US Pension Funds May Shun Companies That Move Offshore

by Mike Godfrey, Tax-News.com, New York

12 August 2002

Although Congress is moving towards excluding companies that ‘expatriate’ to Bermuda or other offshore centers from government contracts, it isn’t yet clear that such legislation will eventually make its was onto the statute book. But a more serious danger for firms that try to optimize their international tax situation comes from US pension funds, many of which are considering an investment ban on companies such as Tyco, which operate out of the US but locate their fiscal headquarters in low-tax jurisdictions.

A meeting of many large US pension funds in New York today will discuss the subject, and may decide to ban investment in companies that move offshore.

The issue surfaced when Phil Angelides, the California treasurer, last month called on the California Public Employees' Retirement system (Calpers), the biggest US public pension fund, and its sister fund the California State Teachers' Retirement System (Calstrs), to ban such companies.

Mr Angelides says: ‘You have companies here that are setting up sham offshore mailboxes just to avoid paying taxes. It's not clear that Congress is going to close the loopholes this year.’

Apart from such well-known names as Tyco, Ingersoll-Rand and Nabors, a number of Silicon Valley companies have ‘inverted’, and very many of them use tax havens, Bermuda, the Cayman Islands and Barbados as home for some of their intellectual property rights.

It’s not clear exactly why pension funds would want to punish their members by such a self-denying ordinance when tax optimization is in shareholders’ best interests. OK, there is a wave of post-9/11 patriotism, the ongoing war against terrorism, fallout from the Enron debacle and allegations of financial mismanagement by Tyco, but this is far from adding up to an indictment of Bermuda-based companies as such. More than 13,000 international companies are based on the island.

Mr Angelides, who will attend today's meeting, is on the board of both Calpers and Calstrs. Calpers said last week that the earliest it would officially consider Mr Angelides' proposal was at its August 19 investment board meeting, but the broader issue of divestment would probably be discussed by the board in September or October.

In recent times, Calpers has been voting against reincorporation offshore, saying: "We don't believe it is a good idea and are concerned shareholders will lose protection. It also opens the floodgates for other companies to do this."

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