Gimme shelter (from taxes)

Introduction

U.S. oil and gas companies have at least 882 subsidiaries located in oil-free tax havens such as the Cayman Islands, Bermuda, and even the tiny European principality of Liechtenstein, a Center for Public Integrity investigation has found.

Further, the investigation revealed that at least a half dozen U.S. oil and gas companies have actually re-incorporated in tax haven countries.

In the past, Enron Corp. had by far the most tax haven subsidiaries with 780, but that was before the troubled company declared bankruptcy and sold off or shut down nearly all of its operations. It is unclear how many of those subsidiaries are still in existence today.

Among active companies, El Paso Corp. leads the list with 233 subsidiaries located in tax haven countries, followed by ConocoPhillips (133).

Officials from El Paso Corp. and ConocoPhillips did not return repeated phone calls about their subsidiaries located in tax haven countries.

Information on the subsidiaries came from MergentOnline and was gleaned from company financial filings. The latest available information showing where subsidiaries of companies are located was used.

The Cayman Islands were by far the most popular choice for U.S. oil and gas company subsidiaries, with 489 subsidiaries located there. Bermuda comes next with 126, followed by the British Virgin Islands (49), Liberia (41), and Panama (40).

The investigation also showed that U.S. companies are much more active than their overseas counterparts in setting up subsidiaries in tax havens. The entire rest of the world had just 311 such subsidiaries. One expert says companies locate in tax haven countries for a variety of reasons, many of which are absolutely legitimate—and have little or nothing to do with avoiding taxes.

That’s the opinion of Philip Garlett, a policy analyst with the Organisation for Economic Co-operation and Development, a Paris-based international policy consortium made up of 30 governments, including the United States. He says oil companies might have subsidiaries in tax haven countries because they don’t want to set up shop and make themselves subject to local laws in areas such as the Middle East or the Caspian Sea.

“It is sort of like a neutral court in basketball,” Garlett says.

But another expert says the only plausible reason for U.S. oil and gas companies to locate subsidiaries in tax havens is to avoid paying U.S. taxes.

Bob McIntyre, the director of Citizens for Tax Justice, a government watchdog that has studied the issue, says that big companies with tax haven subsidiaries are able to conduct complex transactions that shelter their profits. Since the transactions are kept within the company, he says they are next to impossible to detect.

“The more these companies can bounce things around offshore, the more profit that can be kept offshore and tax free,” McIntyre says. “They shouldn’t get away with it, but it is really hard to police.”

President Bush, who has said he disapproves of U.S. companies setting up subsidiaries in tax havens, was a director of a Texas oil company when it decided to do just that.

In 1989, Harken Energy Corp. set up Harken Bahrain Oil Co. in the Cayman Islands to oversee a drilling contract with the government of Bahrain. When questioned about it by reporters, Bush spokesman Dan Bartlett said the president had no recollection of the matter.

Vice President Dick Cheney was also a big fan of locating subsidiaries in tax havens during his days as CEO of Halliburton Corp.

An analysis of Halliburton’s filings with the Securities and Exchange Commission by watchdog group Citizen Works showed that while Cheney was CEO of Halliburton between 1995 and 2000, the number of subsidiaries the company operated in tax havens rose from nine to 44.

Slashing Tax Bills

Among the U.S. companies incorporated in tax havens are GlobalSantaFe Corp. (Cayman Islands), McDermott International (Panama), Nabors Industries(Bermuda), Noble Corp. (Cayman Islands), Seven Seas Petroleum Corp. (Cayman Islands), and TransOcean Inc. (Cayman Islands).

As these companies have learned, setting up shop in a tax-haven country can certainly lower tax bills. In simple terms, a large U.S. company can effectively reduce its corporate tax rate from 35 percent to zero by reincorporating in a tax haven such as the Cayman Islands.

Take the case of Nabors Industries, one of the largest land-based, oil and gas drilling companies in the world with more than 600 rigs.

Nabors reincorporated in Bermuda in June 2002 and moved its “headquarters” from Texas to Barbados. That new headquarters consisted of a small office located on the tiny Caribbean island. The company’s board of directors also held a meeting on Barbados.

Nabors says its effective overall tax rate fell from 36 percent in 2001—the last full year before it moved to Bermuda/Barbados—to 10 percent in 2003, the first full year after the move.

In actual dollars, Nabors’ overall tax bill for 2001 was $83.7 million, according to the company’s annual report. In 2003 the company’s overall tax bill fell to just $8.5 million.

The company’s revenue remained relatively steady during that period. In 2001, its revenue was $2.3 billion; in 2003, it was $1.9 billion.

Nabors Director of Corporate Development Denny Smith says the company made the move simply to remain competitive.

“We lost a ton of jobs and found ourselves in a position where we could not be competitive anymore,” Smith says. “Most of our competitors don’t face the same tax burden as we do.”

Smith says Nabors still does most of its work in Houston and estimates the company pumped as much as $100 million into the local economy since re-incorporating offshore.

“We would love to see the tax code get fixed,” Smith says.

Despite the huge tax windfalls it has realized from its move offshore, Nabors still wants to be considered a U.S. company when it works to its advantage to do so.

For example, Nabors wants to be considered a U.S. company to fully qualify for business under the Jones Act, a 1916 law that requires ships engaged in purely domestic trade to be built, owned and operated by American companies.

Nabors owns nearly three dozen ships that service oil rigs in the Gulf of Mexico. The company argues that its American subsidiary fully qualifies under the Jones Act because the Bermuda-based parent company is simply lending it money for the ships.

Nabors’ competitors say full qualification of the company under the Jones Act while it pays no taxes would give the company a huge competitive advantage and could force them to eventually move offshore to remain in business.

Then there is Noble Corp., which operates one of the world’s largest fleets of offshore drilling rigs. Noble reincorporated in the Caymans in May 2002, leaving its physical headquarters where it was in Sugarland, Texas.

The move has already paid off handsomely for Noble.

The company’s overall tax bill fell from $29.5 million in 2001 to just $16.2 million in 2003. The company’s revenue was steady those years at about $1 billion in 2001, compared to about $987 million in 2003.

The drop in U.S. taxes paid by the company was even more dramatic. Noble had paid $15.3 million in U.S. taxes in 2001, but got a refund of $2.6 million in 2003—the company’s first full year in the Caymans.

Noble claimed it was forced to move to a tax haven in order to compete in the offshore drilling rig business. Noble’s two other main competitors—Transocean Inc. and GlobalSantaFe Corp.—are also incorporated in the Caymans.

Noble CEO James Day admitted to stock analysts soon after the company’s move that he was “philosophically opposed” to reincorporating offshore, but that his hand was forced.

“I don’t want a competitor to get up and say we are bringing 10 percent more to the bottom line because we have a tax structure that Noble is too stupid to take advantage of,” Day told the analysts on a conference call. “We were caught between a rock and a hard place on it.”

Day said he would bring the company back to the U.S. if the tax laws were changed to remove the competitive advantages of incorporating in the Caymans.

“If legislation comes down that says we are going to level the playing field, you bet I would reverse everything we have done,” said Day. “This is not appropriate in my mind.”

Center for Public Integrity database editor Aron Pilhofer contributed to this report.