Halliburton moves to the Mideast/Halliburton dumping the IRS?

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March 12 2007 6:46 PM

Halliburton Says Salaam

How much will Halliburton save in U.S. taxes?

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Halliburton Company's building in Houston. Click image to expand.
A Halliburton building in Houston

On Sunday, Halliburton announced a plan to move its corporate headquarters from Houston to Dubai, United Arab Emirates. Democratic lawmakers, led by Sen. Patrick Leahy, D-Vt., accused the company of dodging taxes and called the move "corporate greed at its worst." How much will Halliburton save in U.S. taxes?

Not much, for the time being. Halliburton's headquarters has moved, but the company is still incorporated in Delaware and remains subject to U.S. law and taxes. Halliburton also says it won't lay off or transfer any of the 4,000 employees in Houston. The company will still have to pay U.S. income taxes on revenue generated in its U.S. business, which amounted to $194 million last year.

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To skip out on U.S. taxes altogether, Halliburton would need to incorporate overseas. This feat calls for some tricky legal acrobatics. A 2005 regulation from the Internal Revenue Service makes it almost impossible to reincorporate without merging with a foreign company. If Halliburton did manage to reincorporate overseas, it would still need to dump its existing shareholders to avoid paying U.S. taxes. In any case, it wouldn't make much sense to pursue this plan in Dubai. Bermuda and the Cayman Islands still offer the best deal for dodging taxes and regulations.

The move to Dubai could save Halliburton (and CEO Dave Lesar) some money on foreign taxes, though. (With operations in 100 countries, Halliburton had to pay out $289 million to foreign governments last year.) The United Arab Emirates government may have sweetened the deal with favorable real-estate terms or other incentives. Dubai's Jebel Ali Free Zone, which already houses more than 5,000 foreign-owned businesses, doesn't impose corporate or personal income taxes and has a robust workforce with no minimum wage. The labor advantage could even convince Halliburton to eventually close the Houston office as the North American business shrinks. After 2008, about 55 percent of Halliburton's services business will come from the Eastern Hemisphere—up from just 40 percent in 2006.

Lawmakers also fear that the Dubai move could endanger national security. After all, how can a military contractor move down the block from the enemy? But it's a moot question. KBR, the engineering and military services unit of Halliburton, will be a stand-alone company by the end of the month. Halliburton shareholders, who now hold about 80 percent of KBR, are selling off their stock every day.

Got a question about today's news? Ask the Explainer.

Explainer thanks Poe Fratt of A.G. Edwards & Sons, Brad Handler of Wachovia Securities, David Rosenbloom of New York University School of Law, and Anthony Sabino of St. John's University.

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