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Fred E. Foldvary explains how the whole “Bermuda Tax Haven” works:

Several U.S. corporations have incorporated in Bermuda to reduce their taxes. There is no income tax in Bermuda. Insurance companies have done so, and now manufacturers are doing it. Some are incorporating in other tax havens, such as the Cayman Islands in the Caribbean. Offshore reincorporations reduce U.S. Treasury tax revenue by $70 billion annually.

According to David Cay Johnston, by incorporating in Bermuda, the company’s income from outside the USA becomes exempt from American taxes. Also, when an American company borrows from its Bermuda parent, the interest it pays creates a deduction that reduces U.S. taxes, but there is no tax on the interest earned by the Bermuda parent.

A much-publicized case is Stanley Works, a manufacturer of hammers and wrenches, which had been headquartered in Connecticut for 159 years. The company will reduce its taxes by $30 million, to about $80 million. Some companies save much more. Tyco International, headquartered in New Hampshire, saved $400 million last year by being incorporated in Bermuda.

Incorporating in tax havens is not a pure gain to the shareholders. The Internal Revenue Service has ruled that shareholders must pay taxes on any increase in the value of their shares, even if they don’t sell the shares. This deliberately penalizes tax-motivated expatriation. But if the owners bought the shares when the price was higher, there may not be any capital gains. Also, it is up to the share holder to report such gain, since the company does not report it to the IRS.

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