Offshore corporations could have edge in contracts

Corporations located in tax-haven countries such as the British Virgin Islands hold an advantage in bidding for federal contracts because they pay lower taxes, according to a new Government Accountability Office report. The report, "International Taxation: Tax Haven Companies Were More Likely to Have a Tax Cost Advantage in Federal Contracting," (GAO-04-856) cites the financial conditions in which large expatriated corporations can hold an edge over domestic companies when applying for federal contracts. The report estimates that 66 percent of large tax haven contractors had no tax liability in 2001, compared to 46 percent of domestic contractors.

Using tax data, the report looked at 4,264 corporations in 2001 and 3,924 in 2000 with at least $10 million in assets. Auditors concluded that tax haven corporations pay lower taxes on income generated from federal contracts, allowing them to poteintially bid for such contracts at lower prices.

Fifty large tax haven contractors examined in the report paid 0.75 percent of their gross receipts in taxes in 2001, while 3,524 domestic contractors paid 1.18 percent. Thirty-three of the tax haven contractors in 2001 had no tax liability.

"A contractor that pays less tax on additional income from a contract gains a tax cost advantage compared to companies that pay higher tax," the report said. Corporations located in tax havens use techniques such as "transfer pricing abuse" to drop to lower tax brackets by charging U.S. subsidiary companies excessive prices for goods and services and doling out high-interest loans to U.S. holdings, auditors reported.

GAO cited a December 2003 Organisation for Economic Co-operation and Development report identifying 39 countries or jurisdictions as tax havens.

Senate Governmental Affairs Chairwoman Susan Collins, R-Maine, requested the GAO report in order to find out the extent of the problem, and said in a press release that she is pleased that the GAO documented what "many of us suspected--that there is an unfair playing field between U.S. companies and corporate inverters when it comes to federal government contracts."

"American companies should not suffer a competitive disadvantage because tax haven contractors have inverted ownership to gain an unfair edge by avoiding paying corporate tax," Collins continued.

Collins co-sponsored legislation (S. 2119) with Sen. Chuck Grassley, R-Iowa, in April 2002 that would have cut back tax advantages of tax haven corporations, but the bill didn't make it to the Senate floor.

A spokeswoman for Collins said the Governmental Affairs Committee had scheduled a hearing on the results of the GAO report for September, but the 9/11 commission hearings forced a postponement until later in the year.

Grassley said in a Monday press release that the GAO report affirms legislation (S. 3120) he proposed in October 2002 that would have restricted agencies from issuing contracts to companies that move out of the United States to reduce their federal taxes. Grassley said he would continue to work to keep U.S. corporations from avoiding federal taxes by expatriating to tax-haven countries.