U.S. Companies Seek New Tax Havens

Anticipating U.S. tax-law changes for Bermuda and other standbys, Tyco and Ingersoll-Rand are among the corporations looking at Switzerland or Ireland

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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 Baker Hostetler. 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 ties

Ireland, 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 Grant Thornton. "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."