The Front

Halliburton: Comfort in Dubai

Halliburton, the oil services firm once headed by Dick Cheney and alleged to have engaged in rampant overbilling and misconduct in Iraq, announced in March that it will move its headquarters to Dubai, in the United Arab Emirates (UAE).
           
“The Eastern Hemisphere is a market that is more heavily weighted toward oil exploration and production opportunities” as contrasted to the company’s North American gas-focused market, said Halliburton CEO Dave Lesar in announcing the move, “and growing our business here will bring more balance to Halliburton’s overall portfolio.”
           
The announcement came as the company is being investigated in the United States for bribery, bid rigging, defrauding the military and illegally profiting in Iran. It is currently in the process of divesting all of its ownership interest in its scandal-plagued KBR subsidiary, notorious for overcharging the military and serving contaminated food and water to U.S. troops in Iraq.
           
Although Halliburton will still be incorporated inside the United States, critics say moving its corporate headquarters to UAE will make it easier to avoid accountability from U.S. federal investigators. Corporate watchdogs say the company has proven adept at using offshore subsidiaries to circumvent restrictions on doing business in Iran and to elude responsibility for paying benefits to former employees.
           
“Given the multiple ongoing investigations into Halliburton’s alleged wrongdoing, policymakers should closely scrutinize Halliburton’s latest move, and whether it will allow the company to further elude accountability,” says Charlie Cray, co-director of Halliburton Watch and director of the Center for Corporate Policy, a project of Essential Information, the fiscal sponsor of Multinational Monitor.
           
Moving to UAE may also hinder ongoing government investigations into Halliburton’s alleged bribes paid to the government of Nigeria. CEO David Lesar, a former accountant, supervised former KBR chair Albert “Jack” Stanley during the time when KBR is alleged to have bribed Nigerian government officials. Stanley was subsequently fired after allegedly receiving $5 million in “improper” payments related the bribery scheme.
           
The United States has no extradition treaty with the UAE.
           
The exodus to UAE may also help the company to reduce its tax payments significantly.
           
Martin Sullivan, contributing editor at the nonpartisan Tax Notes magazine, says relocating to the no-tax jurisdiction of Dubai would change Halliburton’s tax situation “significantly” even though the company would still be registered in the United States. By relocating its CEO and other top executives to Dubai, Halliburton can argue that a portion of its profits should be attributed to the no-tax jurisdiction, he says.
           
Sarah Anderson of the Institute for Policy Studies notes that most Fortune 500 companies have global operations, so moving an entire headquarters to another country is not necessary. “With today’s technologies, there’s no real reason to have to physically relocate,” she says. “Those that have are trying to evade U.S. oversight and tax authorities. And Dubai is a tax-free haven — no corporate or employee taxes. Halliburton claims this is not a big deal, but I can’t imagine Lesar will be working over there alone in a little cubicle. This will be a much-expanded operation in Dubai.”
           
Halliburton earned a record $2.3 billion in profits last year. That’s almost equal to the $2.7 billion the Pentagon found in the company’s overcharges in Iraq.
           
Members of Congress have called for an investigation. Senator Byron Dorgan, D-North Dakota, says, “I want to know, is Halliburton trying to run away from bad publicity on their contracts? Are they trying to run away from the obligation to pay U.S. taxes? Or are they trying to set up a corporate presence in Dubai so that they can avoid the restrictions that currently exist on doing business with prohibited countries like Iran?”
           
Senator Patrick Leahy, D-Vermont, says, “This is an insult to the U.S. soldiers and taxpayers who paid the tab for their no-bid contracts and endured their overcharges for all these years.”
           
Representative Henry Waxman,  D-California, chair of the powerful House Committee on Oversight and Government Reform, has promised hearings into the matter. “I want to understand the ramifications for U.S. taxpayers and national security,” he says.
           
Critics’ concerns seemed corroborated by voices from Dubai.
           
“I think they are rushing toward what I would call a ‘comfort zone,’” Yusef Ibrahim, managing director for the Strategic Energy Investment Group (SEIG), a major Dubai-based consulting firm, told WBUR Radio’s On Point program. “Dubai is a ‘comfort zone’ because what many people here, for example, in the United States would consider ‘corruption’ is not necessarily considered a vice in a place like Dubai. It’s a very free-wheeling atmosphere where all kinds of businessmen come and they don’t expect too many questions to be asked. … It’s still considered the largest spot on the earth where you launder money. All the Russian moguls came there. I don’t mean that it’s a place that spends all its time doing things that are irregular, but basically it prefers to let people work under soft light rather than under spotlights.”
           
The move is not likely attributable to Halliburton’s interest in being closer to clients in the Middle East, Ibrahim said. “I don’t think Halliburton is doing this because its clients are having a hard time getting to the United States.”
           
Halliburton, said Ibrahim, “works in areas and with countries that deal in oil and weapons. Halliburton has worked with Iran in the past — directly and indirectly. The Middle East is an area where you need some ambiguity when it comes to things like paying commissions. Other people would call it “bribes.” But this is the way business is done out there. You can’t be constantly scrutinized. You can’t forget that Halliburton is now under tremendous scrutiny and a number of investigations. Especially KBR. It has had a history that has disturbed some people in Congress. … They would feel a lot more comfortable in a place like Dubai.

— Jim Donahue is co-director of Halliburton Watch

Toying With Taxes

On the corner of North Market Street and East 11th in Wilmington, Delaware, sits a modest building that houses nearly 700 firms, many with household names. While most of the offices have no real staff and few, if any, daily activities, they prove to be exceptionally lucrative entities for their parent companies, saving them billions of dollars a year in taxes.
           
By manipulating U.S. state income tax laws and exploiting minor loopholes, companies are able to send large parts of their revenue out of the state the money was earned in, and into the shell companies based in states — like Delaware, Nevada and Michigan — that don’t charge income tax on certain types of earnings.
           
However, states are beginning to crack down on the corporate manipulations — U.S. PIRG, the Federation of state Public Interest Research Groups, reported in July 2007 that half of U.S. commerce is now based in states that have acted to close loopholes. But many other states remain victims.
           
Common schemes involve corporations paying shell companies for trademark rights or paying exceptionally high interest rates on “loans” from the subsidiary. One of the most notorious corporations involved in tax-shifting is Toys “R” Us. A subsidiary, Geoffrey, Inc., holds the rights to the Toys “R” Us trademark and collects royalties on that trademark from stores across the country. Conveniently located in Delaware, which doesn’t tax most royalty income, the money a Toys “R” Us store in Florida, for example, sends to Geoffrey does not get taxed in any state. The more money the Florida store pays in royalties, the less Florida state income tax the store has to pay. The result is more profit for Toys “R” Us, a competitive advantage for the giant retailer over local companies, which must pay full state taxes, and a substantial shift of the state tax burden onto residents.
           
Between 1979 and 2000, the share of total state tax revenues paid by corporations fell from 10.2 percent to 6.3 percent, largely because of companies’ manipulation of state tax laws, according to the Center on Budget and Policy Priorities.
           
In a 2005 study, focusing on roughly half of the Fortune 500, the Institute on Taxation and Economic Policy and Citizens for Tax Justice found that by manipulating their accounting and taking advantage of certain federal tax loopholes, the 252 studied companies slashed their actual state income tax payments to only a third of the statutory rate between 2001 and 2003. The 252 companies in the study are those that were profitable between 2001 and 2003 and that fully disclosed key financial information. The report also found that 71 of the 252 companies used these tactics to pay absolutely no state taxes in at least one of those years, according to Citizens for Tax Justice director Robert McIntyre. Some companies, such as AT&T, Boeing, Eli Lilly, Merrill Lynch and ITT Industries, paid no net state income tax at all between 2001 and 2003.
           
Other well-known companies involved in tax shifting include Home Depot, Radio Shack and Tyson Foods. None of the companies would comment directly on their tax policies.
           
But more and more states are eyeing corporate income tax reform as a way to help balance their budget. Combined reporting obligates multi-state corporations to report the total income earned by the parent company and all of its subsidiaries. The corporations then pay taxes based on the proportion of economic activity in the state, without regard to accounting shenanigans.
           
“Combined reporting is the single most effective means of preventing corporations from avoiding taxation through accounting techniques designed to shift income from one state to another,” states an April 2007 report by the Institute on Taxation and Economic Policy.
           
In New York, which has an estimated budget gap of $1.6 billion, corporate income tax revenues fell between 1977 and 2007 from approximately 1.4 percent of state revenue to only 0.75 percent, according to a report by the New York-based Fiscal Policy Institute. Bush administration’s budget cuts cost New York more than $1 billion in federal funding for programs including those that help low-income families pay for housing, heat and child care. To help close these gaps, Governor Eliot Spitzer enacted combined reporting in April, retroactively taking effect on January 1, 2007. This tax change will bring in approximately $449 million annually, according to the Fiscal Policy Institute.
           
“Combined reporting will help companies that pay their fair share of taxes but compete against multi-state companies that do not,” says Phineas Baxandall, senior analyst at U.S. PIRG. “As more states catch on, fewer companies will waste their time on sham transactions and subsidiaries. This is a big step toward fairer state taxes and fairer competition among businesses.”
           
When Michigan reformed its tax policies at the end of June 2007, it signaled a tipping point in combined reporting — now the majority of the U.S. economy has adopted the tax modernization. According to U.S. PIRG, in 2003 only 29 percent of the economy — 16 states — used combined reporting. “Combined reporting has become standard best practice,” says Johanna Neumann, policy advocate for Maryland PIRG. “This is a day that everyone but a few tax lawyers should celebrate.”
           
The partners at Delaware Corporate Management (DCM) might not be as enthusiastic. More than two decades ago, DCM found a niche market acting as overseers and errand-boys for corporations’ shell subsidiaries. DCM provides an address in Wilmington’s bustling business district, “telephone listing and answering,” “mail forwarding” and “clerical and secretarial support.” The firm even provides office furniture and letterhead stationery. The shadowy firm leaves almost no traces of its involvement, except for the occasional “c/o Delaware Corporate Management, Inc.” on Securities and Exchange Commission filings.
           
DCM’s services are alluded to on the web site of its parent corporation, Wilmington Trust, whose headquarters are across the street, and which offers special services including the “establishment and management of special purpose vehicles (SPVs) in the jurisdiction of choice.” SPVs are often established to isolate financial risk, but they are also used to avoid taxes. The jurisdictions Wilmington Trust offers happen to be in Delaware and Nevada — two tax-shelter states.
           
“Ultimately, this is something that should be addressed at the federal if not international level,” says Baxandall. “But states have some ability to not be cheated quite as terribly as they are.”   

- Jennifer Wedekind