Week of June 24, 2002
Snapshot from the Field
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Stanley's Bermuda Move Scrutinized
Congress Considers Clampdown on Offshore 'Re-Incorporations'
By JACK LYNE,
Site Selection Executive Editor of Interactive Publishing
WASHINGTON, D.C. Stanley Works (www.stanleyworks.com), based in New Britain, Conn., for its entire 158-year history, is angling to change its corporate address. And the largest U.S. toolmaker wants a new postal drop that's totally outside the United States - in Bermuda, specifically.
Stanley, however, isn't headed for a headquarters relocation. The new Bermuda address wouldn't shift a single business operation for the 14,400-employee company. What Stanley wants instead is the same thing that a host of other companies - including Accenture, Cooper Industries, Foster Wheeler, Global Crossing, Globalstar, Ingersoll-Rand, Monday (formerly PriceWaterhouse Consulting), Nabors Industries, Seagate Technology and Tyco International - already have: an offshore shell entity that would take a big bite out of its U.S. taxes.
"This strategic initiative will strengthen our company over the long term," Stanley Works Chairman and Chief Executive Officer John Trani explained. "An important portion of our revenues and earnings are derived from outside the United States, where nearly 50 percent of our people reside. Moreover, an increasing proportion of our materials [is] being purchased from global sources. This change will create greater operational flexibility, better position us to manage international cash flows and help us to deal with our complex international tax structure."
Politically, however, the issue is far more thorny. Such technical changes of corporate venue - or "re-incorporations," as they're called - have, in fact, become the business-location hot button in America's post-9/11, post-Enron-meltdown environment.
"It's simply outrageous that there's this corporate rush to put up a shingle in Bermuda and still put a USA stamp on their products," said Rep. Richard Neal (D-Mass.). Neal, a member of the House Ways and Means Committee, is one of 25 cosponsors (including two Republicans) of a bill that would require companies that re-incorporate in a foreign nation to continue paying U.S. taxes if their stock remains largely in the hands of its former shareholders.
However, other prominent politicos - including many major Bush administration figures - maintain that the flaw is not in such offshore strategies. The rub instead rests with an outmoded U.S. tax code sorely in need of revamping, they say.
"Trying to put up a Berlin Wall in response to these transactions is something that is unlikely to work," Pamela Olson, Treasury Dept. acting assistant secretary for tax policy, told a House Ways and Means Committee hearing earlier this month. "Companies will get around it.
Senator: 'Renouncing Their U.S.
Opponents of re-incorporation, for example, assert that relocated U.S. companies in Bermuda alone cost the U.S. Internal Revenue Service an estimated US$70 billion in lost tax revenue each year. House Minority Leader Dick Gephardt (D-Mo.), a supporter of Rep. Neal's bill, maintains that only four companies relocating offshore cost the government $525 million in annual taxes. Re-incorporation opposition, however, crosses partisan lines.
Sens. Max Baucus (D-Mont.), and Charles Grassley (R-Iowa), for example, both blasted Ingersoll-Rand and Stanley on the Senate floor earlier this year.
Grassley, mentioning that both companies make sales to the government, charged the two firms with "evading U.S. taxes and making profits off the taxes of middle-class Americans who are paying their taxes honestly." Baucus accused the corporate duo of "in effect, renouncing their U.S. citizenship to cut their taxes."
Stanley: $30 Million a Year in SavingsCountering those numbers are the substantial bottom-line benefits cited by re-incorporating companies.
Trani, for example, says that establishing Stanley Works Ltd. in Bermuda would provide "enhanced flexibility to manage worldwide tax liabilities, [which] should reduce our global effective tax rate from its current 32 percent to within the range of 23 percent to 25 percent." The corporate address in Bermuda, which imposes no direct taxation, would save Stanley some $30 million a year in U.S. taxes, Stanley officials say. (The company would, however, continue to pay some $80 million in annual taxes to the federal government from its U.S. operations, Stanley points out.)
The Bermuda re-incorporation is also essential in remaining competitive, Stanley maintains. "Today, the company pays an excessive amount of tax relative to our foreign competitors," a Stanley position asserted. "If the company is not competitive, there are no taxes and no jobs."
Some of Stanley's biggest "foreign" competitors are, in fact, U.S. companies that have re-incorporated offshore. There's New Jersey-headquartered Ingersoll-Rand, for example, the parent of Torrington Co., one of Stanley's principle competitors, which re-incorporated on Dec. 31 in Bermuda. Ohio-headquartered Cooper Industries, Stanley's major rival in the handtool business, followed a similar strategy, setting up a Bermuda shell entity in February. Cooper's move will generate "additional cash flow of approximately $55 million annually and add approximately $.58 per share to earnings," the company said in a statement.
The ante required to achieve such savings is minimalism incarnate. In Bermuda, for example, companies pay a $1,000 fee to file re-incorporation papers. After that, firms pay an annual fee of $750.
Most companies maintain only skeleton crews in their re-incorporated operations. Global Crossing, for example, has a staff of four stationed in Hamilton, Bermuda. The bankrupt firm's headquarters staff remains anchored in tonier digs in Beverly Hills, Calif.
Temporary Moratorium The re-incorporation debate will likely boil down to politically resolving questions vis-à-vis the equitability of U.S. corporate tax laws.
The Treasury Dept. is currently marshalling a speedy study on just that issue. Significantly, Treasury Secretary Paul O'Neill is strongly on record as a zealous critic of the current tax system. O'Neill, along with other prominent Treasury officials, maintains that the U.S. system is flawed in taxing all income regardless of where it's earned. In contrast, European countries, for example, only tax companies for earnings within their borders.
In addition, measures like the Neal-sponsored bill could backfire, Treasury's Olson warned. Permanently removing re-incorporation's tax advantages could trigger greater foreign ownership of U.S. companies, she suggested.
Re-incorporation opponents, however, point to the low level of current U.S. corporate taxes, now near an all-time nadir as a percentage of Gross Domestic Product. Corporations paid 1.3 percent of U.S. GDP last year, according to Citizens for Tax Justice. By comparison, U.S. corporations paid some 4.5 percent of GDP during the Truman and Eisenhower administrations.
Despite the marked differences in opinion, some sort of congressional action is likely. U.S. stock market investors' confidence in corporate financial statements is already shaky in the wake of glaring Enron-era improprieties. The mere appearance of a massive offshore corporate migration could spur a stock market collapse, some financial analysts maintain. In addition, appearing to dodge taxes won't likely play well in a nation preoccupied with counter-terrorism.
One of a trio of bills currently in the works in Congress could resolve the re-incorporation squabble.
There's the legislation that Neal is cosponsoring, The Corporate Patriot Enforcement Act of 2002. A bipartisan Senate bill, the Reversing the Expatriation of Profits Offshore Act, would similarly continue to tax nominally re-incorporating firms as if they were still U.S. companies. Then there's the House-initiated Patriotic Purchasing Act of 2002, which would eliminate firms that re-incorporate offshore from eligibility for federal contracts.
The frontrunner solution for the moment, however, looks to be a moratorium on re-incorporations until Dec. 31, 2003. The Bush administration said this month that it would support a short-term moratorium, but only if the freeze is a temporary step toward broad-based business tax reforms. "Temporary moves might be appropriate," Olson said at the House hearing. "A moratorium would be preferable to a complete block on these transactions."
Politicos haven't, however, addressed what impact - if any - a new law would have on taxing U.S. firms that have already achieved re-incorporation.
Bermuda Buckles DownMeanwhile, the dustup has spilled over into re-incorporation target nations. Bermuda's central bank, for example, has stepped up its vigilance in screening companies that apply for re-incorporation.
The controversy's spillover notwithstanding, Bermuda's well-educated work force has helped make it a bona fide business center - and one with potent anti-fraud and money-laundering regulations in place. The Caribbean nation has a strong base of companies, particularly in the insurance sector, that have actually relocated their headquarters. "Bermuda wants legitimate business and only legitimate business," Cheryl Lister, who chairs Bermuda's monetary authority, told CNBC. "We are not interested in companies that want to break the laws in their home country."
(Editor's note: Re-incorporation is currently a perfectly legal maneuver.)
Stanley Hopes for Second Shareholder VoteBack at its Connecticut headquarters, Stanley is readying for a second shareholder vote on re-incorporation. Shareholders actually narrowly approved the re-incorporation in a May 9 vote. The 67.2 percent of all shares supporting the change just attained the needed two-thirds majority.
That May 9 vote, however, remains shrouded in doubt. Connecticut State Attorney General Richard Blumenthal early this month asked the U.S. Securities and Exchange Commission to "investigate all the circumstances" of Stanley's shareholders vote. Blumenthal further asked the SEC to block a shareholders' vote until the investigation is completed.
Both Stanley employees and re-incorporation opponents have alleged that the company confused shareholders with conflicting voting information. Union officials, for example, claim that a Stanley letter notified employees that failure to return their ballots would count as a vote against re-incorporation. But shareholders, union officials charge, received a Stanley communication that said that failing to return a proxy would count as a vote for re-incorporation.
"The company believes," Stanley responded in a statement, "that there is no reason for the revote to be delayed and that the investigation requested today by Connecticut Attorney General Blumenthal is unnecessary and unwarranted."
The re-incorporation controversy has thrown some high-glare publicity on re-incorporation's major financial impact on Stanley shareholders. That publicity has underscored a recent IRS strategy change that treats offshore company moves as stock sales. That change will leave many Stanley stockholders facing sizeable capital-gains taxes. Shares held more than 12 months by taxpayers in the 27.5-percent and higher tax bracket would face a long-term capital gains tax of 20 percent. Taxpayers in the 15-percent tax bracket would face a 10-percent capital-gains levy.
Stanley shareholders' combined tax liability will run some $150 million, financial analysts have estimated. But tax savings, countered Vice President of Investor Relations Gerard Gould, will produce larger dividends and higher share prices.
Stanley is still hoping for the second shareholder vote this summer. Congressional action, however, could make such hopes moot.
©2002 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.