[Congressional Record Volume 148, Number 65 (Monday, May 20, 2002)]
[Extensions of Remarks]
[Pages E865-E866]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      CONGRESS SHOULD CLOSE THE LOOPHOLE ON CORPORATE TAX DODGING

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                           HON. GEORGE MILLER

                             of california

                    in the house of representatives

                          Monday, May 20, 2002

  Mr. GEORGE MILLER of California. Mr. Speaker, I believe most 
taxpayers will share my deep concern at the ongoing practice of 
American corporations reincorporating offshore to avoid their tax 
responsibilities to state and federal taxpayers.
  Several months ago, the New York Times broke the story that more and 
more American companies are avoiding U.S. corporate income taxes by 
reincorporating in tax havens like Bermuda and the Cayman Islands. This 
means they can keep their headquarters and all of their operations in 
the United States, continue to benefit from the ``Made in the USA'' 
label, but also pay a small fee to maintain a mail drop in another 
country (like Bermuda) and dodge tens of millions of dollars in U.S. 
taxes.
  By dodging their tax responsibilities, these companies claim they are 
acting in the best interests of their shareholders. But now it turns 
out that even their investors--like taxpayers--are getting the short 
end of the stick.
  Now the New York Times reports today that ``the government's loss in 
taxes is the chief executives' gain.'' I am inserting for my colleagues 
a complete copy of today's article.
  Top executives at Connecticut-based Stanley Works, for example, win 
take home up to fifty-eight cents for every dollar the company avoids 
in taxes. These executives will reap millions of dollars through huge 
bonuses and stock option windfalls, leaving workers, shareholders, and 
the rest of taxpaying America to pay the bill.
  Today's article provides further justification for bringing to a vote 
in the House a bill by my colleagues Jim Maloney of Connecticut and 
Richard Neal of Massachusetts--the Corporate Patriot Enforcement Act of 
2002. There is no reason for Republican leaders to deny Congress--and 
the American people--the opportunity to correct this gross injustice.
  We don't need a temporary prohibition to this practice, as some are 
suggesting. We need to end it immediately. If Stanley Works and other 
companies are indeed proud to be American companies, they should stay 
American--in both practice and in name and pay their fair share for the 
benefits of being an American company.

                [From the New York Times, May 20, 2002]

        Officers May Gain More Than Investors In Move to Bermuda

                        (By David Cay Johnston)

       The parade of companies that in recent months have proposed 
     incorporating in Bermuda to reduce their American taxes 
     usually provide the same rationale. They are doing it, they 
     say, to increase their profits and, in turn, to benefit their 
     shareholders.
       But left unsaid is another fact: the biggest beneficiaries 
     could actually be the chief executives of these companies. At 
     a minimum, these executives could pocket millions in 
     additional pay. In some cases, they could well take home 
     extra pay equal to half the company's tax savings or more. In 
     effect, the government's loss in taxes is the chief 
     executives' gain, in the form of higher pay, bonuses and 
     profits on the sale of stock options.
       While each company's Bermuda strategy differs in details, 
     chief executives always profit because their compensation is 
     based partly on the profitability of the company or its stock 
     price. If taxes fall, both would be expected to rise.
       But, in some cases, like that of Stanley Works, other 
     shareholders may not fare nearly so well, because many would 
     owe taxes that the chief executive does not.
       Eugene M. Isenberg, of Nabors Industries; John M. Trani, of 
     Stanley Works, H. John Riley Jr., of Cooper Industries; 
     Herbert L. Henkel, of Ingersoll-Rand, and Bernard J. Duroc-
     Danner of Weatherford International are among the chief 
     executives who stand to benefit.
       At Nabors Industries of Houston, the world's largest 
     operator of land-based oil drilling rigs, Mr. Isenberg could 
     see his pay rise by tens of millions of dollars each year if 
     shareholders approve on June 14 his plan to incorporate in 
     Bermuda and establish the company's legal residency in 
     Barbados, said Brian Foley, an executive compensation lawyer 
     who analyzed Mr. Isenberg's employment contract.
       Mr. Isenberg is already well paid. Over the past two years, 
     he made more than $126 million, including profits from the 
     sale of stock options, from a company with $2 billion in 
     annual revenues. That is partly because his contract pays him 
     6 percent of the company's cash flow--a measure of profits 
     before certain charges are subtracted--once cash flow exceeds 
     a certain amount. The company's No. 2 executive gets 2 
     percent of this cash flow.
       The company expects the Bermuda move to increase cash flow 
     significantly. Mr. Foley and five other compensation lawyers 
     said that beginning in the year after the Bermuda move, the 
     related payments to Mr. Isenberg and his deputy also should 
     begin rising.
       What is more, Mr. Foley said, details of the Nabors stock 
     option plan indicate that Mr. Isenberg will make an 
     additional $100 million on the exercise of his 10.3 million 
     options of Nabors shares, currently at $42.99, rise by $9.72. 
     The company has said that lower taxes and higher cash flow 
     should increase share prices, but has not said by how much.
       Mr. Isenberg owns 1.1 million shares outright, but it is 
     not known how many of these are in retirement and charitable 
     accounts, which would shield his gains from taxes. Mr. 
     Isenberg declined to comment, as did a spokesman for the 
     company.
       At Stanley Works, the New Britain, Conn., tool maker, Mr. 
     Trani stands to pocket an amount equal to 58 cents of each 
     dollar the company would save in corporate income taxes in 
     the first year after its proposed move to Bermuda.
       Mr. Trani has estimated that, as a result of the tax 
     savings alone, the company's stock should rise 11.5 percent. 
     Corporate income taxes would fall $30 million annually, while 
     the value of his existing options would increase $17.5 
     million if the stock rises as much as he expects.
       In a presentation to Wall Street analysts, Mr. Trani 
     estimated that 60 percent of Stanley shares are held in 
     retirement and charitable accounts where no tax will be due. 
     Investors holding Stanley shares in taxable accounts, 
     however, would suffer losses during that first year. They 
     would have to pay $150 million in capital gains taxes, he 
     estimated, on holdings worth $1.6 billion, so the deal can go 
     through. Even if their shares rise 11.5 percent, they will 
     barely break even after taxes.
       At the time of the move, Mr. Trani, however, would owe less 
     than $50,000, less than he earns each week in salary and 
     bonuses, on his 16,688 shares where the gains are taxable. 
     The rest of his holdings are in options and retirement 
     accounts, neither of them taxable in the move. Mr. Trani has 
     campaigned hard for the Bermuda vote, personally calling 
     pension fund trustees and having executives call Stanley 
     employees at home.
       Mr. Trani, in an interview, said that, to avoid any taxes, 
     he might give his taxable holdings to charity. He would then 
     be able to reduce his federal income taxes by about $300,000.
       Mr. Trani has said that building wealth for all 
     shareholders is his only motive in proposing the move to 
     Bermuda.
       The move is more likely to greatly benefit Stanley 
     shareholders over the longer run, which is how Mr. Trani 
     prefers to look at it. If the move to Bermuda doubles the 
     company's stock price in eight years--a prospect that the 
     company has no quarrel with--all shareholders will increase 
     their wealth by about $3.3 billion. The government will lose 
     $240 million of corporate income taxes.
       Such an increase would no doubt mean a bigger salary and 
     bonus for Mr. Trani. In addition, if he receives all the 
     additional options he is eligible for under the company's 
     current plan, he could gain at least $385 million from 
     exercising those options, or far more than the taxes the 
     company would save.
       On May 9, Stanley shareholders approved the Bermuda move by 
     the slimmest of margins. But after union officials accused 
     the company of rigging the outcome, and the state of 
     Connecticut sued to throw the election out, the company 
     announced a new election to be held later this year. The 
     company denied any wrongdoing.
       Spokesmen for Cooper Industries, Ingersoll-Rand and 
     Weatherford International all said that increased pay for 
     executives was the inevitable result of packages that reward 
     executives for lowering costs, including taxes, and 
     increasing share prices. John Breed, the Cooper spokesman, 
     noted that none of the company's executives received bonuses 
     last year.
       Simply by changing their corporate addresses to Bermuda, 
     which has no income tax, a growing number of large American 
     businesses are saving tens of millions each in United States 
     taxes on profits made overseas. Also establishing a separate 
     legal residence in another tax haven, like Barbados,

[[Page E866]]

     allows companies to save on taxes on their United States 
     profits as well.
       By reducing their tax bills, companies can increase their 
     profits and better compete against rivals both in the United 
     States and abroad. Many American companies assert that some 
     profits are taxed twice, at home and abroad, putting them at 
     an unfair disadvantage against rivals in countries abroad 
     with lower or no taxes.
       But the corporate flight from taxes has raised concerns 
     among some members of both parties in Congress. Bipartisan 
     legislation to block such moves has been proposed, but House 
     Republican leaders have refused to allow it to reach a vote.
       Congress permits companies to move their headquarters 
     outside the United States, but it requires shareholders to 
     pay taxes on capital gains earned until that time. These 
     taxes can be paid by the company or by the shareholders. The 
     Stanley board decided that shareholders should foot the bill.

     

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