Monday, June 14, 2010

Transocean: traditionally offshore

We've written a bit about the Deepwater Horizon, Transocean's ill-fated oil rig, being offshore in more ways than one. Now there's a superb article by Marty Sullivan of TaxAnalysts, courtesy of TaxProf, looking at the details of five oil services companies, all operating out of Texas.

"There is something else not working well in the gulf: the tax system."

The article looks at the practice of corporate inversions: the practice by which a company changes its legal domicile from one jurisdiction to another - a practice that seems to have been unusually common for U.S. oil service companies.

"In general, a U.S. multinational is liable for U.S. tax on income from its worldwide operations. By inverting, a multinational is no longer subject to U.S. tax on income from its foreign operations."

And there are transfer pricing games that can be played too. Sullivan's article examines five corporate inversions by Texas-based oil services companies: Transocean, Noble Corp., Weatherford, Nabors and Global Santa Fe. Each started out domiciled in Delaware and ended up in the Caymans and Bermuda (and two subsequently hopped to Switzerland, in fear of possible anti-avoidance moves by the Obama administration.) These companies saved 10-15 percentage points in tax each: Transocean's effective tax rate fell from 31.6% to 16.9%. At the earlier rate, Transocean would have paid nearly $2bn more in U.S. taxes since then.

These moves generated quite some outrage in the U.S. especially after the September, 11, 2001 terrorist attacks. In April 2002 then-Senate Finance Committee ranking minority member Chuck Grassley said that ‘‘These expatriations aren’t illegal. But they’re sure immoral.’’ Subsequently, the American Jobs Creation Act of 2004 closed the loophole for taxes. Britain, by contrast, continues to see a bleeding of companies, as this article explains.

"In a recent survey half of the top 30 UK companies said they would consider a move abroad."

Talk is cheap, of course, and most of those won't go down this route. But the threat from offshore is real enough.

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