US Treasury To Investigate Offshore Business Exodus

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

01 March 2002

In response to a swelling chorus of demands from members of Congress anxious about the seepage of the US corporate tax base to offshore jurisdictions such as Bermuda, the Treasury Department said yesterday it would study both the reasons companies decide to relocate, and the tax and other consequences that result.

Other factors influencing the Treasury to be seen to take action are the wave of patriotism that has swept America since the September 11th attacks, and the accounting worries that have surrounded major Bermuda-based corporations such as Global Crossing (in administration) and Tyco.

Waves of US companies have made the move offshore, led by the insurance industry, prompting those companies that can't leave to demand action by Congress. Recent stock-price declines have made relocation cheaper under tax rules, and it's thought that major accounting practices are now actively encouraging their clients to go. In many cases of course the relocation is largely a paper exercise - the balance sheet may move, but the company's working assets stay where they are.

Many business tax experts say that the relocations merely reflect the antiquated basis of US taxation of multinationals. "We need to make sure that there are no inadequacies in our current tax rules that facilitate the transactions or that can be taken advantage of as a consequence of the reincorporation," said Mark Weinberger, Assistant Treasury Secretary for Tax Policy. "We must also understand if there are aspects of our tax system that are driving companies for reasons of competitiveness to consider leaving the US. 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,' he explained.

Support for action in Congress is mostly Democrat, although Republican Senator Charles Grassley has called for a Senate Finance Committee investigation into the rising number of defections, observing that: 'There is no business reason for doing this, other than to escape US taxation.'

At a congressional hearing this week, Rep. Richard Neal of Massachusetts questioned Treasury officials about the problem, and plans to introduce legislation next week that would impose US taxation on companies that move their headquarters offshore without actually relocating operations. He dismissed the Treasury's announcement yesterday as "an effort to postpone a decision."

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