16-04-02 Some large companies, encouraged by top law and accounting firms, are adopting a new strategy to cut taxes legally on profits they make in the United States.
The technique works this way: A company transfers the profit it earns in the United States to a company that basically exists only on paper and is based in a third country, such as Barbados or Luxembourg, that has a special tax treaty with the United States.
These treaties allow companies to transform taxable profits into expenses that they can deduct on their US tax return. These tax-deductible expenses include interest payments to the overseas company, royalties for use of the company's logotype and fees for management advice. The "paper" company then sends the money to the US company's worldwide headquarters in Bermuda, which has no income tax.
In short, what once were taxable profits have been turned into virtually untaxed dollars for use anywhere in the world. Publicly traded companies can use this method to reduce taxes on American profits to as little as 11 % from an average of 21.5 %.

Nabors Industries and Weatherford Industries, two oil drilling services companies based in Houston, and Stanley Works, a Connecticut-based maker of hammers and other hand tools, are among the first companies preparing to use the strategy to reduce taxes paid to the American government on profits earned in the United States.
The new techniques are being promoted by leading US accounting and law firms, said Beth Brooke, a vice chairman of the accounting firm Ernst Young. Accounting and consulting firms advising on these strategies include Arthur Andersen, Deloitte Touche, KPMG, PricewaterhouseCoopers and Grant Thornton. The top law firms include Skadden, Arps, Slate, Meagher Flom; Baker McKenzie; Sutherland, Asbill Brennan, and Arnold Porter.
"Everyone wants this business," said the general counsel of one company using the methods.

Several dozen companies were already using part of this technique -- incorporating in Bermuda while keeping their headquarters in the United States -- to eliminate their US tax liability on profits made overseas. Senators Max Baucus, Democrat of Montana, and Charles Grassley, Republican of Iowa, introduced legislation to close the loophole.
But the new strategies go beyond the techniques addressed in the legislation. The key is to use treaties with Barbados, Luxembourg and other havens. Companies need the third country as well as a Bermuda headquarters because the United States does not have a tax treaty with Bermuda.
One leading tax lawyer, David Hariton of Sullivan Cromwell in New York, said he expected the debate to shift once members of Congress and citizens understood the impact on American tax revenue. "If the transaction serves only to eliminate the US tax on foreign-source income, there are good policy arguments for allowing it," Hariton said. "If, on the other hand, it serves to eliminate US tax on US income, then the transaction is of greater concern."

Nabors Industries, the largest oildrilling services company in the United States, is one corporation preparing to use the tax-avoidance techniques. It has proposed to its shareholders an incorporation as a Bermuda company that would have its legal residence in Barbados.
To qualify the company as a resident of Barbados, the Nabors CEO, Eugene Isenberg, simply has to meet with his directors once a year on that island, experts said. Because of the tax treaty, dollars can be moved untaxed from the company's taxable American pocket to its Barbados pocket, from which 99 % of the money can then move on to tax-free Bermuda and remain in the hands of the company. The company is then free to invest the money anywhere.

Weatherford International, another oil services company, said in documents sent to investors that its arrangement meant that it would be able to "commit additional capital to international expansion" and would "facilitate the cost-effective acquisition and operation of non-US business."
By creating a tax triangle out of the United States, Bermuda and a country such as Barbados or Luxembourg, and pushing every rule to the limit, companies can legally pay as little as 11 % of their US profits in taxes to the United States, said Richard Andersen, a tax lawyer at Arnold Porter in New York.
Congress imposes a 35 % tax on profits of large companies, but after taking advantage of deductions and loopholes, the largest 9,669 companies paid an average of 21.5 % of their profits in US income taxes in 1998, the latest data from the Internal Revenue Service show. These taxes totalled $ 141.6 bn, or nearly 18 % of the total income taxes paid by companies and individuals.

Just how much companies expect to save on taxes on their US profits is not known because the companies have not disclosed any such figures. Companies using the techniques, asked about it, either did not respond, declined to comment or reiterated previous remarks about eliminating US taxes on profits earned outside the United States.
"We are pretty much radio silentthese days" on taxes, said Paul Dickard, a spokesman for Ingersoll-Rand, an industrial manufacturer with operating headquarters in Woodcliff Lake, New Jersey. Under current rules, only publicly traded companies can take advantage of these techniques. Individual Americans are taxed on their worldwide income whether they live in the United States or overseas, making a Bermuda mail drop worthless to them. The rules exclude family-owned businesses, partnerships and professional corporations.

Lawyers and accountants who are promoting the strategies -- they charge hourly fees for this kind of work -- say that Congress is forcing companies into them by not modernizing the corporate income tax. Typical of these statements were remarks by Brooke of Ernst Young, who said that "to become globally competitive, companies have to unshackle themselves from the arcane US tax system that in essence results in US company profits' being taxed in multiple places."
Brooke acknowledged that companies that did this could also pay lower taxes on profits earned in the United States. "The issue is global competitiveness and that includes taxes paid in the United States on profits earned there," she said.