Profits or Patriotism?

This is the question posed by The New York Times reporter David Cay Johnston whose article, “US Companies File in Bermuda to Slash Tax Bills”, appeared on the front page of the newspaper yesterday.

Mr. Johnston says insurance companies led the way to Bermuda, but now manufacturers and other kinds of companies are following, and uses the example of Stanley Works whose board of directors recently agreed to incorporate on the Island and is currently seeking approval from shareholders.

Mr. Johnston says: “Stanley Works, for 159 years a Connecticut maker of hammers and wrenches, is among the latest with plans to become a corporation in Bermuda, where there is no income tax. The company estimates that it will cut its tax bill by $30 million a year, to about $80 million.”

Several Island business leaders criticised the report as inaccurate and damaging to Bermuda's reputation.

Opposition leader and Shadow Finance Minister Dr. Grant Gibbons told The Royal Gazette the article does not help Bermuda's cause since it takes a simplistic, one dimensional look at US corporations bent on trying to avoid taxes.

“It will unnecessarily raise our profile in a very negative way with the US legislators without providing any balance to the positive contributions that Bermuda makes,” he said, and gave the example of reinsurance cover provided to the US through the Island.

One industry insider who was incensed by the article said that although much of the report is correct, there is in particular one gross inaccuracy regarding the regulation of insurance companies.

The article says: “Insurers have flocked to Bermuda to escape most insurance regulations, including how much money they must hold in reserve to pay claims.”

The insider, who did not wish to be named, said: “This is absolutely inaccurate.”

He said Bermuda had gone to great lengths to ensure companies were well regulated and he feels it is his duty to protect Bermuda's reputation against such inaccurate and damaging information.

The insider also criticised the article for saying: “Becoming a Bermuda company is a paper transaction, as easy as securing a mail drop there and paying some fees, while keeping the working headquarters back in the United States.”

Bermuda based Ingersoll Rand is used as an example of a company which pays $27,653 a year to be incorporated in Bermuda, saving the company $40 million annually in US corporate income taxes.

Mr. Johnston spoke to Ingersol Rand's chief financial officer David W. Devonshire who said that the company was not required to conduct any meetings in Bermuda and will not have an office on the Island.

“We just pay a service organisation” to accept mail, he told the New York Times.

However, the industry insider shot back: “That's not quite true. The company will have to have a registered office in Bermuda.”

He said the office is usually provided by a service organisation that is usually owned by one of the local law firms.

The insider added: “There is a registered office and they are required to provide - to anyone who cares to look - a list of directors and officers of the company, as well as a copy of its share register. And the company's constitutional documents are a matter of public record that can be examined at the Registrar of Companies office.”

He added: “This is perhaps a smaller point, but it is factually incorrect.”

An Ernst and Young tax partner told the New York Times that incorporating in Bermuda was currently a market “megatrend” and many corporations were planning to make the move but have yet to announce it.

The partner said in a conference call that patriotism was the only potentially troubling issue that corporations consider before moving to Bermuda, but said that profits trumped patriotism.

The article said the White House has said nothing about these moves and their effect on tax revenues, but Mark A. Weinberger, head of tax policy in the Treasury Department said the moves to Bermuda and other tax havens showed that the American tax system might be driving companies to make such decisions.

He told the newspaper: “We may need to rethink some of our international tax rules that were written 30 years ago when our economy was very different and that now may be impeding the ability of US companies to compete internationally.”

However, The ranking Republican on the US Senate Finance Committee Senator Charles E. Grassley of Iowa, told the New York Times: “There is no business reason for doing this, other than to escape US taxation. I belive the Finance Committee needs to investigate this activity.”

The ranking Democrat on the House Ways and Means Committee, Charles B. Rangel of New York said the patriotism question needed to be debated and told said: “Some companies flying the stars and stripes renounce America when it comes to paying their taxes.

“They choose profits over patriotism. So far, the Bush Treasury Department has shown no interest in stopping these corporate moves, or even drawing attention to them.

Rep. Rangel added: “Supporting America is more than about waving the flag or saluting it - it's about sharing the sacrifice. That's true of soldiers, citizens, and it should be true of big companies, too.”

Efforts to contact Mr. Johnston at the New York Times were unsuccessful yesterday.