Report Says US Tax Treaties Just Act As Shield For Corporate Profits

by Mike Godfrey, Tax-News.com, Washington

17 April 2002

In what appears to be fast becoming a vendetta against US companies which choose to reincorporate offshore, New York Times reporter David Cay Johnston has launched another attack, this time focusing on the network of tax treaties which the United States government has established overseas.

In a report published on Tuesday, the NY Times columnist criticised organisations which establish offshore branches in countries with US tax treaties in order to minimise American taxes, citing Barbados, Luxembourg, and - once again - Bermuda as target jurisdictions.

'These treaties, originally intended to serve American economic interests overseas, allow companies through accounting sleight of hand to transform taxable profits into expenses that they can deduct on their American tax return,' the article explained. 'These tax-deductible expenses include interest payments to the overseas company, royalties for use of the company's logo and fees for management advice from the overseas company.'

This new report is likely to fan the flames of controversy in the United States, where several leading lawmakers are already pushing for the tax advantages of Bermuda reincorporation for US companies to be abolished. However, Bermuda is not the sole target of Mr Cay Johnston's ire on this occasion, as he admits that: 'The key is to use treaties with Barbados, Luxembourg and other havens. Companies need the third country and a Bermuda headquarters because the United States does not have a tax treaty with Bermuda.'

Among the tax experts who spoke to the New York Times this week, however, opinion was divided on the issue. Richard E. Anderson, author of 'Income Tax Treaties of the US', observed that:

'If Congress wants to say this is a time of war and you can't do this any more and if you do we will put you in handcuffs and throw you in prison that is fine with me. But until they do, it is perfectly appropriate to do what the law provides.'

However, Lee Sheppard, a lawyer who also writes for the Tax Notes journal, told the newspaper that he believed that US companies which establish this kind of structure are not abiding by the spirit of the law:

'The real problem here is that Congress trusts these guys to act responsibly and so do the tax administrators at Treasury and the IRS, and no one who writes the laws and the treaties and the regulations ever thought they would behave like this.'

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