Delaware Takes More Hits for Racing to the Bottom on Corporate Secrecy and Tax Avoidance

A New York Times article takes Delaware to task for racing to the bottom as a home for tax dodging and corporate secrecy. One Delaware blogger has complained the attack is a "smear" piece but the points he raises are at most modest quibbles arising from other states taking some action to stop the tax dodging. Key excerpts follow:

"For corporate tax planners, Delaware is a dream. The state helps companies legitimately reduce their United States taxes and, sometimes, obscure profits in other countries.

“Companies are able to turn taxable income into tax-exempt income in Delaware and then use it to reduce their tax bills in other states,” said Bradley P. Lindsey, an accounting professor at North Carolina State University and one of three authors of a 2011 study titled “Exploring the Role Delaware Plays as a Domestic Tax Haven.” Delaware does not tax certain profit-making intangible items — like trademarks, royalties, leases and copyrights. Yet those same intangibles can be part of a tax strategy that allows them to be classified as deductions in other states, reducing a company’s tax bill there.

“Delaware serves as a domestic tax haven, much like the Cayman Islands serves as an offshore foreign tax haven, and offers a similar level of tax avoidance,” the report states.

American corporations find the Caymans alluring for many reasons. There, they can operate in relative secrecy, attract more foreign customers, avoid regulation and enjoy a low tax rate. In one respect, however, Delaware is even better than the Caymans. At some point, American companies have to bring back their foreign profits from the Caymans and pay federal taxes. But in Delaware, the state tax savings through the Delaware loophole are permanent.

And on the reputational front, “Delaware doesn’t carry the same stigma as the Caymans or Bermuda,” Mr. Lindsay said, adding, “Why not attract business to my little state and get something at the expense of the other states?”

WorldCom, the telecom giant that collapsed into bankruptcy after an accounting scandal, could be a symbol for the Delaware loophole. Bankruptcy court filings showed that the company had cut $20 billion from state taxes thanks to an intangible asset it called “management foresight.”

Delaware subsidiaries are especially popular with global energy and mining companies like Exxon, Chevron and Rio Tinto. Among the top 10, some 915 subsidiaries have been set up in Delaware, compared with 51 in Switzerland and 49 in the Caymans, according to a report last September by the Norway chapter of Publish What You Pay, a London-based group that studies natural resources. The study said that this allows these resource extraction companies to put up a “wall of silence” about their far-flung operations and profits, especially from poor countries that may want a greater slice of the revenue. Exxon, Chevron and Rio Tinto declined to comment.

STATES like Pennsylvania are increasingly fed up. More than 400 corporate subsidiaries linked to Marcellus Shale gas exploration have been registered in Delaware, most within the last four years, according to the Pennsylvania Budget and Policy Center, a nonprofit group based in Harrisburg that studies the state’s tax policy.

***

More than two-thirds of the companies in the Marcellus Shale Coalition, an industry alliance based in Pittsburgh, are registered to a single address: 1209 North Orange Street, according to the center.

“So many of these Marcellus Shale companies have figured out that it is fairly easy to siphon profits from Pennsylvania, so that they don’t pay taxes here,” said Michael Wood, research director at the Harrisburg center.

The center is urging Pennsylvania to try to close the Delaware loophole. But it is running into opposition from Pennsylvania companies that want to retain the break. And, in Delaware, state officials say that their approach to business is good for America."

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Since becoming a lawyer in 1983, Kirk’s over 30 years of practice have focused on advising a wide range of corporations, associations, and individuals (as both plaintiffs and defendants) on both tort and commercial law issues centered around “mass torts.”

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