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Monday, June 14, 2010

Transocean: Better at Tax Planning Than Oil Drilling

Tax Analysts Martin A. Sullivan (Tax Analysts), Oil Drillers Gain Billions From 'Immoral' Tax Break, 127 Tax Notes 1183 (June 14, 2010):

There is something else not working well in the gulf: the tax system. No, we are not talking about those cash-only Cajun-country fishermen who never pay income tax and now lack records needed to receive compensation ("The Fishermen and the Tax Man," Los Angeles Times, May 30, 2010). We are talking about the two largest offshore drilling companies in the world, Transocean and Noble Corp., that are in reality headquartered in the Houston area but moved their legal domiciles first to the Cayman Islands and then to Switzerland to avoid U.S. tax. Calculations shown below indicate that those maneuvers have reduced their tax bills by more than $2 billion. ...

[W]hile the entire oil and gas extraction industry accounted for less than 1.5% of GDP (according to 2008 Commerce Department data), the oil services industry accounted for about one-fifth of all corporate inversions.

Transocean completed the reorganization that changed its place of incorporation from Delaware to the Cayman Islands on May 14, 1999. In comments to shareholders before the reorganization, Transocean's management stated: "Our expectation is that we will, over time, achieve a reduction of 10 to 20 percentage points in our effective rate." The table shows that prediction was correct. Transocean's effective tax rate before 1999 was 31.6% and after 1999 was 16.9% -- a 14.8 percentage point reduction. If the preinversion tax rate of 31.6 percent had prevailed, Transocean would have incurred $1.88 billion of additional tax expense on the $12.8 billion of profits earned from 2002 through 2009. ...

[E]liminating future tax benefits for expatriate corporations in the oil industry would be consistent with the president's goals of tilting tax benefits away from fossil fuels and of raising revenue by suppressing aggressive tax avoidance by U.S. multinationals using shell companies in tax havens.

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Comments

Why should a global business entity, particularly one that is publicly traded, pay more taxes than it absolutely has to? If it were to do so, it would set its corporate Board up for removal for failure to preserve and improve shareholder value, a cardinal breach of fiduciary duty. The company's competition in the global market, by being subjected to a global tax rate of 16.9%, would render the U.S. based company paying 31.6%totally uncompetitive if it did not take this defensive move. Thsee U.S. Subpart F rules on foriegn base company services, as now expanded and applied to oil service companies, were never intended as such when those provisions were proposed by John Kennedy in the early '60s and enacted by the time of his assassinaton. Since then, the other progressive nations of the world that had not already exempted such income from home country income taxation have done so, making the U.S. the exception to the general rule. And, more importantly, why SHOULD any corporate or individual taxpayer voluntarily overpay its tax bill? As Winston Churchill put it: "There is no such thing as a good tax."

Posted by: Ed Dwyer | Jun 14, 2010 10:42:35 PM

And despite the article's implication to the contrary, the OCS based profits of Transocean and Noble ARE fully subject to U.S. income tax. See IRC Section 638 and the related Treasury Regulations. It is only their foreign source business income that was their motivation for the changes in country of incorporation/tax residence. They are competing in an environment full of companies subject only to source country taxation rules rather than residence based taxation and needed to take this action to remain competitive.

Posted by: Ed Dwyer | Jun 14, 2010 10:57:40 PM

The US gets taxes on the earnings from US activities as it should. The US gets taxes on the incomes the individuals earn in the US. The US should not be taxing earnings earned outside the US of the Transocean employees located in other countries or the corporation. There is nothing "immoral" about it.

Posted by: Charley | Jun 15, 2010 1:08:21 PM