How Offshore Havens Helped Enron Escape Taxes
David Cay Johnston New York Times Service
Friday, January 18, 2002
Enron Corp. paid no income taxes in four of the last five years, using almost 900 subsidiaries in tax-haven countries and other techniques, an analysis of its financial reports to shareholders shows. It was also eligible for $382 million in tax refunds from the Treasury. .The company used strategies common among U.S. businesses to avoid taxes. It also used some unusual methods, including the creation of 881 subsidiaries abroad, including 692 in the Cayman Islands, 119 in the Turks and Caicos, 43 in Mauritius and eight in Bermuda. Two Enron subsidiaries have been accused by a group of insurers of engaging in sham transactions in a tax haven, according to court papers in a New York lawsuit. Enron is by no means alone in not paying income taxes. A small but growing percentage of large U.S. companies pay no income taxes, a study by Citizens for Tax Justice showed in October 2000. The study of half the Fortune 500 companies found that 24 owed no tax in 1998, up from 13 in 1997 and 16 in 1996. While it is common for American companies to create subsidiaries in tax havens abroad, Enron had far more than most other companies, tax experts said.came under attack from the Treasury Department and the Internal Revenue Service during the Clinton administration. The basic technique involves having profits go to a partner not subject to American income taxes, such as a bank in a country that is a tax haven. The partner, after taking its fee, then returns the profits in a form that is recognized as not taxable by American law. Enron avoided taxes for another big reason: deductions for stock options. When executives exercise stock options the company takes a deduction on its corporate income tax return equal to the profit realized by the executive, even though it is not required to show an expense on its profit-and-loss statement to shareholders. The benefits to the company can be great, particularly if a soaring stock price leads to the exercise of large numbers of options. That was true at Enron when its shares were soaring in 1998 through 2000. It is not clear from Enron's financial reports how much the tax haven operations reduced the company's taxes. But Enron did disclose that deduction for stock options alone turned what would have been a tax bill of $112 million in 2000 into a refund of $287 million. Indeed, Enron paid taxes in only one of the years between 1996 and 2000, while the government paid the company hundreds of millions of dollars in refunds. The analysis of Enron's tax payments was performed by Citizens for Tax Justice, an organization that is backed by labor unions. Its calculations are widely accepted by groups with sharply different views. Mark Palmer, a spokesman for Enron, said Wednesday he was unable to comment on the tax issues. International tax experts said corporations create offshore subsidiaries in tax havens for a variety of legitimate reasons, including keeping profits earned overseas from being taxed in the United States and insulating foreign business partners from U.S. tax law.