GAO

 GAO-03-194R Federal Contractors Incorporated Offshore

United States General Accounting Office

Washington, DC 20548

October 1, 2002

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

The Honorable Jim Turner

Ranking Minority Member

Subcommittee on Technology and

Procurement Policy

Committee on Government Reform

House of Representatives

Subject: Information on Federal Contractors That Are Incorporated Offshore

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.1

 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 broad category of transactions 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.2

 Generally, 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

 1

The term “tax haven” is generally used in research and the media to refer to countries that have no or

nominal taxes. Multinational companies incorporated in a tax haven may have U.S. based subsidiaries

that pay U.S. taxes. The Organization for Economic Cooperation and Development (OECD) has

developed criteria for identifying countries that may engage in harmful tax competition in the form of

tax havens.

2

 Department of the Treasury, Office of Tax Policy, Corporate Inversion Transactions: Tax Policy

Implications (Washington, D.C.: May 17, 2002).
Page 2 GAO-03-194R Federal Contractors Incorporated Offshore

profile of inversion transactions. This year, several bills have been introduced in

Congress that address such transactions.

You asked us for information on the extent to which large federal contractors are

incorporated offshore. In response, we agreed to determine which, if any, of the

largest 100 publicly traded federal contractors are incorporated in a tax haven

country or have engaged in a transaction characterized by independent observers as

an inversion.

We used the General Services Administration’s listing of top federal contractors to

identify (1) the top 100 federal contractors that are publicly traded corporations and

(2) the total dollar amount that was obligated in fiscal year 2001. We reviewed

various public documents filed by the corporations with the Securities and Exchange

Commission (SEC) on its Electronic Data Gathering, Analysis, and Retrieval

(EDGAR) system to identify the state or country where the contractor is

incorporated. When the data we needed to do our analysis were not available on

EDGAR, we obtained our information from the corporations’ Web sites and from

published reports. To determine whether a country is considered a tax haven, we

made reference to the work the Organization for Economic Cooperation and

Development did on tax haven countries.3

 Finally, to determine whether a

transaction has been characterized as an inversion, we reviewed the corporations’

SEC filings and reports published by organizations, including Congressional Research

Service and the New York State Bar Association Tax Section. We did our work in

August and September 2002 in accordance with generally accepted government

auditing standards.

Results

Four of the top 100 federal contractors that are publicly traded corporations are

incorporated in a tax haven country. Table 1 lists the four corporations, the dollar

amount of their federal contract obligations in fiscal year 2001, the country where

they are incorporated, and the year of incorporation.

 3

Organization for Economic Cooperation and Development, Towards Global Tax Co-operation:

Progress in Identifying and Eliminating Harmful Tax Practices (2000); Organization for Economic

Cooperation and Development, The OECD’s Project on Harmful Tax Practices: The 2001 Progress

Report (November 2001); and OECD’s List of Unco-operative Tax Havens (April 18, 2002). We

referred to OECD’s list of 31 countries that have made commitments to end “harmful tax practices” by

December 31, 2005, as well as to OECD’s list of seven countries that have not made such

commitments. The commitments are to transparency and effective exchange of information. In this

report we refer to these 38 countries as tax havens.
Page 3 GAO-03-194R Federal Contractors Incorporated Offshore

Table 1: Federal Contractors, out of the Top 100 Publicly Traded Federal

Contractors, Incorporated in a Tax Haven Country

Name of corporation

Federal contract

obligations

 FY 2001

(dollars in

thousands)

Incorporation

location

 Incorporation

date

McDermott International,

Inc. 1,885,243 Panama 1983

Foster Wheeler, Ltd. 286,298 Bermuda 2001

Accenture, Ltd. 278,990 Bermuda 2001

Tyco International, Ltd. 206,387 Bermuda 1997

Source: GAO analysis of General Services Administration contract data and SEC records.

The four corporations accounted for about $2.7 billion for contract obligations in

fiscal year 2001, which is about 2.6 percent of the $102 billion in federal contract

obligations awarded to the top 100 publicly traded corporations. (See enc. I for a list

of the top 100 publicly traded federal contractors.)

Three of the four corporations (McDermott International, Inc., Foster Wheeler, Ltd.,

and Tyco International, Ltd.) have engaged in transactions that have been

characterized as inversions.4

 The enclosure provides more information on how the

four corporations became incorporated offshore.

We are sending copies of this letter to the Chairman of the House Committee on

Government Reform and the Chairman of the Subcommittee on Technology and

Procurement Policy of the House Committee on Government Reform; the Chairmen

and Ranking Minority Members of the House Committee on Ways and Means and the

Senate Committee on Finance; and other interested parties. We will also make copies

available to others upon request. In addition, this letter will be available at no charge

on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions, please contact me on (202) 512-9110 or Ralph

Block on (415) 904-2150.

James R. White

Director, Tax Issues

Enclosure

 4

 New York State Bar Association Tax Section, Report on Outbound Inversion Transactions, Report

No. 1014 (Albany, N.Y.: May 24, 2002) and Congressional Research Service, Firms That Incorporate

Abroad for Tax Purposes: Corporate “Inversions” and “Expatriation” (Washington, D.C.: Sept. 20,

2002).
Page 4 GAO-03-194R Federal Contractors Incorporated Offshore

Enclosure

Information on Corporations Receiving Federal Contracts

 and Those That Are Incorporated Offshore

The following table lists the top 100 federal contractors that are publicly owned

corporations, the dollar amount of their fiscal year 2001 federal contracts, the state or

country where they are incorporated, and the year of incorporation.

Table 2: Top 100 Publicly Traded Federal Contractors

Rank Company name

Federal contract

obligations

FY 2001

(dollars in

thousands)a

Incorporation

location

Incorporation

date

1 Lockheed Martin Corporation 17,951,303 Maryland 1995

2 The Boeing Company 14,362,243 Delaware 1916

3 Raytheon Company 6,123,605 Delaware 1998

4 Newport News Shipbuilding, Inc. 5,689,359 Delaware 1996

5 Northrop Grumman Corporation 5,636,124 Delaware 1985

6 General Dynamics Corporation 4,928,238 Delaware 1952

7 United Technologies Corporation 3,500,465 Delaware 1934

8 Science Applications International Corporation 2,654,492 Delaware 1984

9 TRW, Inc. 2,499,816 Ohio 1916

10 AmerisourceBergen Corporation 1,900,969 Delaware 2001

11 McDermott International, Inc. 1,885,243 Panama 1983

12 General Electric Company 1,808,984 New York 1892

13 American Management Systems, Inc. 1,675,676 Delaware 1970

14 Computer Sciences Corporation 1,648,495 Nevada 1959

15 Honeywell International, Inc. 1,442,018 Delaware 1985

16 BAE Systems, plc. 972,526 United Kingdom 1977

17 Health Net, Inc. 944,618 Delaware 1990

18 Fluor Corporation 931,885 Delaware 2000

19 ITT Industries, Inc. 879,772 Indiana 1995

20 Alliant Techsystems, Inc. 862,269 Delaware 1990

21 Exxon Mobil Corporation 707,283 New Jersey 1882

22 The IT Group, Inc. 671,977 Delaware 1987

23 Philipp Holzmann AG 655,360 Germany 1849

24 Textron, Inc. 600,533 Delaware 1967

25 Oshkosh Truck Corporation 566,511 Wisconsin 1917

26 Electronic Data Systems Corporation 560,767 Delaware 1994

27 Motorola, Inc. 552,520 Delaware 1947

28 Unisys Corporation 549,905 Delaware 1999

29 Jacobs Engineering Group, Inc. 536,130 Delaware 1987

30 Halliburton Company 534,177 Delaware 1924

31 Washington Group International, Inc. 531,234 Delaware 1993

32 WorldCom, Inc. 503,811 Georgia 1983

33 International Business Machines Corporation 498,656 New York 1911

34 Dell Computer Corporation 493,423 Delaware 1987

35 L-3 Communications Holdings, Inc. 482,248 Delaware 1997

36 BP, plc 480,858 United Kingdom 1998

37 Affiliated Computer Services, Inc. 451,067 Delaware 2001
Page 5 GAO-03-194R Federal Contractors Incorporated Offshore

38 DaimlerChrysler AG 435,921 Germany 1998

39 The Titan Corporation 424,087 Delaware 1986

40 Cardinal Health, Inc. 422,120 Ohio 1979

41 Anteon International Corporationb 406,304 Delaware 1996

42 GTSI Corporation 402,408 Delaware 1983

43 AT&T Corporation 398,326 New York 1885

44 Humana, Inc. 394,135 Delaware 1964

45 Harris Corporation 389,970 Delaware 1926

46 CACI International, Inc. 380,524 Delaware 1985

47 Rockwell International Corporation 372,131 Delaware 1996

48 The Wackenhut Corporation 356,968 Florida 1958

49 Rolls-Royce, plc 327,792 United Kingdom 1906

50 Engineered Support Systems, Inc. 321,384 Missouri 1981

51 Valero Energy Corporation 310,202 Delaware 1981

52 Goodrich Corporation 308,283 New York 1912

53 Johnson Controls, Inc. 299,592 Wisconsin 1900

54 CNF, Inc. 295,113 Delaware 1958

55 Anthem, Inc. 293,153 Indiana 2001

56 ManTech International Corporation 291,513 New Jersey 1968

57 Foster Wheeler, Ltd. 286,298 Bermuda 2001

58 Accenture, Inc. 278,990 Bermuda 2001

59 URS Corporation 262,489 Delaware 1991

60 SRA International, Inc. 234,926 Delaware 1984

61 Rockwell Collins, Inc. 234,075 Delaware 2001

62 The Procter and Gamble Company 224,212 Ohio 1837

63 General Motors Corporation 222,440 Delaware 1916

64 FedEx Corporation 214,907 Delaware 1997

65 Oracle Corporation 212,468 Delaware 1986

66 Tetra Tech, Inc. 211,705 Delaware 1988

67 Verizon Communications, Inc. 207,210 Delaware 1983

68 Tyco International, Ltd. 206,387 Bermuda 1997

69 Motor Oil (Hellas) Corinth Refineries S.A. 199,462 Greece 1970

70 Archer Daniels Midland Company 189,876 Delaware 1923

71 Veridian Corporation 188,960 Delaware 1986

72 Smiths Group, plc 184,232 United Kingdom 2000

73 Ford Motor Company 179,126 Delaware 1919

74 Texas Instruments, Inc. 178,631 Delaware 1938

75 Computer Associates International 172,202 Delaware 1974

76 United Industrial Corporation 171,044 Delaware 1959

77 Orbital Sciences Corporation 161,286 Delaware 1987

78 Ball Corporation 153,613 Indiana 1922

79 Parker-Hannifin Corporation 153,562 Ohio 1938

80 Philip Morris Companies, Inc. 149,634 Virginia 1919

81 Xerox Corporation 139,224 New York 1906

82 Sprint Corporation 136,200 Kansas 1938

83 ConAgra Foods, Inc. 131,850 Delaware 1975

84 GenCorp, Inc. 131,848 Ohio 1915

85 Siemens AG 124,452 Germany 1966

86 Roy F. Weston, Inc. 124,380 Pennsylvania 1957

87 Holly Corporation 121,831 Delaware 1947

88 McKesson Corporation 121,526 Delaware 1994

89 Telos Corporation 118,803 Maryland 1972
Page 6 GAO-03-194R Federal Contractors Incorporated Offshore

90 KPMG Consulting, Inc. 117,456 Delaware 1999

91 Cubic Corporation 117,054 Delaware 1984

92 PC Connection, Inc. 116,919 Delaware 1997

93 DRS Technologies, Inc. 116,395 Delaware 1968

94 Avaya, Inc. 115,079 Delaware 2000

95 Hillenbrand Industries, Inc. 114,456 Indiana 1969

96 Furniture Brands International, Inc. 112,395 Delaware 1921

97 Berkshire Hathaway, Inc. 111,993 Delaware 1973

98 Lucent Technologies, Inc. 107,402 Delaware 1995

99 WGL Holdings, Inc. 105,260 Virginia 2000

100 Olin Corporation 104,121 Virginia 1892

Total 101,770,865

a

Contract obligations include contracts with subsidiaries. According to a General Services Administration (GSA)

official, GSA follows a multi-step process (that includes using Dun & Bradstreet assigned D-U-N-S numbers,

company names, and company affiliations) to aggregate federal contracts by company. We did not verify GSA’s

federal contractors listing for accuracy or completeness.

b

Formerly Azimuth Technologies, Inc.

Source: General Services Administration, Securities and Exchange Commission, and GAO Internet research.

Four of the top 100 federal contractors that are publicly traded corporations are

incorporated in a tax haven country. Information on when these four corporations

(McDermott International, Inc., Foster Wheeler, Ltd., Accenture, Ltd., and Tyco

International, Ltd.) were incorporated in a tax haven country is discussed below.

McDermott International, Inc.: With over $1.8 billion in federal contract obligations

in fiscal year 2001, McDermott International was the 11th largest publicly traded

federal contractor. Almost three-quarters of the contracts awarded to McDermott

International, Inc. and its subsidiaries and their joint ventures were with the

Department of Energy (DOE). Most of the contract amounts were for providing

facilities support services at Department of Energy facilities in Oak Ridge, Tenn., and

Albuquerque, N. Mex. Other Energy Department contracts were for work related to

nuclear reactors, hazardous waste clean up and Strategic Petroleum Reserve

operations.

McDermott International’s filings with the SEC and McDermott International’s Web

site did not contain information on the circumstances surrounding its incorporation

in Panama. However, a May 2002 report by the New York State Bar Association

provides some background on how McDermott Incorporated, a U.S.-based

corporation, exchanged shares with McDermott International to become a Panamabased corporation.5

 McDermott Incorporated, which was incorporated in Delaware

in 1946, had a Panamanian subsidiary, McDermott International. In 1983,

shareholders of McDermott Incorporated exchanged their shares for McDermott

International shares.

 5

 New York State Bar Association Tax Section, Report on Outbound Inversion Transactions, Report

No. 1014 (Albany, N.Y.: May 24, 2002).
Page 7 GAO-03-194R Federal Contractors Incorporated Offshore

Foster Wheeler, Ltd.: With over $280 million in federal contract obligations in fiscal

year 2001, Foster Wheeler, Ltd., was the 57th largest publicly traded federal

contractor. Sixty-two percent of Foster Wheeler contracts were with the Department

of Defense, with another 34 percent held by the Department of Energy. Fifty-three

percent of the contract dollars were for hazardous waste cleanup or other

environmental services, with another one-third for facilities maintenance or

construction.

According to filings with the SEC, the Foster Wheeler Corporation was originally

incorporated in New York in 1900 and reorganized to become a Bermuda corporation

in 2001. In order to accomplish its change in domicile, it established a new

subsidiary, Foster Wheeler, Ltd., based in Bermuda and wholly owned by Foster

Wheeler Corporation. Foster Wheeler, Ltd., indirectly owned another company,

Foster Wheeler LLC, a Delaware company. On May 25, 2001, Foster Wheeler LLC

became the surviving entity of a merger with Foster Wheeler Corporation. Because

Foster Wheeler LLC was already a subsidiary of Foster Wheeler, Ltd., the Bermuda

corporation became the new parent company. All shares in the Foster Wheeler

Corporation were converted into shares of Foster Wheeler, Ltd. According to the

prospectus to shareholders filed with the SEC, the Foster Wheeler Corporation made

this transaction to have a more favorable regulatory environment, attract non-US

investors, improve their worldwide effective tax rate, and provide for greater

flexibility to restructure.

Accenture, Ltd.: With about $280 million in federal contract obligations, Accenture

was the 58th largest publicly traded federal contractor in fiscal year 2001. Accenture

contracted with many departments of the government, but about 43 percent of its

contracts were with the Department of Defense. About 98 percent of Accenture's

contract dollars are for automatic data processing and telecommunications services

and equipment.

According to SEC filings, Accenture, Ltd. was incorporated in Bermuda in 2001. The

company was formerly associated with Arthur Anderson and Andersen Worldwide.

Prior to incorporating in Bermuda, Accenture was operating as a series of related

partnerships and corporations under the control of its partners through the

mechanism of contracts with a Swiss coordinating entity. In April 2001, Accenture’s

partners voted to pursue an initial public offering. According to the prospectus filed

with the SEC, the partners were to generally exchange all of their interests in these

partnerships and corporations for Accenture stock.

Tyco International, Ltd.: With over $200 million in federal contract obligations, Tyco

International was the 68th largest publicly traded federal contractor in fiscal year 2001.

About 76 percent of Tyco’s federal contracts are with the Department of Defense. The

contracts are for such products and services as aeronautical and nautical system

manufacturing, architect and engineering services, construction and restoration of

facilities, maintenance and repairs, general purpose machine manufacturing, and

environmental consulting services.

According to SEC filings, in 1997 Tyco International, Ltd., incorporated in

Massachusetts, merged into ADT Limited, a Bermuda corporation. The name of the

combined company was changed from ADT Limited to Tyco International, Ltd. Each
Page 8 GAO-03-194R Federal Contractors Incorporated Offshore

Tyco share was converted to one share of stock in the combined company. In a press

release, Tyco said that the combined company would provide cost, marketing, and

service synergies. According to the prospectus to shareholders filed with the SEC,

keeping the company incorporated in Bermuda would allow the combined company

to preserve certain advantages enjoyed by ADT Limited. For example, Tyco

International reported that its overall tax savings was over $400 million in 2001.

(440163)