The Internal Revenue Service (IRS) is likely to take a closer look Tyco International's tax arrangements, which could result in the Bermuda-based company facing hefty penalties, according to the latest edition of BusinessWeek magazine.

The magazine devotes two pages to examining how Tyco's "bag of tax tricks", including an array of subsidiaries in low tax jurisdictions allows the corporation to save millions on its annual US tax bill.

It says the large number of subsidiaries used by Tyco appear to exist mainly to deal with related units, which the IRS may want to closely examined.

Tyco moved to the Island in 1997 when it bought Bermuda-based securities services company ADT Ltd.

"Through a reverse merger, in which the smaller ADT effectively acquired Tyco, Tyco no longer had to pay US taxes on its non-US income," said the magazine in an article headlined 'The Tax Games Tyco Played'.

Democrat Congressman Richard Neal, who has tabled a bill which would force Tyco to pay taxes as a US corporation from 2004, said the company had "raised tax avoidance to an art form".

The magazine states: "That perception, along with (former CEO Dennis) Kozlowski's indictment (on sales tax evasion charges) makes it more likely that tax authorities in the US and other high-tax industrialised countries will put Tyco's tax schemes under a microscope.

"The basic strategies 'are very consistent with the tax code and regulations', says one Wall Street tax expert.

"However, because a number of Tyco's subsidiaries appear to exist mostly to deal with related units, that could be challenged by the IRS.

"'Tyco is an obvious audit target,' argues Leslie B. Samuels, a New York tax attorney, and former assistant Treasury secretary for tax policy.

"Some tax experts suspect if the IRS fully probed Tyco's bag of tax tricks, the company could be hit with huge penalties, because it could argue Tyco's tax situation doesn't reflect economic reality."

BusinessWeek says since Tyco's move to Bermuda in 1997, it has "gone to extraordinary lengths to amass subsidiaries" in places such as Barbados, the Cayman Islands and Jersey - doubling the number from 2000 to 2001 to more than 150.

As a result, its tax bill fell from 36 percent in 1996 to 23 percent in 2001, slashing $600 million.

After the "reverse merger" with ADT, Tyco acquired subsidiaries in a series of tax havens.

The subsidiaries "have little apparent connection to Tyco's operating businesses. But they are perfect vehicles 'for shielding interest, dividends, royalties, and other forms of passive income from tax'", the magazine quotes Miami Law School Professor Samuel Thompson as saying.

Tyco reported in 2001 that while 65 percent of its revenues came from the US, only 29 percent of its income came from America, so 71 percent was not subject to the US's 35 percent corporate income tax.

BusinessWeek says Tyco provides no information about the workings of these "mysterious subsidiaries", but tax experts suspect the company could be involved in "transfer pricing".

"Goods produced in a high tax country might be sold to a tax haven subsidiary for a low price, and then legally re-sold at a higher price - with most of the profit tax-free."

The Luxembourg-based Tyco International Group (TIG) borrows a lot of the money Tyco needs to finance its $27 billion debt then re-loans it to Tyco units in the US and other high tax countries, says the magazine.

Tyco reported TIG had $16.7 billion in inter-company loans, which allowed Tyco's US subsidiaries to claim tax deductions on them, claims BusinessWeek.

TIG could also be charging other Tyco subsidiaries more interest than it is paying, so increasing the tax benefit.

But, according to Lehman Brothers tax expert Robert Willens, the interest payments Tyco subsidiaries pay back to TIG are not taxed in Luxembourg.

The magazine reports the US Securities and Exchange Commission is investigating whether a Tyco subsidiary in Venezuela, Earth Tec, paid bribes to win a $200 million contract build and operate an industrial water treatment plant.

"Since Kozlowski's resignation, Tyco has strived to argue that his personal conduct will have no material impact on the company," the magazine states.

"But Kozlowski's legacy also included an increasingly aggressive strategy of avoiding taxes by any means possible. That may prove to be an even bigger problem for Tyco."