Several oil-service companies' efforts to reduce their tax liabilities may be for naught if Congress closes the loophole through which the companies are leaping. By incorporating in Bermuda or the Cayman Islands, a company is obligated to pay a U.S. income tax only on revenues generated in the U.S. As more oil-service companies incorporate offshore, more are finding it necessary to follow in their competitors' wake-to continue to compete at least in the area of tax liability. U.S. senators Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.) seek to end corporate inversions that have taken place after March 21, 2002. The fear is that the U.S. tax base will erode because of these transactions. "This is very troubling especially now, as we all try to pull together as a nation." A corporate inversion is when a U.S. corporation forms a subsidiary in a foreign tax haven, then names it the parent company, which "inverts" the corporate chain of ownership. Once this structure is in place, the company can transfer its foreign assets to the new parent corporation, protecting those assets from U.S. tax. Oil-service companies moving their country of incorporation offshore include Houston-based drilling contractor Nabors Industries Inc.; Sugar Land, Texas-based driller Noble Drilling Corp.; and Houston-based service company Weatherford International Inc. Additionally, Veritas DGC Inc. and Petroleum Geo-Services ASA plan to become subsidiaries of a Cayman Islands holding company when they complete their planned merger. Both are incorporated in Delaware currently. Baucus and Grassley contend that many foreign parent corporations are merely inactive "shell" corporations, consisting of nothing more than a sheet of paper in a filing cabinet. But oil-service executives say that most of their earnings come from foreign locales, and it makes sense to avoid the "double taxation" that arises when foreign assets are taxed by both foreign and U.S. governments. "It would have been unthinkable for us not to go this route given the effect double taxation has on us and will increasingly have," Weatherford spokesman Don Galletly says. "The market for our types of products and services is declining in the U.S., and more and more of our earnings are coming from international sources." Galletly estimates that close to two-thirds of Weatherford's income is generated abroad. Changing the company's incorporation to Bermuda will lower the company's tax rate from about 36% to well below 30%, he says. Kenneth Sill, who follows service and supply companies for Credit Suisse First Boston, says, "I don't understand the rationale for not letting people do it. It would seem you're putting U.S. companies at a competitive disadvantage." That competitive disadvantage could apply not only to U.S. companies versus foreign companies, but to companies who were able to complete their inversions before March 21 versus those who were not. For example, Transocean Inc. became a Cayman Islands corporation in May 1999. Marshall Adkins, an oil-service analyst with Raymond James & Associates, says, "Obviously as a taxpayer you sit back and say, 'That isn't right, we need the taxes.' But as a businessperson and/or stockholder, you look at it and say, 'Well wait a minute, all of the competition has a lower tax rate.' So you want to compete on a level playing field." A corporate inversion could lower a company's tax rate from an average of 35% to 40% to a range of 20% to 25%. Baucus says a widespread review of U.S. tax policy may be required in the future. "I also understand that, over the long term, we may need to consider whether the structure of the U.S. international tax rules creates an incentive for U.S. corporations to shift their operations abroad to remain competitive." -Jodi Wetuski