager, a nurse, a court clerk in the eye and say ‘I chose hedge fund managers instead of you and your family’,” said Lori Lodes of the SEIU.

Nicole Tichon, of the U.S. Public Interest Research Group, framed the debate in similar terms:

It’s hard to imagine anyone campaigning on protecting hedge fund managers, Wall Street banks and companies that ship jobs and profits overseas. It’s hard to imagine telling constituents that somehow they should continue to subsidize these industries. We’re anxious to see whose side the Senate is on and what story they want to tell the American people.

Up until now, the story has been a familiar narrative of Two Americas, with one set of rules for those who can afford to hire a fleet of K Street lobbyists and a different set for everybody else. It’s time to give this infuriating tale a different — and far more just and satisfying — ending.

Posted on The Huffington Post,  1 June 2010

]]> http://businessagainsttaxhavens.org/arianna-huffington-offshore-corporate-tax-havens-why-are-they-still-allowed/feed/ 3 http://businessagainsttaxhavens.org/time-to-close-the-tax-haven-loophole/ http://businessagainsttaxhavens.org/time-to-close-the-tax-haven-loophole/#comments Thu, 27 May 2010 21:01:54 +0000 Kristi http://businessagainsttaxhavens.org/?p=133 A loophole in U.S. tax law continues to allow foreign-owned insurance companies to avoid paying billions of dollars of income tax on their U.S. business by stripping their earnings into overseas tax havens.

As the CEOs of leading domestic insurance companies, we urge Congress to close this loophole and end the unfair and unintended competitive advantage for offshore insurers, once and for all. With federal deficits at historic levels, and having just experienced the gravest financial crisis since the Great Depression, it makes no sense to allow this shell game to continue.

Foreign-owned insurance companies operating in the U.S. can escape taxes on most of their income merely by reinsuring their U.S.-written business with an affiliate located in a low-tax or no-tax jurisdiction. In 2008 alone, these entities reinsured upwards of $33 billion in U.S. property and casualty premiums with foreign affiliates domiciled in offshore tax havens and paid but a modicum of U.S. tax on the profits from their U.S. business. During the past ten years, the U.S. government has lost tens of billions of dollars of tax revenue on more than $230 billion of premiums ceded to offshore affiliates.


To take advantage of this loophole and avoid tax on their U.S. insurance operations, several U.S. companies have “inverted” into tax havens and numerous other companies have been formed offshore. With little more than superficial activities related to their U.S. business in their offshore “headquarters,” these companies operate and transact business in the U.S. and many are traded on U.S. stock exchanges. This movement already has resulted in significant capital migration abroad and a concomitant loss to the U.S. tax base. Absent effective legislation, industry experts have predicted that capital migration will continue to grow and other insurers will be forced to redomesticate offshore. As John Berger, CEO of offshore insurer HarborPoint Limited, recently put it, “If you’re not in one of these [offshore] domiciles, shame on you. All things being equal, the tax advantage will win over time.” It is not good public policy for our country to gradually lose regulatory control over what is in reality a U.S. domestic insurance business. Also, because U.S. insurers presently represent some 15 percent of the total municipal bond market, greater migration of capital to tax-advantaged locales could also adversely affect the market for municipal bonds.
 


Fortunately, President Obama has recognized the problem and recently called for elimination of the tax loophole in his FY 2011 budget proposal. House Select Revenue Measures Subcommittee Chairman Richard Neal (D-Mass.) and the Senate Finance Committee staff have both developed similar legislation that would effectively close the offshore tax haven loophole. We believe passage of this legislation is essential to maintain competitive balance between domestic and foreign insurers and to preserve the U.S. tax base.



Predictably, offshore insurers have strenuously fought the legislation in order to protect their competitive tax advantage. But without facts to support their opposition, they have attempted to obfuscate the real issues by claiming the legislation will adversely affect pricing and capacity in the U.S. insurance market. 



Simply put, this is false rhetoric – scare tactics designed to deflect attention from the true issue. Here are the facts: The proposed legislation expressly does not affect third-party reinsurance – arm’s length arrangements that shift a portion of an insurer’s risks to unrelated parties and add overall capacity to the market by spreading and diversifying risk among different parties. By contrast, the target of the legislation – excessive reinsurance transactions among affiliates – adds no additional capacity to the market because the risk remains within the same overall enterprise. 


Moreover, contrary to rhetoric by offshore interests, affiliate reinsurance plays little, if any, role in providing catastrophe coverage in coastal markets and thus the rates for (and the availability of) such insurance will remain unaffected by the legislation. Association of Bermuda Insurers and Reinsurers trade group executive Brad Kading himself admitted member company profits derived from the tax advantage are “going back to shareholders,” not consumers.


Finally, contrary to the opponents’ claims, the proposed legislation is completely consistent with our tax treaties. Experts on the Joint Tax Committee staff, who are responsible for reviewing every tax treaty before adoption by the Congress, substantiate this fact. 
What this bill will do is level the economic playing field for the U.S. insurance industry and capture billions in tax revenue from companies currently profiting in the U.S. In this time of economic uncertainty and record levels of Federal debt, our country can’t afford to subsidize foreign companies at the expense of other taxpayers.

Sincerely, 

Carl H. Lindner, III
Chairman & President
Great American Insurance Company

William R. Berkley
Chairman & Chief Executive Officer
W. R. Berkley Corporation

John J. Degnan
Vice Chairman & Chief Operating Officer
The Chubb Corporation

Bruce G. Kelley
President & Chief Executive Officer
EMC Insurance Companies

Liam E. McGee
Chairman, President & Chief Executive Officer
The Hartford Financial Services Group, Inc.

Edmund F. Kelly
Chairman, President & Chief Executive Officer
Liberty Mutual Group, Inc.

Anthony F. Markel
Vice Chairman
Markel Corporation
Jay Brown
Chief Executive Officer
MBIA Inc.

The Travelers Companies, Inc.

Stanley R. Zax
Chairman of the Board and President
Zenith Insurance Company

Franklin (Tad) Montross, IV
Chairman and CEO
General Re Corporation

Originally published in The Hill on 30 April 2010.