Changing Tax-Haven Holding Company – An Over-reaction?

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

According to the article, Accenture Is Seeking to Change Tax Locales, published on May 27th, 2009 by the Wall Street Journal, many companies are moving their international holding companies out of the Cayman Islands and Bermuda, as these countries don’t have a tax treaty with the U.S. and the Obama Administration has promised legislation to limit tax benefits. I must say, I think it is a gross overreaction to move your holding company at this point in time because:

UPDATE: Speech by the IRS Commissioner on June 2, 2009:

http://www.irs.gov/newsroom/article/0,,id=209342,00.html

He said: “And let me be clear here too. The President is not repealing deferral. The Administration is simply proposing that deductions for expenses should match the deferred income.”

Returning to original blog:

1) We don’t know what the actual legislation will say or if it will even become law! It took Ronald Reagan over two years to get his tax proposals passed, and many changed drastically from his original proposals.

2) There is nothing wrong or illegal about a Cayman or Bermuda holding company -- as long as the taxpayer timely and accurately reports all their reportable income in their U.S. tax returns. A legal tax “deferral structure” is, and based on what I read in the Obama proposals, will continue to be, valid law.

3) Analytically, the tax rates for international holding companies in Ireland and Switzerland – where these companies are moving to – are just as bad as Cayman or Bermuda, since there are perfectly legal ways to have zero local tax in those countries on income earned outside the local country. Why is that morally superior or different than Cayman or Bermuda?

4) Companies are saying they need to change the location of the International holding company because, in part, of the location of their customers. That is, Ireland is closer to their European customer base. That’s just a ruse to meet the “business purpose” test for such moves to be tax-free. If the company didn’t care that they had no customers in the Cayman Islands before, and their business ran just fine, why does moving the International HQ to, say, Switzerland now (where, they admit, none of the executive management with live and work) matter? It’s all paper-shuffling and just a different corporate file in a different lawyer’s file room.

Now, I’m merely a tax advisor, so I understand that if the shareholders are clamoring to the Board of Directors to move out of Cayman or Bermuda for public relations purposes, I understand that is a legitimate reason…it’s just not a “tax” reason.

I must say, that based on my skeptical view and experience, moving these international holding companies has more to do with public relations and generating additional legal fees, than actually changing the reality of the taxpayer/client’s tax risk. I leave to the reader to decide if this is a good use of corporate assets and management’s time.

I am always available for questions or comments at 510 797 8661 x237.