Should we prevent American companies from using Bermuda as a tax haven? How?

Many reinsurance companies have re-structured so that they are based in Bermuda. (Mine is in the process of doing so.) Bermuda has no corporate income tax or personal income tax.

Furthermore, the Bermuda parent can own an American subsidiary reinsurance, which operates here. The American subsidiary must pay American income tax. However, intra-corporate transactions can move most of the income to Bermuda, where it’s tax-free.

I had wondered why other industries weren’t taking advantage of this sort of structure. This article was in today’s New York Times.

– Should America put up with this movement of companies?

– If not, how should it be prevented?

– Even if legislation prevents American companies from leaving, can it prevent American companies from shutting down or shrinking and being replaced by tax-free Bermuda companies?

One means of solving this problem would be to abolish the corporate income tax. Of course, that cure might be worse than the disease.

So, what’s to be done?

Is it just “Bermuda” that you object to? 'Cause there are lots of other tax havens–the Caymans, Hong Kong, Latvia, etc. If you’re going to prevent U.S. corporations from using one country, then seems to me you oughta prevent 'em from using all of 'em. Switzerland, too. Malta, Guernsey, whatever.

Hey, guess what, I found a list of Tax Havens on Google. :smiley:

If you’re gonna shut down Bermuda as a tax haven, seems only fair to shut down Vanuatu, too.

Not to mention Australia, the UK, and Canada… :smiley:

DDG, I believe you missed december’s point, as the tax-haven (that list strikes me as using a highly liberal definition of ‘tax-haven’ but then I’m not a tax lawyer) issue really is an issue if the US getting a fair bite at the tax apple.

Unfortunately, I suspect that a proper debate on this issue requires someone to give a decent orientation on current tax law in re transfer pricing, dividend definition and payments, etc.

I would suggest that a beefed up IRS supervisory authority combined with a review of rules to see that operations are not primarly set up as tax avoidance vehicles (one meeting a year?) might be a useful method of preventing abuse while allowing legit use of overseas special purpose vehicles and the like.

Yeah, if they do business here, they should pay the same taxes as businesses based here, accounting games be damned.

IIRC, what these companies are doing is having profits made overseas booked by the holding company in Bermuda, thus escaping US tax. The profit they make in the US still gets taxed by Uncle Sam.

Presumably, when they distribute dividends to shareholders domiciled in the US, those dividends will be liable for capital gains or income tax of some sort.

The solution is - don’t tax worldwide income in the first place.

(You could say the same should apply for individuals. US citizens are the subject of great mirth overseas because their government taxes them even when they are living and earning all their income overseas.)

Not so. Transfer pricing allows a company to shift profits to low tax jurisdictions. A simplified example: Have a office in Bermuda where the tax rates are low or zero and no-one asks any difficult questions. Make profit in the US. Have the Bermuda branch charge the US branch a sum for management services or other intangible service that is is sufficient to eliminate US comany tax. Shareholders get the benefit of deferred tax liability which if you’re clever and unashamed enough is near enough to exemption regardless of income and capitial gains tax rates (actually there are some complications to do with risk and corporate governance which is why not all industries do it).

With mobile capital there is a real risk that competition between capital importing countries will drive tax rates to zero. Civilised countries (which really include most of the larger ones on DDG’s list) engage in what amounts to an exchange of gifts by allowing the recognition of other countries company taxes as a legitimate deduction. Transfer pricing is still a bit of a problem, but it’s not too bad. To deal with tax haven countries what is needed is simple enough (although not easy to enforce): blacklist them. Assume that all non-arms-length intangible transactions are sham until convinced otherwise. Refuse to recognise any payment whatsoever to Bermuda as a legitimate deduction for US tax purposes. Same goes for any country that routinely practices deliberately opaque accounting practices or encourages sham transactions for a slice of the action. As you can imagine, this is a pretty serious step and a bullying one, which is one reason it hasn’t happened. Another of course is that the people who gain most from these sham transactions are not without influence.

December, by extension, do you also think it should also be illegal for American companies to change their legal domicile within the United States? Deleware, for example, is a very popular place to incorporate companies owing to the tax breaks they receive. \

In the case of multinational corporations, which is what we are discussing, they will of course relocate headquarters to where it makes the most sense. Be it Manhattan or Bermuda, even if those headquarters are paper only.

Basically, the US government does not have jurisdiction over the international operations of American companies, or even more precise multinational companies that may have significant operations in the US. Nor should the US have jurisdiction. Nor should the US government be able to tax international income.

Hemlock, low blow. Yep, I find it pretty irritating to be taxed on my income outside of the US, especially since I spend about a week a year back in the good ol US of A. My only interaction with the US government comes from those [heavy sarcasm on] helpful folks at the US embassy, INS and IRS [heavy sarcasm off].

On the one hand, these countries are clearly violating the spirit of the law. On the other hand, they have a fiduciary duty to their shareholders. If the government allows them to do this, and they don’t, then they’re kinda lettting their shareholders down. By not closing this obvious loophole, the gfovernment is in effect giving tacit approval to it.

DDG, according to the OP, the Bahamas has income tax. Is that true of the countries in your list?

Hawthorne: are you saying that costs incurred in other countries can be deducted from the domestic taxes? If so, I think that there’s an obvious remedy.

Exactly. Shifting profits is particularly easy for reinsurance companies, because one subsidiary can reinsure another subsidiary with any profit margin the company chooses. The result is that there’s little or no corporate income tax paid on US income. What if many companies in many industries do this? The US corporate income tax becomes eroded.

My favorite solution would be to abolish the corporate income tax, BUT, have individual stockholders pay income tax on their share of corporate earnings (rather than on their share of corporate dividends.)

I think is will be difficult to draft effective legislation that doesn’t have loopholes. It may also be difficult to enact effective legislation, because companies will fight to retain their tax shelters. There has been an effort to restrain this practice in insurance, but it hasn’t gone anywhere in the Congress.

Well, I’ve got a question. What do you think would happen to the ability of American companies to raise money via the stock market if you tax shareholders instead of companies? There would also be all sorts of manipulation of earnings to minimize the impact on shareholders. What would you do about dividends?

To be constructive, I believe that a simple and easy to calculate tax structure (a flat rate corporate tax), would be infinately more practical.

To take the last first, if the shareholder paid income tax on the full earnings, he wouldn’t be taxed on the dividends. Then corporations might be encouraged to pay more dividends, and retain less earnings.

This change would be a huge benefit to corporations wanting to establish or grow in the US. It would cerate an enormous boom in this country.

Regarding the manipulation of earnings, I wondered the same thing. It might be less of a problem, because

– much of the stock is owned by funds that don’t pay income tax
– executive bonuses are generally based on earnings. Holding earnings down would hurt the company management.

Here’s a recent thread on company tax abolition in which I suggest reasons why it wouldn’t be a good idea. But the reluctance of companies to pay dividends under your (“classical”) company tax can be addressed by corporate tax integration. The pioneering work on this was done by the Canadian Carter Royal Commission and a form of integration known as dividend imputation was introduced here in the mid 1980s. This allows you to keep the useful features of company tax (ability to tax foreign direct investment, indirect accruals tax on the systematic capital gains arising from retained earning, withholding tax) whilst recognising that those in receipt of franked dividends have already paid tax at the company level.

The suggestion you’re making december (I think) is “full partnership treatment”. This has advantages but is widely regarded as an administrative …erm challenge. But conceptually it’s good idea (subject to a few caveats I mentioned in the other thread).

Company tax abolition is of course, giving up on taxing internationally mobile capital.

First, CG I do believe that it is necessary to note that most industrialized nations have a non-territorial basis to corporate tax, although to my limited knowledge only the US taxes personal income universally (I do feel for you having gone throught the same bullshit).

Now as to the subject, I think we are really looking at a larger policy question of how to update tax structures and enforcement concieved in a far less capital mobile world to the ever more mobile present system.

I note that this is not solely of theoretical import as issues of money laundering, and not to get too fashionable, but terror finance are also caught up in how to deal with off-shore tax sheltering.

Certainly there are legit aspects, above all for multinationals who may not want to fully reptriate earnings to their ostensible home.

Yet at the same time, there is clearly abuse, be it in transfer pricing (which refers to the internal pricing of inside the corporation flow of goods and services – ideally in an economic sense it should always be at an arms length basis, but what gets reported … well might not be.) or dividend or other fee payment policy (e.g. royalties).

It strikes me that part of this may be informational issues, and that a tighter application of present rules might substantially address compaints. At the same time updating and tightening accounting rules to ensure that treatment of the last decade’s worth of financial wizardry is accounted for in a way that ensures shareholders are getting real value (agency costs anyone?) is probably also quite necessary.

Last night’s post got swallowed. Curse these boards!

This is a loophole that needs closing. My understanding is that these practices do not appear to occur to the same extent in Europe.

The NYT wrote a more general article on this on 4/16. It is now only available for payola, but the abstract points out the following:

"Some large companies, encouraged by top law and accounting firms, are adopting new strategy to cut taxes legally on profits they make in US; technique allows company to transfer profit earned in US to paper company in another country…large publicly traded companies can use method to reduce taxes on American profits to as little as 11 percent, from average of 21.5 percent; "

http://query.nytimes.com/search/abs...DAD0894DA404482

Apparently having a once-a-year director’s meeting in the foreign country (eg Barbados) is enough to establish a shell corp in that country. (The tax dodge is executed via transfer pricing, as far as I can tell.) This does NOT seem to me to be a difficult loophole to close. The IRS makes determinations like this all the time.

There is a plan supported by the IRS and various democrats (Grassley, IIRC) to close this abusive loophole.

BTW: Eliminating the corporate income tax altogether would vastly expand the potential for abusive tax shelters.

slight hijack. Actually, those fun folks in North Korea also taxes global personal income. China does tax permanent residents after 5 years on global income. IIRC, S. Africa did as well, at least back during their apartied pariah status days. [end hijack on personal income taxes]

December, always remember unintended consequences. If you change the tax structure to penalize retained earnings and encourage dividend payouts, that may not be a good thing. Obviously, such a structure is more appropriate for a mature company rather than one in an expansion phase.

Coll hit the nail on the head. The issue is catching up with a much more liquid capital environment. The regulators, much less the tax authorities, are far too slow and lack the expertise/resources to keep up at the present time. Again, I would vote for simplification of the tax structure so that enforcement is simplified.

BTW, it is kind of only half accurate to include Puerto Rico in the list of “tax haven countries”, as it is a United States Territory, and the (not totally) exempt status of the jurisdiction is a specific part of the U.S. Internal Revenue Code (and only for some specific corporate customers… If I have income from doing business stateside, I have to pay)

OTOH I would imagine this is a highly, ah, theoretical position, eh no?

Ah, China’s position is evil, that’s just bloody wrong.

Quite true, it strikes me that there is no one single rule one can apply, but rather one has to construct a set of rules which do not unduly distort the capital markets (internal or external).

I think we need to be careful. Simplification can cover a number of things.

Taxing authorities have to become more sophisticated (speaking of the industrialized nations) and need to take advantage of info technology in the same way current financial markets are.

I suspect that with more current (given my limited exposure, oddly enough, to 1st world taxing authorities) that better IT may be helpful, although also staffing with some expertise in the best financial flavors.

I am personally reluctant to assail exploitation of financial innovation, on the other hand as in the case of the energy market topic, there are larger policy issues which have to be addressed.

Unfortunately while I’ve some fluency in the basics of this topic, we really need some input from folks more learned in international tax law for more practical observations.

All in all gross attempts to simply ban such moves will probably either backfire or be ineffective. However, an industrialized nation wide effort at standard setting (recalling most investment flows, if only out of habit, are internal to the G 11) is likely to be useful. Multilateral soluations, to reinforce my obs in another thread, is certainly going to be more efficient than not.

      • Real estate is the only logical basis of all taxation, precisely because real estate cannot be hidden or moved. - DougC

Ok, but I find it difficult to see how bringing US laws up to European standards would be harmful.

Although I hasten to add that I read the article in question (abstract above) almost a month ago and my memory is a bit sketchy.

BUT: There is such a thing as a loophole, folks. And permitting a paper company to be set up based upon a once-per-year executive meeting (in Barbados) seems to meet such a test.

BTW: From Saturday’s NYT (today) “Stanley Works threw out a contested shareholder vote today that would have allowed it to become a Bermuda company and said that it would schedule a new vote.”

If Stanley was actually planning on running their company from Barbados (or Bermuda) that would be one thing. But that does not appear to be the case.

You could always invade and make it the 51st state.