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IRS Seeks to Claim Tax on Offshore Moves

New regulations require filing on transactions to help the agency track reincorporations.

November 13, 2002|From Bloomberg News

The federal government Tuesday fired another salvo at companies that seek to locate their headquarters offshore in a bid to save on taxes.

The Treasury Department and the Internal Revenue Service issued temporary regulations requiring Cooper Industries Ltd., Nabors Industries Ltd. and Noble Corp. to file a Form 1099 reporting their stocks' fair market value at the time they reincorporated in Bermuda or the Cayman Islands.

By reincorporating offshore while keeping operating headquarters in the United States -- so-called corporate inversions -- the companies sought to avoid U.S. taxes on their overseas profits. But the move itself generates a "toll tax" equivalent to a capital gains tax as shares in the U.S. entity are exchanged for shares in the new offshore corporation.

That's the tax the IRS and Treasury are trying to capture with the new regulations.

The tax agency also proposed regulations to require all companies to report to the IRS and shareholders any transaction that may be subject to tax. The regulations would affect some corporate mergers, reorganizations and changes in ownership.

Both sets of regulations are part of the government's effort to ensure that U.S. companies that move offshore don't avoid U.S. taxes entirely.

"The regulations issued today will serve to remind shareholders in taxable inversion transactions that they must report their gain from the transactions on their tax returns," said Pamela Olson, the Treasury's assistant secretary for tax policy.

Earlier rules didn't require reporting on such moves.

The IRS will be able to cross-check the information from the 1099 forms with taxpayers' returns to ensure that the required capital gains tax is paid.

Capital gains rates range from 8% to 38.6%, based on income level and how long the stock was owned. Most people pay a rate of 20%.

The 1099 reporting requirement affects only companies that completed a corporate inversion this year. Those include Cooper Industries and Nabors, which moved to Bermuda, and Noble, which reincorporated in the Cayman Islands.

Nabors spokesman Dennis Smith said he hadn't seen any new IRS regulations, but "we'll do whatever the law requires." Messages left with spokesmen for Coopers and Noble weren't returned.

The rule also would affect shareholders of Seagate Technology Holdings if it incorporates in the Cayman Islands, an intention the company recently announced.

Scotts Valley, Calif.-based Seagate, the largest computer disk-drive maker, is planning to raise as much as $1 billion in an initial public stock offering.

Public outcry over the practice of moving headquarters offshore, along with a stream of legislation proposing to restrict or ban the practice, have forced many companies to reconsider the idea.

One example: Stanley Works, a Connecticut-based toolmaker, abandoned its plans to reincorporate in Bermuda after a barrage of criticism and publicity.

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