Stanley Works's Bermuda move cuts tax on U.S. profits


Stanley Works, criticized by lawmakers, unions and Conn. officials for seeking to shift its legal address to Bermuda, acknowledged for the first time that the move would reduce taxes on U.S. profits.

The tool making company says it will save $30 million in taxes annually by maintaining a legal address in Bermuda while keeping its base of operations in New Britain, Conn., its home for 158 years. Chairman and CEO John Trani said the savings involve more than just foreign income.

"Stanley will do what it has to do to be competitive," he said in an interview when asked about tax savings from U.S. operations. The company, which is the largest toolmaker in the U.S., is following its rivals and "will do exactly the same as they do -- no more, no less."

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Stanley Works's Bermuda move cuts tax on U.S. profits

Posted 6/7/02

Stanley Works, criticized by lawmakers, unions and Conn. officials for seeking to shift its legal address to Bermuda, acknowledged for the first time that the move would reduce taxes on U.S. profits.

The tool making company says it will save $30 million in taxes annually by maintaining a legal address in Bermuda while keeping its base of operations in New Britain, Conn., its home for 158 years. Chairman and CEO John Trani said the savings involve more than just foreign income.

"Stanley will do what it has to do to be competitive," he said in an interview when asked about tax savings from U.S. operations. The company, which is the largest toolmaker in the U.S., is following its rivals and "will do exactly the same as they do -- no more, no less."

In similar news, Nabors Industries Inc., the world's largest onshore driller of oil and gas wells, announced it was interested in moving legal residence to Bermuda from Delaware. The company faces opposition from public pension funds in NY and Conn., which have stakes in the oil and natural-gas drilling company.

Members of the U.S. Congress have criticized "corporate inversions," in which companies reincorporate in low-tax jurisdictions outside the U.S., as unpatriotic tax dodges. While reincorporating offshore technically puts only a company's non- U.S. income outside the reach of the Internal Revenue Service, lawmakers fear that once Stanley, Nabors and other businesses are set up offshore, they will shelter U.S. income from tax. The issue was examined in a House Ways and Means Committee hearing.

Cooper, Ingersoll-Rand

Cooper Industries Ltd., maker of rival Crescent wrenches, moved its legal residence from Ohio to Bermuda last month. Weatherford International Inc. is planning to move their legal addresses from the U.S. this month. About a dozen other companies have moved since 1997, including Ingersoll-Rand Co., another Stanley Works competitor.

One reason for the barrage of criticism against Stanley Works was the all-American image it cultivated in an advertising campaign emphasizing its small-town roots.

Stanley Works shareholders face a second vote on the move after a May 9 proxy vote approved it by less than 1 percent. Trani said he expects to win approval. The revote hasn't yet been scheduled.

Since May 9, Stanley Works shares have declined 11 percent. Shares rose 13 cents to $41.32 today.

At the Ways and Means Committee hearing, Pamela Olson, Treasury's top tax official, said Congress should take "urgent" steps to keep U.S. firms that reincorporate in offshore tax havens from "inappropriately" avoiding taxes on their U.S. income.

Legislation, Treaties

Treasury recommended limiting the ability of newly reincorporated companies from leveraging the U.S. subsidiary and deducting the interest, reviewing tax treaties designed to avoid double taxation so they can't be exploited to avoid taxes altogether, and ensuring assets can't be sold by the U.S. firm to its foreign parent at artificially low prices.

"Exploitation of inappropriate income-shifting opportunities erodes confidence in the fairness of the tax system," Olson said.

She also said Congress also should review the way the U.S. taxes companies on their foreign income to be competitive with the laws of the U.S.'s major trading partners, a point reiterated by Trani.

The treasury maintains that the U.S. tax code hurts some companies because it taxes all income while most other countries use a territorial system that doesn't tax foreign income.

Conn. Attorney General Richard Blumenthal was scheduled to testify, at the invitation of committee Democrats, about allegations he's made that Stanley Works rigged the outcome of the May 9 vote. Ways and Means Committee Chair Bill Thomas adjourned the hearing before Blumenthal testified because Democrats complained that he had not allowed Connecticut Congressman Jim Maloney, a Democrat, to testify.

Patriotism, Capital Gains

Critics say moving offshore to reduce U.S. taxes while the U.S. fights a war on terrorism is unpatriotic. Stanley counters the move will help the company compete with its lower-taxed international competitors, prevent the company from being acquired by a non-U.S. firm, and boost shareholder value by reducing its effective tax rate to 24 percent from 32 percent.

Stanley says the transaction will increase revenue for the U.S. government because the move will trigger capital gains taxes as shares in the U.S. company are redeemed before new shares in the Bermuda entity are issued.

"From a tax revenue generating standpoint, our reincorporation will generate U.S. taxes, not diminish U.S. taxes," said Trani, who was in Washington to oppose legislation that would ban his company's anticipated tax savings. Olson's testimony called for new rules to make sure all capital gains from corporate inversions are reported to the IRS.

Shifting Income

Critics are more concerned about the potential for firms to dodge taxes on their U.S. operations by shifting income to the Bermuda parent through high debt-to-equity ratios, transfer pricing practices, or exploiting tax treaty rules with third-party countries such as Barbados, where Stanley will establish a presence by holding board meetings.

Worldwide, Stanley paid $49.6 million in income taxes in 2001, including $24.1 million in U.S. federal taxes, $19.6 million in taxes to other national governments and $5.9 million in state taxes, according to its annual report. Mike Bartone, Stanley's vice president for taxes, said the company paid $7 million in U.S. taxes on foreign earnings in 2001. The company has deferred U.S. taxes on $62.6 million on undistributed non-U.S. earnings, which is considered invested indefinitely overseas.

Trani said he couldn't break down how the company would save the $30 million, saying he didn't know about the "bowels" of the tax code.

"Our objective is to get the reduced tax rate," he said. "The way we do it, how we get there and so on are technical matters I'm not frankly familiar with."

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