Tax Policy and Administration:

Information on Federal Contractors That Are Incorporated Offshore

GAO-03-194R: Published: Oct 1, 2002. Publicly Released: Oct 1, 2002.

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Some U.S.-based multinational companies have found that the effective tax rate on income earned from foreign sources can be reduced if they are incorporated in countries that either do not tax corporate income at all or tax the income at a lower rate than the U.S. corporate tax rate. Consequently, some U.S.-based companies incorporate from the outset in these so-called "tax haven" countries. In addition, some companies that were incorporated in the United States have reincorporated in tax haven countries through "corporate inversion transactions." According to the Department of the Treasury, the term "inversion" is used to describe a transaction through which a U.S.-based multinational company restructures its corporate group so that after the transaction the ultimate parent of the corporate group is a foreign corporation. After an inversion transaction, shareholders of the former U.S. parent company hold stock of the newly formed foreign parent, and the operations of the company are unchanged. Treasury also noted that there has been a marked increase recently in the frequency, size, and profile of inversion transactions. Four of the top 100 federal contractors that are publicly traded corporations are incorporated in a tax haven country. The four corporations accounted for $2.7 billion for contract obligations in fiscal year 2001, which is 2.6 percent of the $102 billion in federal contract obligations awarded to the top 100 publicly traded corporations. Three of the four corporations have engaged in transactions that have been characterized as inversions.

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