The Bermuda Tax Haven
by Fred E. Foldvary, Senior Editor
Several U.S. corporations have incorporated in Bermuda to reduce their taxes. There is no income tax in Bermuda. Insurance companies have done so, and now manufacturers are doing it. Some are incorporating in other tax havens, such as the Cayman Islands in the Caribbean. Offshore reincorporations reduce U.S. Treasury tax revenue by $70 billion annually.
According to David Cay Johnston, by incorporating in Bermuda, the company's income from outside the USA becomes exempt from American taxes. Also, when an American company borrows from its Bermuda parent, the interest it pays creates a deduction that reduces U.S. taxes, but there is no tax on the interest earned by the Bermuda parent.
A much-publicized case is Stanley Works, a manufacturer of hammers and wrenches, which had been headquartered in Connecticut for 159 years. The company will reduce its taxes by $30 million, to about $80 million. Some companies save much more. Tyco International, headquartered in New Hampshire, saved $400 million last year by being incorporated in Bermuda.
Incorporating in tax havens is not a pure gain to the shareholders. The Internal Revenue Service has ruled that shareholders must pay taxes on any increase in the value of their shares, even if they don't sell the shares. This deliberately penalizes tax-motivated expatriation. But if the owners bought the shares when the price was higher, there may not be any capital gains. Also, it is up to the share holder to report such gain, since the company does not report it to the IRS.
A company can incorporate in Bermuda while keeping its operations in the U.S.A. More corporations are considering incorporating in Bermuda to save on taxes.
Mark A. Weinberger, head of tax policy in the U.S. Treasury Department, said that shifting incorporation to Bermuda and other tax havens shows that the U.S. tax system can drive companies out of the country, and so "We may need to rethink some of our international tax rules." What really requires rethinking is the entire tax system. Because U.S. taxes are higher than those of some other countries, many U.S.-based companies are put at a competitive disadvantage.
Some people have criticized these companies for transferring their incorporation abroad to save on taxes. They say this is greedy and unpatriotic. But there are other examples of expatriation besides corporations. During the war in Vietnam, there were American men who fled to Canada to avoid being drafted to fight in a war they opposed. They too were called "unpatriotic."
Such accusations presume that paying taxes on income is a moral duty. This presumes that the proper owner of production is not the producer, but the government. The government owns our labor and our bodies if it can properly command us to work for it rather than for ourselves. Government turns American citizens into tax slaves. Is it unpatriotic to escape slavery?
The fault lies in the U.S. tax system. Any tax that can be escaped by moving is a bad tax. It creates an incentive to move away, and those who don't move are put at a disadvantage. If you have a pond in your back yard, and you keep shooting at the ducks, is it surprising that the ducks will fly away? Stop shooting the ducks!
If we want to stop business from moving out of the country, stop taxing it. Instead, tax something that cannot move away. The main asset that can't move is land. Land is stuck in its place. Its rent is a surplus that can be tapped for public revenue with no loss of business.
Enterprises would be moving into the U.S. and rushing to incorporate in America if the U.S. stopped taxing income and shifted taxation to site values. Instead of welcoming business, the U.S. government, along with State governments, penalizes business for being successful and daring to make a profit. Those who accuse companies of lacking patriotism only show their ignorance. It is the U.S. tax system that is greedy and unpatriotic, not those who seek to escape government takings.
-- Fred Foldvary
Copyright 2002 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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