GAO: Big U.S. Companies Love Tax Havens

In a 60-page report released Friday, the U.S. Government Accountability Office offers some eye-opening details on U.S. companies' use of tax havens and "financial privacy jurisdictions," which the agency defines as "jurisdictions that have strict banking secrecy laws that persons can use to shield their wealth from taxation in their home country." As many as 83 of the 100 largest publicly traded U.S. corporations by revenue have subsidiaries in one or more such haven or jurisdiction, according to the report.

Indeed, four of the firms in that group of 83 own more than 100 subsidiaries in tax havens or financial privacy jurisdictions. And one organization -- Citigroup -- has no fewer than 427, including 91 in Luxembourg, 90 in the Cayman Islands, and 35 in the British Virgin Islands.

The report's investigation of the 100 largest publicly traded U.S. Federal contractors tells a similar story; 63 firms in this group reported having subsidiaries in tax havens or financial privacy jurisdictions. The Procter & Gamble Co., which had nearly $313 million in federal contracts in fiscal 2007, reports having 83 subsidiaries in these locations, including 24 in Switzerland and 11 in Singapore.

What exactly constitutes a tax haven? The GAO's research failed to turn up any agreed-upon definition, and the agency made no attempt to establish one of its own. However, the report describes a group of relevant characteristics, including "no or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center." Rather than develop its own list of tax havens, the GAO amalgamated three such lists, from the Organization for Economic Cooperation and Development (OECD), the National Bureau of Economic Research (NBER), and a 2006 U.S. District Court order.

Of course, the fact that a business chooses to establish a subsidiary in a listed location doesn't necessarily mean that it's seeking to reduce its tax burden; as the report points out, "subsidiaries may be established in a listed jurisdiction for a variety of nontax business reasons." But the GAO also notes the U.S. Treasury's concern that some companies aggressively set transfer prices to shift income to offshore locations in a bid to avoid tax.

Click here for a summary or here for the full GAO report.