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IRS moves to keep companies from avoiding taxes by moving to Cayman and Bermuda
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| Published on Saturday, September 19, 2009 | Email To Friend Print Version
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By Ryan J. Donmoyer
WASHINGTON, USA (Bloomberg) -- The Internal Revenue Service is moving to bolster enforcement of a 2004 law that bars companies from avoiding US taxes by moving their headquarters offshore to Bermuda and the Cayman Islands.
The tax agency said in a notice that it has “become aware” of transactions designed to subvert a test that determines whether a company’s move offshore was for legitimate business reasons or just to avoid US taxes.
“These transactions are inconsistent with the purposes” of the 2004 law, according to the IRS notice, which banned them starting Sept. 17.
The action is the IRS’s latest effort to stop practices that let US companies including Tyco International Ltd., Foster Wheeler AG and Noble Corp. avoid taxes by establishing nominal headquarters in low-tax countries such Bermuda and the Cayman Islands while keeping their operational headquarters in the US.
Senator John Kerry of Massachusetts, the Democratic nominee for president in 2004, made tax-dodging companies with offshore headquarters a campaign issue by labeling them “Benedict Arnold companies.”
Congress banned the practice in 2004 by requiring US companies with offshore headquarters to continue paying US taxes when at least 80 percent of their ownership remains the same as before the move.
Reuven Avi-Yonah, director of the University of Michigan Law School’s International Tax program, said the notice indicates that companies are searching for, and in some cases succeeding in finding, ways to circumvent the 2004 law, which he said is flawed.
“Any share ownership-based test is subject to evasion and ways will be found around this as well,” Avi-Yonah said.
President Barack Obama also is seeking to raise $190 billion over the next decade by outlawing other offshore tax- avoidance techniques commonly used by US-based companies.
The transaction targeted by the IRS seeks to subvert an ownership test that determines whether a company’s move offshore was for legitimate business. A company seeking to escape US taxes would create a foreign entity and an investor would buy 21 percent of that entity.
Typically, the investor would be a private-equity firm or other capital pool, according to IRS and Treasury Department officials who spoke on condition of anonymity.
The IRS and Treasury officials said they couldn’t identify whether any such transactions had yet been carried out, though the Treasury official said government officials had seen materials promoting them.
Robert Willens, founder of Robert Willens LLC, which advises investors on accounting and tax rules, said the IRS may have feared that a number of companies were preparing to use the transaction.
“Presumably, a fair number of domestic corporations are ‘expatriating’ and avoiding the full rigors” of the 2004 law, Willens said. “Or else, the IRS would not have taken the drastic step of issuing a notice announcing its intention to alter the regulations.”
Robert Stewart, a spokesman for the Private Equity Council, a Washington trade association for buyout firms such as KKR & Co. LP, the Blackstone Group, and the Carlyle Group, said the association’s tax lawyers would have to examine the notice before he could comment.
Willard Taylor, an international lawyer at Sullivan & Cromwell LLP in New York, said he had been told there were deals in the works.
“If somebody says ‘I want to move offshore,’ that’s the first thing the bankers suggest,” he said of the IRS-described transactions. “It’s all that’s really left” to get around the law, so the new rules “are important regulations,” he said. | | | | Reads : 1461 | | | |
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