Information on Federal Contractors That Are Incorporated Offshore
(01-OCT-02, GAO-03-194R).
Some U.S.-based multinational companies have found that the
effective tax rate on income earned from foreign sources can be
reduced if they are incorporated in countries that either do not
tax corporate income at all or tax the income at a lower rate
than the U.S. corporate tax rate. Consequently, some U.S.-based
companies incorporate from the outset in these so-called "tax
haven" countries. In addition, some companies that were
incorporated in the United States have reincorporated in tax
haven countries through "corporate inversion transactions."
According to the Department of the Treasury, the term "inversion"
is used to describe a transaction through which a U.S.-based
multinational company restructures its corporate group so that
after the transaction the ultimate parent of the corporate group
is a foreign corporation. After an inversion transaction,
shareholders of the former U.S. parent company hold stock of the
newly formed foreign parent, and the operations of the company
are unchanged. Treasury also noted that there has been a marked
increase recently in the frequency, size, and profile of
inversion transactions. Four of the top 100 federal contractors
that are publicly traded corporations are incorporated in a tax
haven country. The four corporations accounted for $2.7 billion
for contract obligations in fiscal year 2001, which is 2.6
percent of the $102 billion in federal contract obligations
awarded to the top 100 publicly traded corporations. Three of the
four corporations have engaged in transactions that have been
characterized as inversions.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-194R
ACCNO: A05221
TITLE: Information on Federal Contractors That Are Incorporated
Offshore
DATE: 10/01/2002
SUBJECT: Foreign corporations
Multinational corporations
Taxes
SEC Electronic Data Gathering, Analysis,
and Retrieval System
Information on Federal Contractors That Are Incorporated Offshore
(01-OCT-02, GAO-03-194R).
Some U.S.-based multinational companies have found that the
effective tax rate on income earned from foreign sources can be
reduced if they are incorporated in countries that either do not
tax corporate income at all or tax the income at a lower rate
than the U.S. corporate tax rate. Consequently, some U.S.-based
companies incorporate from the outset in these so-called ''tax
haven'' countries. In addition, some companies that were
incorporated in the United States have reincorporated in tax
haven countries through ''corporate inversion transactions.''
According to the Department of the Treasury, the term
''inversion'' is used to describe a transaction through which a
U.S.-based multinational company restructures its corporate group
so that after the transaction the ultimate parent of the
corporate group is a foreign corporation. After an inversion
transaction, shareholders of the former U.S. parent company hold
stock of the newly formed foreign parent, and the operations of
the company are unchanged. Treasury also noted that there has
been a marked increase recently in the frequency, size, and
profile of inversion transactions. Four of the top 100 federal
contractors that are publicly traded corporations are
incorporated in a tax haven country. The four corporations
accounted for $2.7 billion for contract obligations in fiscal
year 2001, which is 2.6 percent of the $102 billion in federal
contract obligations awarded to the top 100 publicly traded
corporations. Three of the four corporations have engaged in
transactions that have been characterized as inversions.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-194R
ACCNO: A05221
TITLE: Information on Federal Contractors That Are Incorporated
Offshore
DATE: 10/01/2002
SUBJECT: Foreign corporations
Multinational corporations
Taxes
SEC Electronic Data Gathering, Analysis,
and Retrieval System
******************************************************************
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GAO-03-194R
GAO GAO- 03- 194R Federal Contractors Incorporated Offshore
United States General Accounting Office Washington, DC 20548
October 1, 2002 The Honorable Henry A. Waxman Ranking Minority Member
Committee on Government Reform House of Representatives
The Honorable Jim Turner Ranking Minority Member Subcommittee on
Technology and
Procurement Policy Committee on Government Reform House of Representatives
Subject: Information on Federal Contractors That Are Incorporated Offshore
Some U. S.- based multinational companies have found that the effective
tax rate on income earned from foreign sources can be reduced if they are
incorporated in countries that either do not tax corporate income at all
or tax the income at a lower rate than the U. S. corporate tax rate.
Consequently, some U. S.- based companies incorporate from the outset in
these so- called *tax haven* countries. 1 In addition, some companies that
were incorporated in the United States have reincorporated in tax haven
countries through *corporate inversion transactions.*
According to the Department of the Treasury, the term *inversion* is used
to describe a broad category of transactions through which a U. S.- based
multinational company restructures its corporate group so that after the
transaction the ultimate parent of the corporate group is a foreign
corporation. 2 Generally, after an inversion transaction, shareholders of
the former U. S. parent company hold stock of the newly formed foreign
parent, and the operations of the company are unchanged. Treasury also
noted that there has been a marked increase recently in the frequency,
size, and
1 The term *tax haven* is generally used in research and the media to
refer to countries that have no or nominal taxes. Multinational companies
incorporated in a tax haven may have U. S. based subsidiaries that pay U.
S. taxes. The Organization for Economic Cooperation and Development (OECD)
has developed criteria for identifying countries that may engage in
harmful tax competition in the form of tax havens.
2 Department of the Treasury, Office of Tax Policy, Corporate Inversion
Transactions: Tax Policy Implications (Washington, D. C.: May 17, 2002).
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 2 profile of
inversion transactions. This year, several bills have been introduced in
Congress that address such transactions. You asked us for information on
the extent to which large federal contractors are incorporated offshore.
In response, we agreed to determine which, if any, of the largest 100
publicly traded federal contractors are incorporated in a tax haven
country or have engaged in a transaction characterized by independent
observers as an inversion.
We used the General Services Administration*s listing of top federal
contractors to identify (1) the top 100 federal contractors that are
publicly traded corporations and (2) the total dollar amount that was
obligated in fiscal year 2001. We reviewed various public documents filed
by the corporations with the Securities and Exchange Commission (SEC) on
its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system to
identify the state or country where the contractor is incorporated. When
the data we needed to do our analysis were not available on EDGAR, we
obtained our information from the corporations* Web sites and from
published reports. To determine whether a country is considered a tax
haven, we made reference to the work the Organization for Economic
Cooperation and Development did on tax haven countries. 3 Finally, to
determine whether a transaction has been characterized as an inversion, we
reviewed the corporations* SEC filings and reports published by
organizations, including Congressional Research Service and the New York
State Bar Association Tax Section. We did our work in August and September
2002 in accordance with generally accepted government auditing standards.
Results
Four of the top 100 federal contractors that are publicly traded
corporations are incorporated in a tax haven country. Table 1 lists the
four corporations, the dollar amount of their federal contract obligations
in fiscal year 2001, the country where they are incorporated, and the year
of incorporation.
3 Organization for Economic Cooperation and Development, Towards Global
Tax Co- operation: Progress in Identifying and Eliminating Harmful Tax
Practices (2000); Organization for Economic Cooperation and Development,
The OECD*s Project on Harmful Tax Practices: The 2001 Progress Report
(November 2001); and OECD*s List of Unco- operative Tax Havens (April 18,
2002). We referred to OECD*s list of 31 countries that have made
commitments to end *harmful tax practices* by December 31, 2005, as well
as to OECD*s list of seven countries that have not made such commitments.
The commitments are to transparency and effective exchange of information.
In this report we refer to these 38 countries as tax havens.
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 3
Table 1: Federal Contractors, out of the Top 100 Publicly Traded Federal
Contractors, Incorporated in a Tax Haven Country
Name of corporation Federal contract
obligations FY 2001 (dollars in thousands) Incorporation
location Incorporation date
McDermott International, Inc. 1,885,243 Panama 1983 Foster Wheeler, Ltd.
286,298 Bermuda 2001 Accenture, Ltd. 278,990 Bermuda 2001 Tyco
International, Ltd. 206,387 Bermuda 1997 Source: GAO analysis of General
Services Administration contract data and SEC records.
The four corporations accounted for about $2.7 billion for contract
obligations in fiscal year 2001, which is about 2.6 percent of the $102
billion in federal contract obligations awarded to the top 100 publicly
traded corporations. (See enc. I for a list of the top 100 publicly traded
federal contractors.)
Three of the four corporations (McDermott International, Inc., Foster
Wheeler, Ltd., and Tyco International, Ltd.) have engaged in transactions
that have been characterized as inversions. 4 The enclosure provides more
information on how the four corporations became incorporated offshore.
We are sending copies of this letter to the Chairman of the House
Committee on Government Reform and the Chairman of the Subcommittee on
Technology and Procurement Policy of the House Committee on Government
Reform; the Chairmen and Ranking Minority Members of the House Committee
on Ways and Means and the Senate Committee on Finance; and other
interested parties. We will also make copies available to others upon
request. In addition, this letter will be available at no charge on the
GAO Web site at http:// www. gao. gov.
If you or your staff have any questions, please contact me on (202) 512-
9110 or Ralph Block on (415) 904- 2150.
James R. White Director, Tax Issues
Enclosure 4 New York State Bar Association Tax Section, Report on Outbound
Inversion Transactions, Report No. 1014 (Albany, N. Y.: May 24, 2002) and
Congressional Research Service, Firms That Incorporate Abroad for Tax
Purposes: Corporate *Inversions* and *Expatriation* (Washington, D. C.:
Sept. 20, 2002).
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 4 Enclosure
Information on Corporations Receiving Federal Contracts and Those That Are
Incorporated Offshore
The following table lists the top 100 federal contractors that are
publicly owned corporations, the dollar amount of their fiscal year 2001
federal contracts, the state or country where they are incorporated, and
the year of incorporation.
Table 2: Top 100 Publicly Traded Federal Contractors
Rank Company name Federal contract
obligations FY 2001 (dollars in thousands) a Incorporation
location Incorporation
date
1 Lockheed Martin Corporation 17, 951, 303 Maryland 1995 2 The Boeing
Company 14,362,243 Delaware 1916 3 Raytheon Company 6, 123,605 Delaware
1998 4 Newport News Shipbuilding, Inc. 5,689,359 Delaware 1996 5 Northrop
Grumman Corporation 5,636,124 Delaware 1985 6 General Dynamics Corporation
4,928,238 Delaware 1952 7 United Technologies Corporation 3,500,465
Delaware 1934 8 Science Applications International Corporation 2,654,492
Delaware 1984 9 TRW, Inc. 2,499, 816 Ohio 1916 10 AmerisourceBergen
Corporation 1,900,969 Delaware 2001 11 McDermott International, Inc.
1,885,243 Panama 1983 12 General Electric Company 1,808,984 New York 1892
13 American Management Systems, Inc. 1,675,676 Delaware 1970 14 Computer
Sciences Corporation 1,648,495 Nevada 1959 15 Honeywell International,
Inc. 1, 442,018 Delaware 1985 16 BAE Systems, plc. 972,526 United Kingdom
1977 17 Health Net, Inc. 944,618 Delaware 1990 18 Fluor Corporation
931,885 Delaware 2000 19 ITT Industries, Inc. 879,772 Indiana 1995 20
Alliant Techsystems, Inc. 862,269 Delaware 1990 21 Exxon Mobil Corporation
707,283 New Jersey 1882 22 The IT Group, Inc. 671,977 Delaware 1987 23
Philipp Holzmann AG 655,360 Germany 1849 24 Textron, Inc. 600,533 Delaware
1967 25 Oshkosh Truck Corporation 566,511 Wisconsin 1917 26 Electronic
Data Systems Corporation 560,767 Delaware 1994 27 Motorola, Inc. 552,520
Delaware 1947 28 Unisys Corporation 549,905 Delaware 1999 29 Jacobs
Engineering Group, Inc. 536,130 Delaware 1987 30 Halliburton Company
534,177 Delaware 1924 31 Washington Group International, Inc. 531,234
Delaware 1993 32 WorldCom, Inc. 503,811 Georgia 1983 33 International
Business Machines Corporation 498,656 New York 1911 34 Dell Computer
Corporation 493,423 Delaware 1987 35 L- 3 Communications Holdings, Inc.
482,248 Delaware 1997 36 BP, plc 480,858 United Kingdom 1998 37 Affiliated
Computer Services, Inc. 451,067 Delaware 2001
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 5
38 DaimlerChrysler AG 435,921 Germany 1998 39 The Titan Corporation
424,087 Delaware 1986 40 Cardinal Health, Inc. 422,120 Ohio 1979 41 Anteon
International Corporation b 406,304 Delaware 1996 42 GTSI Corporation
402,408 Delaware 1983 43 AT& T Corporation 398,326 New York 1885 44
Humana, Inc. 394,135 Delaware 1964 45 Harris Corporation 389,970 Delaware
1926 46 CACI International, Inc. 380,524 Delaware 1985 47 Rockwell
International Corporation 372,131 Delaware 1996 48 The Wackenhut
Corporation 356,968 Florida 1958 49 Rolls- Royce, plc 327,792 United
Kingdom 1906 50 Engineered Support Systems, Inc. 321,384 Missouri 1981 51
Valero Energy Corporation 310,202 Delaware 1981 52 Goodrich Corporation
308,283 New York 1912 53 Johnson Controls, Inc. 299,592 Wisconsin 1900 54
CNF, Inc. 295,113 Delaware 1958 55 Anthem, Inc. 293,153 Indiana 2001 56
ManTech International Corporation 291,513 New Jersey 1968 57 Foster
Wheeler, Ltd. 286,298 Bermuda 2001 58 Accenture, Inc. 278,990 Bermuda 2001
59 URS Corporation 262,489 Delaware 1991 60 SRA International, Inc.
234,926 Delaware 1984 61 Rockwell Collins, Inc. 234,075 Delaware 2001 62
The Procter and Gamble Company 224,212 Ohio 1837 63 General Motors
Corporation 222,440 Delaware 1916 64 FedEx Corporation 214,907 Delaware
1997 65 Oracle Corporation 212,468 Delaware 1986 66 Tetra Tech, Inc.
211,705 Delaware 1988 67 Verizon Communications, Inc. 207,210 Delaware
1983 68 Tyco International, Ltd. 206,387 Bermuda 1997 69 Motor Oil
(Hellas) Corinth Refineries S. A. 199,462 Greece 1970 70 Archer Daniels
Midland Company 189,876 Delaware 1923 71 Veridian Corporation 188,960
Delaware 1986 72 Smiths Group, plc 184,232 United Kingdom 2000 73 Ford
Motor Company 179,126 Delaware 1919 74 Texas Instruments, Inc. 178,631
Delaware 1938 75 Computer Associates International 172,202 Delaware 1974
76 United Industrial Corporation 171,044 Delaware 1959 77 Orbital Sciences
Corporation 161,286 Delaware 1987 78 Ball Corporation 153,613 Indiana 1922
79 Parker- Hannifin Corporation 153,562 Ohio 1938 80 Philip Morris
Companies, Inc. 149,634 Virginia 1919 81 Xerox Corporation 139,224 New
York 1906 82 Sprint Corporation 136,200 Kansas 1938 83 ConAgra Foods, Inc.
131,850 Delaware 1975 84 GenCorp, Inc. 131,848 Ohio 1915 85 Siemens AG
124,452 Germany 1966 86 Roy F. Weston, Inc. 124, 380 Pennsylvania 1957 87
Holly Corporation 121,831 Delaware 1947 88 McKesson Corporation 121,526
Delaware 1994 89 Telos Corporation 118,803 Maryland 1972
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 6
90 KPMG Consulting, Inc. 117,456 Delaware 1999 91 Cubic Corporation
117,054 Delaware 1984 92 PC Connection, Inc. 116,919 Delaware 1997 93 DRS
Technologies, Inc. 116,395 Delaware 1968 94 Avaya, Inc. 115,079 Delaware
2000 95 Hillenbrand Industries, Inc. 114,456 Indiana 1969 96 Furniture
Brands International, Inc. 112,395 Delaware 1921 97 Berkshire Hathaway,
Inc. 111,993 Delaware 1973 98 Lucent Technologies, Inc. 107,402 Delaware
1995 99 WGL Holdings, Inc. 105,260 Virginia 2000 100 Olin Corporation
104,121 Virginia 1892
Total 101,770,865
a Contract obligations include contracts with subsidiaries. According to a
General Services Administration (GSA) official, GSA follows a multi- step
process (that includes using Dun & Bradstreet assigned D- U- N- S numbers,
company names, and company affiliations) to aggregate federal contracts by
company. We did not verify GSA*s federal contractors listing for accuracy
or completeness.
b Formerly Azimuth Technologies, Inc. Source: General Services
Administration, Securities and Exchange Commission, and GAO Internet
research.
Four of the top 100 federal contractors that are publicly traded
corporations are incorporated in a tax haven country. Information on when
these four corporations (McDermott International, Inc., Foster Wheeler,
Ltd., Accenture, Ltd., and Tyco International, Ltd.) were incorporated in
a tax haven country is discussed below.
McDermott International, Inc.: With over $1.8 billion in federal contract
obligations in fiscal year 2001, McDermott International was the 11 th
largest publicly traded federal contractor. Almost three- quarters of the
contracts awarded to McDermott International, Inc. and its subsidiaries
and their joint ventures were with the Department of Energy (DOE). Most of
the contract amounts were for providing facilities support services at
Department of Energy facilities in Oak Ridge, Tenn., and Albuquerque, N.
Mex. Other Energy Department contracts were for work related to nuclear
reactors, hazardous waste clean up and Strategic Petroleum Reserve
operations.
McDermott International*s filings with the SEC and McDermott
International*s Web site did not contain information on the circumstances
surrounding its incorporation in Panama. However, a May 2002 report by the
New York State Bar Association provides some background on how McDermott
Incorporated, a U. S.- based corporation, exchanged shares with McDermott
International to become a Panamabased corporation. 5 McDermott
Incorporated, which was incorporated in Delaware in 1946, had a Panamanian
subsidiary, McDermott International. In 1983, shareholders of McDermott
Incorporated exchanged their shares for McDermott International shares.
5 New York State Bar Association Tax Section, Report on Outbound Inversion
Transactions, Report No. 1014 (Albany, N. Y.: May 24, 2002).
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 7 Foster
Wheeler, Ltd.: With over $280 million in federal contract obligations in
fiscal
year 2001, Foster Wheeler, Ltd., was the 57 th largest publicly traded
federal contractor. Sixty- two percent of Foster Wheeler contracts were
with the Department of Defense, with another 34 percent held by the
Department of Energy. Fifty- three percent of the contract dollars were
for hazardous waste cleanup or other environmental services, with another
one- third for facilities maintenance or construction.
According to filings with the SEC, the Foster Wheeler Corporation was
originally incorporated in New York in 1900 and reorganized to become a
Bermuda corporation in 2001. In order to accomplish its change in
domicile, it established a new subsidiary, Foster Wheeler, Ltd., based in
Bermuda and wholly owned by Foster Wheeler Corporation. Foster Wheeler,
Ltd., indirectly owned another company, Foster Wheeler LLC, a Delaware
company. On May 25, 2001, Foster Wheeler LLC became the surviving entity
of a merger with Foster Wheeler Corporation. Because Foster Wheeler LLC
was already a subsidiary of Foster Wheeler, Ltd., the Bermuda corporation
became the new parent company. All shares in the Foster Wheeler
Corporation were converted into shares of Foster Wheeler, Ltd. According
to the prospectus to shareholders filed with the SEC, the Foster Wheeler
Corporation made this transaction to have a more favorable regulatory
environment, attract non- US investors, improve their worldwide effective
tax rate, and provide for greater flexibility to restructure.
Accenture, Ltd.: With about $280 million in federal contract obligations,
Accenture was the 58 th largest publicly traded federal contractor in
fiscal year 2001. Accenture contracted with many departments of the
government, but about 43 percent of its contracts were with the Department
of Defense. About 98 percent of Accenture's contract dollars are for
automatic data processing and telecommunications services and equipment.
According to SEC filings, Accenture, Ltd. was incorporated in Bermuda in
2001. The company was formerly associated with Arthur Anderson and
Andersen Worldwide. Prior to incorporating in Bermuda, Accenture was
operating as a series of related partnerships and corporations under the
control of its partners through the mechanism of contracts with a Swiss
coordinating entity. In April 2001, Accenture*s partners voted to pursue
an initial public offering. According to the prospectus filed with the
SEC, the partners were to generally exchange all of their interests in
these partnerships and corporations for Accenture stock.
Tyco International, Ltd.: With over $200 million in federal contract
obligations, Tyco International was the 68 th largest publicly traded
federal contractor in fiscal year 2001. About 76 percent of Tyco*s federal
contracts are with the Department of Defense. The contracts are for such
products and services as aeronautical and nautical system manufacturing,
architect and engineering services, construction and restoration of
facilities, maintenance and repairs, general purpose machine
manufacturing, and environmental consulting services.
According to SEC filings, in 1997 Tyco International, Ltd., incorporated
in Massachusetts, merged into ADT Limited, a Bermuda corporation. The name
of the combined company was changed from ADT Limited to Tyco
International, Ltd. Each
GAO- 03- 194R Federal Contractors Incorporated Offshore Page 8 Tyco share
was converted to one share of stock in the combined company. In a press
release, Tyco said that the combined company would provide cost,
marketing, and service synergies. According to the prospectus to
shareholders filed with the SEC, keeping the company incorporated in
Bermuda would allow the combined company to preserve certain advantages
enjoyed by ADT Limited. For example, Tyco International reported that its
overall tax savings was over $400 million in 2001.
(440163)
*** End of document. ***