Bermuda received a big political boost yesterday when a leading Republican in the House of Representatives blamed the US tax code for the American companies fleeing to offshore jurisdictions to slash their tax bills.

House majority leader Dick Armey's comments are significant because the ruling Republicans have so far said little about the patriot tax controversy which erupted in February when Stanley Works announced it would move to Bermuda to save $30 million a year in taxes.

The move prompted a flurry of bills in both the House and Senate to stop the corporate moves designed to cut tax bills.

But yesterday Representative Armey, the House majority leader, cited the US tax code as the reason behind the wave of American companies moving offshore.

And he said America had to change its tax system to allow US corporations to be more competitive globally or US jobs would be lost.

Rep. Armey's comments prompted a furious reaction from Democrat Richard Neal, who has tabled a bill to stop the moves, and who last night accused the Republicans of backing "financial traitors" who are dodging their responsibilities in the war against terrorism.

In a hard-hitting letter to his congressional colleagues, Rep. Armey said: "We should fix this problem with our tax code and make our economy stronger. When our American companies do well, our economy prospers, unemployment goes down and wages rise.

"The Democrat approach is the wrong medicine. If enacted, US companies would either move US jobs offshore or be bought out by foreign companies. Neither option is a good outcome for US workers. Congress should respond to this challenge and improve our tax code to help US businesses to compete globally.

"Tax competition is a fact of life. Within the US, companies move to states with lower tax rates, just as people do. Retirees flock to Florida, not just for the sunshine, but also for Florida's low tax rates. It's not controversial when a company chooses to relocate from its home state to Delaware - a low tax state. And it should come as no surprise that states with no individual income taxes like Florida and Texas grow faster and create more jobs than high-tax states.

"Keep in mind that America's corporate tax rate is the fourth highest in the developed world. According to a new KPMG survey, the US corporate income tax rate of 40 percent is higher than Germany (38.4 percent), France (34.3 percent) and Britain (30 percent.)

"Corporate inversions are not the result of anti-American corporate sentiment, but tax laws that place US-based multinational companies at a disadvantage with their foreign competitors."

In March, Rep. Neal tabled The Corporate Patriot Enforcement Act with Rep. James Maloney to stop US companies reincorporating overseas to avoid domestic on taxes on foreign income.

But last night Rep. Neal said: "I am surprised that the Republican leader would excuse the actions of corporate expatriates like Tyco and Stanley who are deliberately trying to cheat the Treasury out of billions of dollars while we are fighting the war against terrorism.

"It is clear that the Republican leader feels that ordinary Americans should foot the bill for national defence, homeland security and other priorities, not wealthy corporate draft-dodgers.

"The Republican leader is fond of telling the American people that tax revenue is their money and they should get more of it back.

"By endorsing the actions of these financial traitors he allows them to pick the pocket of the American people to the tune of $4 billion."In an interview with The Royal Gazette on Tuesday Rep. Neal said that he was confident that if it got past the tax-writing Ways and Means Committee, his bill would pass through the House.

"I am confident that if the bill came out of committee and got to the full House of Representatives it would garner at least 300 votes (of the 450 members in the House), maybe more. That's how powerful this issue has become."

Last night, Rep. Neal repeated the claim and challenged the Republicans to put the issue to a vote on the floor of the House of Representatives.

Meanwhile, it emerged yesterday that the Treasury Department could look at tightening tax treaties as another means of deterring companies from reincorporating outside of the US.

Pamela Olson, Acting Assistant Secretary for Tax Policy for the US Department of the Treasury said, in specific, action could be taken to tighten residency requirements to deny tax-treaty benefits to companies moving abroad to cut their US taxes.

"What we're trying to do is remove the incentives to invert. This is one aspect of it that clearly has to be addressed."

Ms Olson predicted that tougher treaties "will have a significant dampening effect" on corporate inversions.

The US has tax treaties with most countries, including Bermuda , to prevent double taxation of income. The treaties allow the countries to sort out income eligible for taxation in their jurisdictions.

Olson said some companies shift their headquarters to Bermuda , but that country's tax treaty doesn't offer substantial benefits since Bermuda has no income tax. To get US treaty benefits therefore, some companies then establish residency in another country, such as Barbados.

Doing this "will allow them to efficiently move income out of the US and reduce their taxes.

"Tax treaties should eliminate double taxation of income, not eliminate taxation of all income," Ms Olson said.