A damning report that labelled Bermuda as a ?pure tax haven? was not meant to be a bad reflection on the Island but an indicator of flaws in the American tax system, according to the report?s author.

The findings ? the result of an analysis of US commerce department data by economist Martin Sullivan ? were revealed in the New York Times on Monday, showing US corporations were increasingly shifting profits off American shores and into tax havens.

Mr. Sullivan, who writes regularly for noted US tax journal Tax Notes and who previously worked for the US Treasury as an international taxation specialist, told yesterday that the numbers really underscored a US tax issue.

In the report, called ?Data shows Dramatic Shift of Profits to US tax havens?, Mr. Sullivan reported that US multinational corporations were increasingly shifting tens of billions of dollars in profit to offshore domiciles. In round numbers, the profits posted by the foreign subsidiaries of US corporations in 18 ?tax havens? grew to $149 billion in 2002 compared to $88 billion in 1999.

Mr. Sullivan wrote: ?Subsidiaries of US corporations now generate profits mainly in tax havens rather than in the locations in which they conduct most of their business.?

Speaking yesterday, Mr. Sullivan said he understood that the Island did have a bona fide international business sector actually doing business from these shores, but he said that what may not be as well known was the extent to which American corporations were using tax deferral methods to post profits, even if only on paper, from this domicile. ?They certainly are not all paper corporations, but the amount of profit compared to the actual business activity in Bermuda of these corporations, shows us we have got a problem on our side,? he said.

Mr. Sullivan?s analysis of US commerce data showed that the subsidiaries of American corporations in Bermuda were only paying an effective tax rate of 1.8 percent on before-tax profits of $25.2 billion, although revenue was only marginally higher than income at $34.3 billion. ?Unbeknownst to anyone in Bermuda, paper corporations are parking enormous profits, at least on paper, in Bermuda,? Mr. Sullivan said.

He added: ?My paper was not meant to be a bad reflection on Bermuda; it really is a reflection on US tax laws.?

But he did point out that American corporations with Bermuda affiliates were also not in the wrong.

?They are not doing anything illegal by any means,? Mr. Sullivan said. Although the report is not meant to imply anything bad about Bermuda or any wrongdoing by the American entities themselves, Mr. Sullivan did say the presence of these companies was not necessarily good news for Bermuda as there would be few dollars actually going into the Island?s coffers from this business.

Mr. Sullivan said that the names of the Bermuda entities behind the data were not made available for confidentiality reasons in US Commerce Department data, but he did reveal that the latest figures from the body that compiles these figures, the Bureau of Economic Analysis, did give some information.

In 2002, which is the latest year that data is available, the number of affiliates of US corporations in Bermuda was reported as 331 with combined assets of $307.7 billion, while after-tax income posted was a whopping $24.8 billion.

The 331 affiliates jointly employed 6,400 employees, of which more than half ? 3,700 staff ? were said to be working in the financial services and insurance sectors; 400 employees worked in wholesale trade and the balance in ?various other? sectors.

Although it is not clear how many nominee companies in Bermuda are the subsidiaries of US corporations, recent Government statistics reported that only three percent of the companies incorporated on the Island ? with there being a 77 percent surge in the total number of international companies registered in Bermuda from 1991 to 2000 ? actually have a physical presence here.

Mr. Sullivan said he did not believe the companies included in the US Commerce Department?s data would include firms headquartered on the Island but trading on US stock exchanges, as is the case with numerous Bermuda-based insurance and reinsurance companies.