Wednesday, March 21, 2007

Halliburton’s Dubai Move Does What to Iranian Subsidiary?

The Justice Department investigated Halliburton’s independent subsidiary in 2004 after a 60 Minutes story showed no staff at the Cayman Islands registered corporation. Halliburton CEO then announced in 2005 that his company would exit Iran while “fulfilling current contracts and commitments”. One contract happened to be a brand spanking new deal to develop natural gas fields in the South Pars project.

Both the Justice and Treasury Departments expressed concern about the “independence” of this Halliburton subsidiary, Dubai based Halliburton Products and Services Limited. The 60 Minutes story indicated mail sent to the Cayman Islands was forwarded to Halliburton headquarters in Houston. Treasury officials seemed concerned that the Cayman registered but Dubai based subsidiary had offices in the same building as Kellogg, Brown and Root, another Halliburton sub. This resulted in a formal Justice Department criminal investigation.

Current U.S. law allows independent foreign subsidiaries to conduct business in Iran, but not in Cuba or North Korea. One Congressman has worked for years to close this loophole, Senator Frank Lautenberg (D-NJ). The move of Halliburton Chair and CEO to Dubai raised an odor the Senator wishes to investigate. Frank formally asked the Treasury Department to look into the matter.

In announcing the move, Halliburton CEO Dave Lesar said “My office will be in Dubai, and I will run our entire worldwide operations from that office, Dubai is a great business center.” How will his move impact that independent subsidiary based in Dubai doing business with Iran?

Lesar also said “At this point in time we clearly see there are greater opportunities in the eastern hemisphere than the western hemisphere.” Driving that point home is the company’s announced spin off of Kellogg, Brown and Root, the huge Pentagon contractor. Just a month ago Halliburton announced its plans to selling their 81% stake in KBR. They’re currently offering shareholders the opportunity to exchange shares.

Money is driving the move to Dubai according to legal experts. Corporate litigation specialists said Halliburton would still be subject to such laws as the Foreign Corrupt Practices Act and Sarbanes-Oxley as a company traded on U.S. stock exchanges and run by U.S. citizens.

"The bottom line seems to be that the only change in status is in respect to tax consequences," said Gregory Craig, an attorney with Williams and Connolly. Foreign income paid to a company based abroad would not be subject to U.S. taxes, according to Craig.

At first the company would not comment on any tax changes. After the firestorm of questions Halliburton said that it anticipated "absolutely no tax benefits" from moving its headquarters to Dubai, which has a zero tax rate. It noted Houston would remain the company's principal executive office.

But tax expert Martin Sullivan said Halliburton's move would change its tax situation "significantly" even with the company still registered in the US. Mr. Sullivan stated by basing its Chairman and Chief Executive in Dubai, Halliburton would be able to argue that some portion of its profits should be attributed to the no-tax jurisdiction.

The director of the Center for Corporate Policy, Charlie Cray said his primary concern was that the move would further reduce Halliburton's overall accountability. "They have proven very adept at circumventing American policy and restrictions by using offshore subsidiaries.”

While it remains to be seen if the average American loses in this deal from a tax perspective, Halliburton’s latest press release provides some insight as the company announced a new plant in Monterrey, Mexico. The facility will manufacture oilfield equipment for upstream customers. Do you know of any U.S. towns that could use the jobs?

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