Founded in 1905, heavy-equipment manufacturer Ingersoll-Rand Company Ltd. promotes its jackhammers as those that sculpted one of America’s icons, Mount Rushmore National Memorial. But three months after the Sept. 11, 2001, terrorist attacks, Ingersoll-Rand (IR) set up a tiny office in the tax haven of Bermuda and reincorporated there. Today, while holding tens of millions of dollars in government contracts, including the U.S. Capitol Visitor Center, IR uses its Bermuda incorporation to avoid paying about $40 million annually in U.S. taxes.
IR is one of more than a dozen publicly traded American companies that have incorporated in foreign tax havens to avoid paying U.S. taxes. With federal and state governments facing record deficits and budget gaps and the federal government looking at a $373 billion deficit (excluding Social Security funds) in fiscal year 2004, union activists are joining lawmakers in moving legislation to crack down on corporate expatriates.
And with union and union-sponsored pension funds worth approximately $400 billion, union shareholder activists are using the power of their investments to compel American corporations to come back from tax havens with weak corporate governance rules that leave pension funds vulnerable to the kind of executive wrongdoing that went on at Tyco International Ltd.
When Corporations Incorporate Overseas, Union Shareholders Take Action
Among the hundreds of shareholder resolutions unions are proposing in board rooms across the country this year, an AFSCME-sponsored proposal that would require scandal-ridden, industrial giant Tyco to repatriate from Bermuda back to the United States tallied more than 26 percent of “yes” votes at Tyco’s annual meeting. Former Tyco CEO Dennis Kozlowski, now charged with looting the company of $600 million, claimed foreign incorporation saved the company that amount in taxes annually. In fact, Tyco’s directors say they don’t know how much was saved and they announced they are going to find out with the help of newly elected director H. Carl McCall, the former New York State comptroller, who has helped lead the movement to make Tyco repatriate.
The AFSCME Pension Plan also joined with the California Public Employees’ Retirement System (CalPERS) in announcing April 1 that they will work with energy services provider McDermott International Inc., to fairly determine whether McDermott should repatriate back from Panama to America. Pending financial review, McDermott management will recommend repatriation to shareholders at their next annual meeting. According to the U.S. General Accounting Office, McDermott took in $1.9 billion in federal contracts during the 2001 fiscal year.
Union shareholder action around corporations that take their tax money and run began in August 2002, when the union movement took its No More Business As Usual campaign to toolmaker Stanley Works. Three days after corporate accountability activists rallied with AFL-CIO President John J. Sweeney and Machinists President R. Thomas Buffenbarger at the New Britain, Conn., headquarters of Stanley, company executives announced they were abandoning plans to reincorporate in Bermuda.
Backing Bills to Bar Legal Tax Evasion
In February, Rep. Richard Neal (D-Mass.) and Sens. Harry Reid (D-Nev.) and Carl Levin (D-Mich.) introduced the Corporate Patriot Enforcement Act of 2003 to close a tax loophole that encourages companies to incorporate in tax havens. The bill is similar to a measure introduced last year that passed in the Senate but not the House.
At the state level, North Carolina recently passed a law prohibiting its agencies from signing new contracts with U.S. expatriate companies. And legislation is pending in California, Massachusetts, Minnesota, Pennsylvania and Texas that would eliminate corporate expatriates’ state tax benefits or bar those companies from receiving state contracts.
In California, unions, including the California Labor Federation, the Machinists and AFSCME, are co-sponsoring SB 640, authored by state Sen. John Burton (D-San Francisco). The measure would prohibit the state from contracting with expatriate corporations. IAM also is co-sponsoring, with support from other unions, another bill slated for introduction that would close loopholes allowing expatriates to avoid California corporate taxes.
Such loopholes cost California—now looking to cut jobs and services to pay for a $35 billion budget shortfall—some $10 million annually in corporate taxes. That lost revenue is projected to cost $132 million over the next decade, according to the state’s Franchise Tax Board. If the tax loopholes are not closed and the number of corporations expatriating continues at the current rate—14 since 1996, and six just in the past year alone, according to the independent Investor Responsibility Research Center—California will lose an estimated $180 million over the next 10 years, the board reports.
California Treasurer Phil Angelides—who has banned the state from investing in corporate expatriates, prohibited his office from doing business with them and urged public pension funds to back shareholder resolutions calling for companies to reincorporate in America—is co-sponsoring both measures. “The expatriate companies want to enjoy the benefits of operating in the world’s strongest economy, but they are not willing to meet their corporate responsibilities,” he says.
“At the very time when we are fighting to restore the public’s faith in our financial system and reinvigorate our economy, and when our nation is facing unprecedented challenges to our national security, we must do all we can to convince these companies to heed the call: Come Home to America,” says California Labor Federation Executive Secretary-Treasurer Art Pulaski.
More
Read union-sponsored shareholder proposals.
See how workers benefit with the power of pension funds.
Find publications and other tools for pension fund fiduciaries.
Learn more about the union movement’s No More Business As Usual campaign.
Get more details about the California legislation.
The Investor Responsibility Research Center provides research on corporate governance, shareholding and other social issues worldwide.
