The Bermuda angle

July 11, 2002

THE DISSONANCE was stunning -- and telling.

While President Bush was professing outrage Tuesday over corporate America's excesses and appealing to CEOs' morality and patriotism, many of his Republican colleagues in the House were lining up behind a bill to bar U.S. firms from receiving some federal contracts if they have reincorporated offshore -- a growing problem that the president did not even bother to mention in his Wall Street sermon.

The congressional effort to stem this outrageous tax dodge by some of the nation's most prominent companies is laudable. The House committee vote Tuesday underscores the failings of Mr. Bush's delicate effort to address the rising national ire over corporate wrongdoing while not offending his biggest supporters -- or costing them money.

Reincorporating American companies offshore -- Bermuda is the favored haven -- enables them to evade the 35 percent U.S. corporate tax on any income earned overseas, which is estimated to cost the Treasury at least $4 billion a year. The moves also put firms under looser rules for shareholder disclosures, contrary to the greater transparency Mr. Bush called for Tuesday.

Moreover, offshore entities have played big roles in such recent corporate scandals as Enron, which used such devices to hide income and debt. Increasingly, firms are shifting potentially profitable patents and other intellectual property to these havens, as well.

This problem was spotlighted this spring with plans by Stanley Works, the Connecticut toolmaker, to reincorporate in Bermuda to save about $30 million a year in taxes. But Stanley is only the latest in a long line of American brands that have fled to that island's pink beaches. In all, an estimated 13,000 foreign companies have incorporated in Bermuda, most from the United States, including Arthur Andersen, Accenture and Tyco.

Like other Bermuda-incorporated firms, Stanley executives say their planned move is patriotic because it would enable the company to remain competitive against overseas firms, retain American jobs and perhaps avoid a takeover from abroad.

Many foreign companies do operate in more favorable tax environments. This is one of the more challenging aspects of the globalization of industries and markets, and it should prompt a comprehensive examination of how to improve the U.S. tax code so that it does not drive companies offshore -- short of abolishing corporate income taxes.

But such improvements will be tricky. In the meantime, Congress properly is primed to act. House Democrats want to go further than their GOP peers, making sure U.S. companies that have gone offshore are barred from all federal contracts. And some Democrats want to entirely bar offshore relocations -- retroactive to last Sept. 11.

These tax dodges represent precisely the sort of unconscionable corporate abuse that Mr. Bush railed against this week. Why is his administration not going after the tax evaders?

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