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GAO-03-194R 1 (2002-10-01)

handle is hein.gao/gaocrptapdf0001 and id is 1 raw text is: SGAO Accountability * Integrity * Reliability United States General Accounting Office Washington, DC 20548 October 1, 2002 The Honorable Henry A. Waxman Ranking Minority Member Committee on Government Reform House of Representatives The Honorable Jim Turner Ranking Minority Member Subcommittee on Technology and Procurement Policy Committee on Government Reform House of Representatives Subject: Information on Federal Contractors That Are Incorporated Offshore Some U.S.-based multinational companies have found that the effective tax rate on income earned from foreign sources can be reduced if they are incorporated in countries that either do not tax corporate income at all or tax the income at a lower rate than the U.S. corporate tax rate. Consequently, some U.S.-based companies incorporate from the outset in these so-called tax haven countries.' In addition, some companies that were incorporated in the United States have reincorporated in tax haven countries through corporate inversion transactions. According to the Department of the Treasury, the term inversion is used to describe a broad category of transactions through which a U.S.-based multinational company restructures its corporate group so that after the transaction the ultimate parent of the corporate group is a foreign corporation.2 Generally, after an inversion transaction, shareholders of the former U.S. parent company hold stock of the newly formed foreign parent, and the operations of the company are unchanged. Treasury also noted that there has been a marked increase recently in the frequency, size, and 1The term tax haven is generally used in research and the media to refer to countries that have no or nominal taxes. Multinational companies incorporated in a tax haven may have U.S. based subsidiaries that pay U.S. taxes. The Organization for Economic Cooperation and Development (OECD) has developed criteria for identifying countries that may engage in harmful tax competition in the form of tax havens. 2 Department of the Treasury, Office of Tax Policy, Corporate Inversion Transactions: Tax Policy Implications (Washington, D.C.: May 17, 2002). GAO-03-194R Federal Contractors Incorporated Offshore

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