The US government is losing $1 billion a year in tax revenue because of companies reincorporating to Bermuda, a tax analyst claimed yesterday.

Robert Willens predicted the figure would increase as companies moved offshore to avoid paying taxes.

His comments come amid renewed debate about "corporate inversions", the phrase used to describe reincorporations. Also yesterday:

Democratic Senator Max Baucus, chairman of the Senate Finance Committee, vowed to crack down on company moves. He said it was important to protect the "American Dream."

USA Today said it was wrong to lay the blame on Bermuda. The challenge was to reform tax laws to make companies want to remain based in the US.

Mr. Willens, who since 1987 has been a managing director and tax accounting analyst at Lehman Brothers and formerly a tax partner with KPMG for 15 years, spoke out in an interview with financial publication Barons.

He said there was a huge benefit to companies incorporating in Bermuda and said the first company to do it was Helen of Troy in 1994.

He told Barons: "A shell company or holding company is created in Bermuda, and that company then issues its stock to acquire the stock of the US company from its shareholders. Helen of Troy Ltd., the new company created in Bermuda, issues stock to the shareholders of Helen of Troy Inc., the US company, and they in turn give their stocks to Helen of Troy Ltd. The US company then becomes a subsidiary of the Bermuda company."

Mr. Willens said the IRS got upset when this happened and decided they would police these types of transactions in an attempt to deter them by creating a "toll charge" which was levied on shareholders.

Mr. Willens said the IRS went after shareholders as they thought this would be deterrent enough, and for a while it worked.

However, he said Tyco's 1997 merger with ADT Ltd. changed everything. Even though shareholders had made large profits on Tyco stock, and management admitted shareholders would be hit with hefty taxes - including former CEO Dennis Kozlowski paying some $10 million - they justified the cost to shareholders because of the potentially huge corporate tax savings over several years.

The move saved Tyco approximately $400 million in taxes a year. Mr. Willens added: "It was an important event, because once other companies saw the numbers and realised how much in corporate tax savings could be realised by moving to Bermuda, they had to go."

He said the break in the market meant fewer shareholders had profits in the stocks they held. This meant the toll charge had less effect.

Would he recommend reincorporation in Bermuda? Mr. Willens told Barons that it clearly saves companies money, but it wasn't for all companies as consumer-products companies would suffer more in terms of image and goodwill than it would save in taxes. "So we were really surprised when Stanley Works announced their plan," he said.

Mr. Willens said post September 11 it was clear that patriotism would be a prevalent issue and said: "It was just shocking they (Stanley Works) wouldn't have anticipated the uproar."

Ignoring insurance companies, Mr. Willens said the 20 to 22 companies in Bermuda cost the US Government about $1 billion a year in tax revenue, which he said was a lot of money but "not a great deal in the scheme of things."

He said this figure would increase as companies moved offshore to avoid paying taxes on foreign earned income.

He added: "But as people have gotten a little more sophisticated - and greedy - they have figured out ways of also reducing US taxes on their US income, as well. It is now more than simply a revolt against the way the US taxes multinational companies."

When asked where the situation currently stands, Mr. Willens said some companies were unable to reincorporate before the March 20, 2002 "wire", the effective date of legislation proposed to terminate the practice. Some companies just made it such as Ingersoll-Rand, but others failed to make the deadline and their cases are pending.

Mr. Willens was asked about Halliburton: "I don't think we will be hearing Halliburton is moving offshore anytime soon," he said.

USA Today ran two opinion pieces yesterday, one by Democrat Senator Max Baucus who is also chairman of the Senate Finance Committee, as well as USA Today's view entitled: "Don't fault firms for fleeing cumbersome US Tax code."

Sen. Baucus said the US system of Government and enterprise was the best in the world, but came at a cost. He said Americans had given their lives to protect the "American Dream" of owning their own business and empowering themselves, family and employees economically, but said taxes were collected to "support our country's infrastructure, build a military and maintain the American Dream for future generations."

Sen. Baucus said every American was obliged to "protect the integrity of our economic system," and highlighted the need for executives to adhere to honest and accurate accounting.

He also said there was an important aspect of corporate integrity: "being honest about where a company establishes its legal residence."

Sen. Baucus said: "Recently, however, a number of businesses have chosen to locate their headquarters in low-tax nations where they have no operations, own no real estate and have no employees. The executives still enjoy the privileges afforded and paid for by honest US taxpayers while they, in effect, renounce their US citizenship just to cut taxes."

Sen. Baucus said this was permitted under the US tax code but added: "These actions are wrong." And he said this is why he and Senator Charles Grassley introduced legislation to "crack down" on these companies. "Corporations should not be able to avoid US taxes on their US profits earned by US operations built with US capital. And the federal government should not be permitted to sign a contract with companies that do," wrote Sen. Baucus.

Following some rhetoric about "mom and pop" hardware stores who pay their fair share in taxes, Sen Baucus concluded: "Our hardworking Americans are counting on Congress to make sure that corporations pay their fair share. I am committed to protecting the American Dream that our small-business owners represent."

In USA Today's view, the newspaper highlighted the debate over the plans of Stanley Works to reincorporate but said: "The concern, while understandable, is overwrought."

The newspaper pointed out that the practice has been around for nearly two decades and just two dozen of the thousands of publicly traded US companies have relocated offshore.

"Nor are these firms skipping out on paying taxes on profits made in the USA. Mostly, they save taxes on profits earned by overseas operations because the US Government - unlike most other countries - taxes profits made on foreign earnings. US job losses from corporate moves are minimal, too, since the firms "relocate" on paper only." said the newspaper. According to PricewaterhouseCoopers, from 1998 to 2000, in three fourths of mergers involving a US and foreign firm, the resulting company choose to locate headquarters in the foreign country, said the newspaper. The Treasury Department has also said more companies are choosing countries outside of the US as a home base.

"...when companies that operate around the world become more reluctant to establish US headquarters, a nation that prides itself as the leader in global commerce needs to re-examine its tax rules," said the newspaper. USA Today's view concluded: "Punishing companies that relocate to Bermuda by withholding contracts plays well with the public, but doesn't confront the reality of today's competitive world economy. The challenge for Congress is to reform the tax laws so most companies will want to remain US-based. That's a harder task than deploring the few that leave."