Contractors with units in tax havens might be unfairly targeted

Sixty-three of the largest publicly traded federal contractors operate subsidiaries in offshore tax havens, according to a new report from the Government Accountability Office.

Large contractors with such subsidiaries include Oracle Corp., which operates in 77 tax havens; Boeing Co., in 38; Dell Inc., in 29; BearingPoint Inc., in 28; and Computer Sciences Corp., in 21, the report states.

On the other hand, 34 of the 100 largest federal contractors have no offshore havens, including Lockheed Martin Corp., Northrop Grumman Corp., Raytheon Co., SRA International Inc. and Unisys Corp., the report states.

In response to the report, Justice Department officials expressed concern that GAO’s list of contractors operating offshore could be regarded as a blacklist and result in sanctions against the companies.

But GAO auditors cautioned that the existence of a subsidiary in a tax haven such as the Cayman Islands or Mauritius is not necessarily a sign of U.S. tax avoidance. Many companies form units in such jurisdictions for other reasons, GAO said.

“The existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or contractor established that subsidiary for the purpose of reducing its tax burden,” the GAO report states. “We did not attempt to determine if corporations or contractors engaged in transactions with their subsidiaries in order to reduce their tax burden.”

GAO did not recommend any policy changes with regard to the contractors.

Concerns about federal contractors’ tax payments have become a hot issue for the House Oversight and Government Reform Committee. Chairman Rep. Edolphus Towns (D-N.Y.) has said one of his priorities this year is promoting legislation to deny federal contracts to companies that have not paid taxes. However, the bill he submitted last year did not specifically address offshore tax havens.

For the 63 federal contractors with subsidiaries in jurisdictions listed as tax havens, 11 had a single such subsidiary. The rest had two to 83 such subsidiaries.

Federal contractors operate in 34 of the 50 known tax havens, GAO said. Five of the tax havens had more than 100 subsidiaries operated by federal contractors.

Other contractors listed as operating in offshore tax havens include EDS Corp., which operates in 19 tax havens; ITT Corp., in 18; L-3 Communications Corp., in 15; Hewlett-Packard Co., in 14; Harris Corp., in 13; Perot Systems Corp., in 13; United Technologies Corp., in 12; Jacobs Engineering, in 11; IBM Corp., in 10; Microsoft Corp., in eight; Sprint-Nextel Corp., in seven; and Motorola Corp., in four.

Justice officials also cautioned that there is no agreed-upon definition of a tax haven. GAO auditors said they combined three lists for 50 jurisdictions commonly viewed in that fashion, including Barbados, the Cayman Islands, Gibraltar and Mauritius.