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U.S. Companies Seek New Tax Havens

Ah, Bermuda. Pink sand beaches. Charming pastel cottages and kelly-green golf courses. Tiny storefront "headquarters" of major global corporations. For years the archipelago, along with its Caribbean siblings the Cayman Islands and British Virgin Islands, has played host to companies seeking favorable tax treatment. But rising concerns about a U.S. crackdown on tax havens have a growing number of companies rolling up their beach blankets and decamping to far less sunny shores. Since October at least a half-dozen major corporations, including Tyco International ( (TYC)), Noble ( (NE)), and Ingersoll-Rand ( (IR)), have proposed reincorporating in Ireland or Switzerland. The two countries may have higher tax rates than in the tropics, but both offer bigger tax savings than either the U.S. or Europe. Plus, both have well-established tax treaties, which decide which country has primary taxing rights and help avoid double taxation. The trend comes amid increasing moves by both the Obama Administration and congressional Democrats to clamp down on corporate overseas tax maneuvering. Much attention has been given to the White House's call to end the deferral of taxes on foreign profits, but the plan will also make it harder to shift profits from one foreign subsidiary to one with tax-haven status. Meanwhile, legislation introduced by Senator Carl Levin (D-Mich.) would, among other things, tax corporations based in designated tax havens as U.S. corporations if they're managed and controlled here, too. While it's not yet clear how the proposals for change will play out, companies that may be affected have been working to get ahead of any changes by relocating their official bases to Ireland and Switzerland. The latter country's "statutory" tax rate is 24%, says Paul Schmidt, who heads the international tax practice at law firm . But with each Swiss district offering competing rates to lure businesses to put down roots, many companies end up paying much less. "It's pretty easy to get down to a total of 8% to 10%," Schmidt says. That's a huge savings over the potential 35% federal tax rate these corporations could owe in the U.S. betting on strong U.S.-ireland tiesIreland, meanwhile, has a 12.5% corporate tax rate and a good working relationship with the Internal Revenue Service, says Conor Begley, an independent tax consultant and a former Dublin-based director of international tax at . "What they're really betting on is that the Irish relationship with the U.S. is so strong that the Administration is not going to change the rules of engagement," he says. Still, tax experts warn that the moves aren't guaranteed to get around the potential legal tweaks. "It's not a foolproof thing by any means," says independent tax consultant Robert Willens. "It amounts to hoping this new legislation will be overwritten by the tax treaties." To what extent executives will be downing pints of Guinness or eating Swiss chocolates after the move depends on the company. Some, such as offshore driller Transocean ( (RIG)) and oil-services provider Weatherford ( (WFT)), have moved or plan to move their CEOs and senior management to Switzerland. Health-care products maker Covidien ( (COV)), on the other hand, is building out the financial staff at its Dublin location and calling it the principal office, but senior management will remain in Mansfield, Mass. "We will have a physical presence," says Eric Kraus, a Covidien spokesperson. One thing these migrant companies are likely to have in common is a more substantial local presence than they had in the islands. "They're not going to be able to get away with just brass plates," Schmidt says. Some companies may hold their board meetings in Dublin and have some kind of manufacturing base there. Many others are likely to set up separate entities to meet any requirements. "How that's interpreted in practice is looser than one might expect," Schmidt says. Tax experts predict that the trend will continue among companies that are still incorporated in the islands—according to Capital IQ, Bermuda, the Caymans, and the British Virgin Islands are still home to 55 companies with market capitalizations over $500 million. And insurers are likely to be the next to flee, expects Begley. U.S.-based companies would face "exit charges"Despite the potential public relations boost that might be had from leaving a so-called tax haven—Accenture ( (ACN)) specifically noted in its proxy that "continued criticism" and "negative publicity" of Bermuda-based corporations could have adverse effects—most departees are wary of having their executives talk further about the moves. "We've already covered all the information we're going to talk about," says Ingersoll-Rand spokesman Paul Dickard. Indeed, PR controversies are just one reason why companies currently based in the U.S. are unlikely to pull up roots in the same way. International tax experts think the exit charges—taxes based on lost revenue to the IRS for future earnings—will be so astronomical that U.S.-based multinationals are unlikely to leave. And some could be scared off from relocating by the prospect of being removed from the Standard & Poor's 500-stock index. Several companies that have "redomiciled" have been dumped from the index, so there's potential share-price pain if some mutual fund managers are forced to unload non-S&P 500 shares. Still, some U.S.-based CEOs won't rule out the possibility of pulling up stakes. J. Erik Fyrwald, the CEO of $4.2 billion water-treatment and chemicals company Nalco ( (NLC)), says he knows of fellow CEOs who are evaluating it. "Even though there are strict penalties, in the long run you've got to have your business competitive," Fyrwald says. While he has no interest in doing the same himself, Fyrwald worries that changes to corporate tax law could also make U.S.-based companies targets for foreign acquisition. "If it got to where we were unable to effectively compete globally, we would have to evaluate our options."
McGregor is BusinessWeek's management editor.

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