Global Policy Forum

By Carol D. Leonnig

Most of America's largest publicly traded corporations -- including several that are receiving billions of dollars from U.S. taxpayers to finance their recovery -- have set up offshore operations that could help them avoid paying U.S. taxes on their profits, a government study released yesterday found.

American International Group, Bank of America, Citigroup and Morgan Stanley are among the companies that are getting bailed out by U.S. taxpayers while having subsidiaries in locations where they can avoid paying U.S. taxes, according to the Government Accountability Office.

Of the 100 largest public companies, 83 do business in tax-haven hotspots like the Cayman Islands, Bermuda and the British Virgin Islands, where they can move their income into tax-free accounts.

It is all legal, but it could come to an end, given the dire condition of the U.S. economy and President-elect Barack Obama's campaign pledge to close this popular business tax loophole. The Treasury estimates that it loses $100 billion a year in tax revenue as a result of companies shipping their income off shore, and congressional leaders are vowing to introduce legislation forcing big companies to pay full freight.

The GAO did not independently review company transactions to see if the companies purposely created tax-haven businesses to avoid U.S. taxes. But it said that historically, offshore subsidiaries are used for reducing tax costs and shielding transactions from public view.

Several of the companies are household names, including Pepsi, Exxon, Dell and Dow Chemical. In the list of 100 companies that GAO studied were 63 with major federal contracts, including Caterpillar, BearingPoint, Boeing, Merck & Co. and Kraft Foods. Legislators gave particular attention to the 14 companies on the list that received bailout money from the Treasury in the recent financial meltdown. Sens. Byron L. Dorgan (D-N.D.) and Carl M. Levin (D.-Mich.) requested the GAO study as a launching pad for their effort to curtail what they call "tax-dodgers."

The bailout recipients on the list include Bank of America, which received $45 billion; Citigroup, $45 billion; American Express, $3.4 billion; and Goldman Sachs, $10 billion, according to the Taxpayers for Common Sense watchdog group.

"This is kind of like economic patriotism," Dorgan said. "Americans were told you have to pony up some money to help these companies. And it's rather infuriating for them to find out now that those companies, when they were profitable, didn't want to pay taxes and found clever ways to hide their money overseas."

Several companies said they are engaged in legitimate business operations around the world, and rejected the premise that they are trying to avoid paying their share of U.S. taxes.

Representatives from two companies reported in interviews that they couldn't say whether their foreign operations ultimately reduced their total tax bill.

"We do business around the globe," AIG spokesman Nick Ashooh said. "It's absurd that we're being accused of using these as tax havens. Now what the net tax impact is, that's extremely complicated."

Obama pledged during his campaign to shut down the ability of U.S. corporations to avoid paying taxes by shipping their income to offshore havens. As a senator in 2007, he joined Levin in proposing similar legislation to curb abuse of offshore tax operations and force companies to be more transparent about their overseas operations in those jurisdictions.

Some critics of the loophole argue that the secrecy in tax-haven countries may hide shady accounting at some businesses. Members of Congress say that investigators at the Internal Revenue Service are outgunned in trying to track down who is crossing the line and who is not.

"This is a basic issue of fairness and integrity," Obama said in introducing the 2007 bill. "We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren't disadvantaged."

Tax experts said that such legislation has been a perennial in years past, but is "very likely" to gain steam this time around because of growing unpopularity of tax havens.

"The number one thing, however, is we need revenue," said Jack Blum, a tax-haven expert and Washington lawyer who has testified before Congress about shutting down the loophole. "This business of letting people get away with bloody murder by taking their money offshore is inconsistent with trying to fund our government. That is going to put terrific pressure to close down obvious and ridiculous loopholes."

Levin noted that not all companies use such havens and some use far fewer than others. The report found that Citigroup has set up 427 subsidiaries in tax-haven countries, including 91 in Luxembourg, 90 in the Cayman Islands and 35 in the British Virgin Islands.

Levin said other havens where Citigroup has subsidiaries include Switzerland, Hong Kong, Panama and Mauritius. Morgan Stanley has 273 subsidiaries in tax-haven countries, 158 of them in the Caymans, according to the GAO.

Pepsi has 70 tax-haven subsidiaries, while Coca Cola has eight," Levin said. "Morgan Stanley has 273, while Fannie Mae has zero, and Caterpillar has 49, while Deere has three.''

Morgan Stanley declined to comment on the report.

Citigroup said in a statement: "Citi has more than 4,000 subsidiaries throughout the world which enables us to serve hundreds of millions of individuals and institutions in more than 100 countries."