Senators Dorgan, Levin release GAO study: Top Government Contractors Reap Millions, But Flock to Tax Haven Countries

WASHINGTON, D.C. Nearly two thirds of the top 100 contractors doing business with the federal government also have subsidiaries in tax haven countries, a move that could enable them to avoid paying U.S. income taxes even as they reap millions in federal contract revenue each year, U.S. Senators Byron Dorgan (D-ND) and Carl Levin (D-MI) charged Thursday.

The two lawmakers released a General Accounting Office (GAO) study [PDF] which found that 59 of the top 100 publicly traded federal contractors have set up subsidiaries in off-shore tax haven countries. Even more surprising is the finding that many of the contractors set up dozens of subsidiaries in tax haven countries.

"Some of the biggest publicly traded corporations in the United States are setting up mechanisms to avoid paying U.S. taxes, even as they earn millions in contracts paid for by U.S. taxpayers," Dorgan said. "They are shortchanging our country even as they profit from it."

"This new empirical data raises a host of questions about why companies holding high-dollar contracts with the U.S. government have so many tax haven subsidiaries," said Levin. "The 100 companies studied here have a total of 464 tax haven subsidiaries, with one company alone sponsoring 115. Tax haven subsidiaries are designed to duck taxes, and some tax havens have a history of delaying or impeding U.S. tax enforcement. The question is how much tax dodging is going on. This issue cries out for additional investigation."

While the off-shore subsidiaries may be technically legal under current law, numerous studies have found that many are little more than a post office box set up to allow corporations to move profits to the low-tax or no-tax havens, rather than reporting that income in the United States.

The full list of companies involved is available in the GAO report. The list includes some of the biggest names in federal contracting and American business. For example:

• Fluor Corporation: $932 million in federal contracts; 27 tax haven subsidiaries, including seven in Bermuda, five in Barbados, and three in Mauritius.

• Exxon-Mobil: $707 million in federal contracts, 11 tax haven subsidiaries in the Bahamas.

• Halliburton: $534 million in federal contracts, 17 subsidiaries in tax haven countries, including 13 in the Cayman Islands which does not impose a corporate tax.

• WorldCom: $504 million in federal contracts; 10 tax haven subsidiaries, including four in Panama, three in Bermuda, and one in the Cayman Islands.

• Tyco International: $206 million in federal contracts; 115 subsidiaries in tax haven countries, including eight in the Bahamas, 17 in Barbados, 55 in Bermuda, and five in the Cayman Islands.

According to FY2005 budget documents, as recently as 1943, U.S. corporations provided nearly 40 percent of total U.S. tax revenues, but now pay about seven percent. One tax expert has estimated that, on the average, large U.S. corporations today are paying an effective tax rate of 15 percent, less than half the 35 percent corporate rate in the tax code. Recently released data also shows that, in 2001, about half of all foreign profits of U.S. corporations were in tax havens.

A tax haven is a country that imposes no taxes or nominal taxes on corporate income. In conducting its analysis, GAO used an international list of 39 tax havens compiled by the Organisation of Economic Cooperation and Development.

Dorgan said he will offer legislation to eliminate any tax breaks that U.S. multinational firms get when they set up offshore subsidiaries for tax purposes. Levin is preparing to introduce legislation to combat abuses associated with both offshore tax havens and illegal tax shelters.