"You've got a building in the Cayman Islands that supposedly houses 12,000 corporations. That's either the biggest building or the biggest tax scam on record."
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Yes, but it's not illegal
Thousands of subsidiaries, many from U.S. corporations, have indeed set up shop — or more precisely, hung a nameplate — at the five-story Ugland House and other financial centers in the Cayman Islands.
They include Coca-Cola, Procter & Gamble, General Motors, Intel, FedEx and Sprint.
But while Sen. Barack Obama is right on the general point, calling the practice "the biggest tax scam on record" is questionable. From the quote itself, it's hard to tell if Obama is taking issue with the way companies use the Caymans as a tax shelter, or if he's objecting to the U.S. tax code that makes it possible.
"There's nothing better than to beat up on a tax haven on a beach," said Douglas Shackelford, a professor at the University of North Carolina's business school. "It sounds crooked, but if one really thinks about the facts, I don't see the grounding."
Weather isn't drawing the corporations, of course. The Caymans do not have a corporate income tax. The United States taxes corporate income at 35 percent, higher than most countries.
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As long as profits are not brought back to the United States, or "repatriated," no tax is due. Federal law allows the taxation of "passive income," meaning the interest earned on profits of those subsidiaries. But typically the companies reinvest the money elsewhere, Shackelford said.
Obama is the co-sponsor of legislation that would crack down on offshore activities by corporations and individuals. The Stop Tax Haven Abuse Act would target an estimated $100-billion annually, including $30-billion from corporations.
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According to published financial reports, Coca-Cola alone saved $500-million in U.S. taxes in 2003 through foreign subsidiaries. Its Cayman company controls syrup-producing facilities in Ireland. The subsidiary pays taxes in Ireland at 12.5 percent, still far less than in the United States.
So, Obama is right that thousands of corporations, and some do say more than 12,000, are in one building in the Caymans, but he goes too far when he implies it's an illegal scam. We rule his statement Half True.
Our Sources
United States General Accounting Office, International Taxation: Information on federal contractors with offshore subsidiaries," February 2004
Press release, Levin, Coleman, Obama Introduce Stop Tax Haven Abuse Act , Feb. 17, 2007
Bloomberg Markets, The $150-billion shell game, by David Evans, August 2004
New York Times, Offshore Tax Breaks Lure Money Managers, by Lynnley Browning, July 1, 2007
Los Angeles, Times, "Trouble coming for Cayman tax paradise?" by Carol J. Williams, May 15, 2007
Interview with Gary Hufbauer, a tax expert at the Institute for International Economics in Washington, D.C,
Interview with Michael McIntyre, a law professor at Wayne State University in Michigan
Interview with Eric Toder, an expert with the nonpartisan Urban Institute in Washington, D.C.
Interview with Douglas Shackelford, a professor at the University of North Carolina's business school
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