Corporate flight: moving “offshore” to avoid US taxes
| DOI | https://doi.org/10.1108/13590790310808826 |
| Date | 01 July 2003 |
| Pages | 246-254 |
| Published date | 01 July 2003 |
| Author | Jackie Johnson,Mark Holub |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 10 No. 3
Corporate Flight: `Moving' Oshore
to Avoid US Taxes
Jackie Johnson and Mark Holub
INTRODUCTION
When Enron ®led for Chapter 11 bankruptcy protec-
tion on 2nd December, 2001 its ®nancial position
came under intense scrutiny. Brought to light were
the complexity of its corporate structure and its
extensive use of oshore ®nancial centres (OFCs),
which had allowed it to avoid paying US$409m in
US tax over the previous ®ve years.
1
Enron is not
the only multinational corporation that has taken
advantage of OFCs to avoid paying tax. News
Corporation has roughly 800 subsidiaries, many of
which are incorporated in the Caribbean Islands; as
a consequence News Corp. has been able to reduce
its eective tax rate by approximately 25 per cent.
2
The Sara Lee Corporation applies a similar strategy
with the use of 722 subsidiaries, 635 of which are
outside the USA. It is not clear how Sara Lee
manages to reduce its tax rate by over 10 per cent
as the company has declined to comment on any
speci®c tax reducing policy. However, executives
of the company do acknowledge that the company
has a policy of `arbitraging tax regimes'.
3
While the use of oshore subsidiaries is one way to
avoid tax, some large US corporations are using a
more direct approach. They are `moving' head oce
oshore. Ingersoll-Rand, Stanley Works, Coopers
Industries and Tyco International are some well-
known companies using this approach. All expect to
avoid millions in US taxes by reincorporating o-
shore. Although the one-o reorganisation costs of
reincorporation are high, this is oset against a mini-
mal increase in operational costs, yearly registration
fees measuring only in the thousands of dollars and
substantial savings in future US income tax.
Following is a discussion of OFCs and how they
are used to achieve eective oshore relocation.
Also considered are the attitudes of the Bush
administration to OFC operations, given the role
they play in money laundering and tax avoidance
activities, and the bene®ts and problems associated
with the `move' oshore. Although the Bush admin-
istration has been targeting OFCs for their role in
laundering terrorists' funds following the 11th
September attacks in the USA, they have not
followed this with a condemnation of OFCs' taxation
policies, despite many of the countries blacklisted as
money laundering centres also being identi®ed as
tax havens. US party politics now dominates the
tax avoidance debate with the Democrats pushing
to eectively stop the practice and the Republican
party backing more ¯exible tax arrangements. The
moves by US corporations to reincorporate oshore
following 11th September have been condemned and
labelled by many as unpatriotic. These calls are going
unheeded by US corporations, which view the deci-
sion as merely an economic one. Currently, there is a
rush to reincorporate oshore ahead of proposed
changes to the US tax legislation.
4
OFFSHORE FINANCIAL CENTRES
Although the term `oshore ®nancial centre' is
viewed as typically referring to small island nations
oering dubious ®nancial services, many large
advanced countries also provide economic incentives
to attract non-resident businesses. The description
`oshore' is thus somewhat of a misnomer since o-
shore ®nance is merely the provision of a more
favourable ®nancial environment to non-residents.
Consequently OFCs cannot be viewed as a homoge-
nous group as the quality of their operations and the
services they oer vary considerably. To get around
the problem of a precise de®nition, the Financial
Stability Forum (FSF), in its assessment of oshore
®nance, focused on the characteristics and uses of
OFCs.
5
OFCs are identi®ed by at least some of the follow-
ing characteristics that are available to non-residents
but unavailable to residents: zero or low taxation,
including the absence of withholding taxes; little reg-
ulatory or ®nancial supervision; the availability of
¯exible corporate structures; no requirement for a
physical presence; secrecy; and little or no sharing
of information or cooperation with other juris-
dictions. An OFC would also be expected to have a
considerable amount of oshore ®nancial business
in comparison with ®nancial business of a domestic
Page 246
Journal of Financial Crime
Vol.10,No. 3, 2003,pp.246 ±254
#HenryStewart Publications
ISSN 1359-0790
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