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Halliburton's Tax Haven Explained

For decades, the U.S. tax code has encouraged companies like Halliburton to transfer the location of its subsidiaries from the United States to foreign countries. This is one reason why only thirty-six of Halliburton's 143 subsidiaries are incorporated in the United States and 107 subsidiaries (or 75 percent) are incorporated in 30 different countries.

There are two methods by which Halliburton lowers its tax liability on foreign income: (1) By establishing a "controlled foreign corporation" and (2) By establishing a subsidiary inside a low tax, or no tax, country known as a "tax haven."

Controlled foreign corporations

Foreign subsidiaries of American corporations must pay U.S. taxes on income generated in foreign countries in the year it was earned. But if an American company incorporates a subsidiary under the laws of a foreign nation, the subsidiary is no longer considered a "U.S. resident" under the tax code. Instead, it is considered a "foreign citizen." This allows the parent corporation in America to avoid paying U.S. taxes on the foreign subsidiary's income as long as the income is retained and reinvested outside the United States. Although the foreign income is taxable if sent (repatriated) to the United States, the U.S. parent corporation may repatriate such income at anytime it wishes, meaning it can avoid U.S. income tax indefinitely. Data show that corporations nearly never bring home any of the foreign profits during the first fifteen years after incorporating a subsidiary inside a foreign country.

The incorporated foreign subsidiary is known under the U.S. tax code as a "controlled foreign corporation" because, while it is not a resident of the United States, it is still "controlled" by the U.S.-headquartered parent. Filing a few incorporation papers and paying a small fee to a foreign government magically turns an American subsidiary into a "controlled foreign corporation" which can lawfully avoid U.S. income tax on foreign income indefinitely. A subsidiary is defined as a "controlled foreign corporation" if U.S. shareholders own more than 50 percent of its outstanding voting stock, or more than 50 percent of the value of all its outstanding stock (directly, indirectly, or constructively) on any day of the year.

Tax Havens

While controlled foreign corporations usually have active and real operations, subsidiaries operating inside "tax haven" countries are nearly inactive and have no real business to transact. The scheme works by incorporating a subsidiary inside a country which imposes little or no corporate income tax. By moving profits around the world, Halliburton can maximize the income it reports in countries with low income tax rates and minimize the income it reports in countries with high income tax rates. For example, a multinational corporation buys and sells goods within its corporate empire. So, a subsidiary located in a high-tax country will often purchase goods from a sister subsidiary located in a low-tax country. The low-tax country is called a "tax haven." The result is that income is reported in the low-tax country, not the high-tax country. It's called "transfer pricing" and allows American companies to transfer high-priced purchases to low-tax countries and low-price purchases to high-tax countries.

Also, foreign subsidiaries may issue debt to the U.S. parent corporation. The interest expense on the debt incurred by the parent is deductible for U.S. tax purposes and can serve to reduce a corporation´┐Żs taxable income in the United States.

In tax haven countries, Halliburton subsidiaries conduct little to no business. These subsidiaries are mere "owners" of plants or operations that exist in countries that have higher corporate income tax rates than the tax haven. Since the tax haven subsidiaries are the legal "owners" of the operations in foreign countries, the taxable income is reported only to the tax haven country and the country where the income was generated, but not to the U.S. Internal Revenue Service. For example, one of Halliburton's subsidiaries is called "Halliburton West Africa Ltd. Cayman Islands." This is a company incorporated in the Cayman Islands but indicates its primary business activity is in "West Africa."

Congress reported that Halliburton owns 17 subsidiaries in tax haven countries, including 13 in the Cayman Islands, which has no corporate income tax, two in Liechtenstein and two in Panama.

An analysis by CitizenWorks.org found a far greater number Halliburton tax havens. The nonprofit public interest group found that, while Dick Cheney was CEO of Halliburton (between 1995 and 2000), the number of Halliburton subsidiaries incorporated in offshore tax havens rose from 9 to 44. CitizenWorks.org also found that the Fortune 500 companies with the most offshore tax havens are dominated by energy firms, including El Paso (#1), AES (#2), Aon (#5), Mirant (#7), Halliburton (#8), and Williams (#14).

Controlled foreign corporations and tax havens are the result of decades of corporate lobbying in Washington, DC. It has benefited corporate America tremendously. The tax savings to Halliburton, and the corresponding tax loss to individual American taxpayers, are enormous. Halliburton paid only $15 million of their $80 million in total taxes (or 19 percent) to the U.S. government in 2002. The remaining 81 percent of the company's taxes went to foreign governments. Although Halliburton is an "American" corporation on paper, it is actually a foreign corporation that has no allegiance to the United States.

More Information

David Cay Johnston: How the rich rigged the tax system against the rest of us
CitizenWorks.org: Halliburton, Dick Cheney, and wartime spoils
Senators Dorgan and Levin press release on GAO study on tax havens
GAO study on government contractors with tax havens
Alternet: How Big Business Evades Taxes
Mercury News: Congress weighs tax `holiday' for firms' foreign cash
Brookings Institution Testimony
IRS explanation of controlled foreign corporations
AEI: Taxing International Business Income
Search engine on tax havens