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'Huge flaw' in nation's tax code aids government contractors

| Saturday, Sept. 22, 2012, 9:17 p.m.
Any money made by World Fuel Services outside of the United States remains free from U.S. income taxes as long as the profits are not 'repatriated,' or brought back to this country.
Any money made by World Fuel Services outside of the United States remains free from U.S. income taxes as long as the profits are not 'repatriated,' or brought back to this country.

When the United States needs fuel for planes and ships, it often turns to Miami-based World Fuel Services.

But rather than sending money to the company's corporate headquarters at the edge of the Everglades, the government awards some contracts to World Fuel subsidiaries in places such as Singapore or London. There, any money the company makes legally remains free from U.S. income taxes as long as the profits are not “repatriated,” or brought back to this country.

With many clients besides the government, World Fuel reported earnings of $794 million for its offshore companies last year. It planned to keep those profits abroad.

“Those subsidiaries pay taxes in those jurisdictions,” said Alexander Lake, the company's general counsel.

World Fuel Services is among many government contractors or multinational corporations based in the United States that have overseas affiliates to limit taxes and liabilities.

The Tribune-Review found that 17 of the 25 largest publicly traded companies with government contracts have one or more subsidiaries in countries identified as tax havens or financial secrecy jurisdictions.

Those government contractors control more than 160 companies in places such as the Cayman Islands, Switzerland and Singapore, among others identified by the Government Accountability Office in 2008 as having some combination of low taxes, lax regulations and strict rules to prevent disclosure of banking secrets.

Twenty of the 25 largest multinational corporations in the United States, meanwhile, report having 691 subsidiaries in those countries, the Trib found. Thirty public companies with a headquarters or large presence in Pittsburgh have them.

Foreign subsidiaries are a normal, legal business practice, but a Senate investigation this month sounded alarms about how some companies work the system to avoid paying taxes.

Government contractors locating offshore after receiving taxpayer dollars raise unique questions, said Rebecca Wilkins, senior counsel at Citizens for Tax Justice, a Washington nonprofit.

“Taxpayers should definitely be concerned,” she said. “It's not illegal, but it is what we consider a huge flaw in the tax system in that it allows … companies who are earning dollars from U.S. contracts to avoid paying any U.S. tax.”

Not only do those companies not pay taxes on business conducted with the government, they can gain an advantage when competing for contracts, the GAO found. By lowering their tax obligations through offshore affiliates, companies might reduce their costs below competitors.

“It gives an almost unfair advantage,” said Dennis Lormel, a private consultant who headed the FBI's Financial Crimes Section. “From a legal standpoint it's not, but from a practical standpoint it would seem to give them an advantage because they're able to park money offshore, and they're able to use that as a vehicle to put in a more attractive bid.”

U.S. companies, like all Americans, have every right to avoid taxes in a legal way, said Curtis Dubay, senior tax policy analyst at The Heritage Foundation, a conservative Washington policy group. Tax regulators closely monitor companies to make sure they pay what they owe.

“The rules are very strict,” he said. “It's not like they're weak. The IRS looks at these transactions very closely.”

Beyond potential tax advantages, offshore companies can avoid U.S. regulations, Wilkins said. And they can benefit from a veil of secrecy that can be difficult — if not impossible — for even top U.S. investigators to penetrate, officials said.

The GAO was stymied this year when it attempted to trace U.S. companies through their overseas affiliates. Investigators often are limited to knowing only the information companies report about themselves, said James White, the GAO's director of tax issues.

“Once you go offshore to look at companies, it's very difficult to get information about them,” he said, “especially when they're in jurisdictions that don't do a lot of reporting or have a lot of public records.”

World Fuel Services is an example. It supplies aviation, marine and vehicle fuel to government and commercial customers at 6,000 locations in 200 countries. It has 20 subsidiaries in secrecy havens, according to Securities and Exchange Commission filings.

Although one of the company's Cayman Islands subsidiaries appears as the global vendor on federal contracts — worth $1.15 billion this fiscal year — Lake described the notation as a mistake. The Caymans subsidiary does not have any direct government business, and the Miami parent company should be listed as vendor, he said.

“From our perspective, it appears to be an error,” Lake said. “The fact that it is in the ownership chain has no impact on the taxes or what we would or will pay.”

Those Cayman contracts were awarded to three other subsidiaries: World Fuel Services Europe and Tramp Oil & Marine, both in London, and World Fuel Services (Singapore). The Singapore company has contracts to provide fuel in places such as Afghanistan and Kyrgyzstan.

“These are contracts that supply goods and service outside the United States,” Lake said, adding that other subsidiaries have customers within the country and pay taxes here.

On worldwide income of $238 million last year, the company reported an income tax provision of $39 million, for an effective tax rate of 16.4 percent. Of that tax bill, $27.5 million went to foreign governments.

Federal contractors based in the United States would not be able to compete on price if their offshore subsidiaries had to pay taxes that foreign competitors would not, Lake said.

“If you were to do that, you're simply going to be putting those companies at a disadvantage to foreign companies that could and do bid on those same contracts and aren't going to pay taxes,” he said.

Andrew Conte and Lou Kilzer are staff writers for Trib Total Media. Conte can be reached at 412-320-7835 or andrewconte@tribweb.com. Kilzer can be reached at 412-380-5628 or lkilzer@tribweb.com.

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