Tough new legislation which would stop US companies registering in Bermuda to allegedly dodge income tax back home was introduced in Washington yesterday.

The bill would make certain American corporations which registered in Bermuda and other foreign jurisdictions liable to pay income tax - a move which could be extremely damaging to the Island's international business sector. Although all the details are not known, the first draft states companies which registered out of America before September 11 can still be hauled back into the US tax system. It is not known how far back the legislation would stretch.

The bill was introduced by Representative Richard Neal in the House of Representatives, reflecting widespread anger following the September 11 attacks about US corporations moving offshore to save millions in taxes.

The controversy hit the front page of the New York Times when Connecticut-based Stanley Works announced it planned to move to Bermuda to save $30 million in taxes.

Introducing the bill in the House of Representatives, Mr. Neal said: “I hope you will join me today in shutting down this loophole exploited by corporate expatriates before one more American company decides to shelve the Stars and Stripes to save some on the bottom line.”

Finance Minister Eugene Cox said he hoped the laws would not be applied rigidly if the bill is eventually passed.

Opposition Leader Dr. Grant Gibbons said it was too early to say how damaging the legislation, which is likely to be called the Corporate Expatriation Bill, would be to Bermuda because it was not known how far back the law would apply and how many US companies it could snag.

Rep. Neal's Press secretary Bill Tranghese told The Royal Gazette he was hopeful the legislation will win cross-party support and be passed this year.

“The goal is to prevent corporations from avoiding US income tax by reincorporating in a foreign country. Any number have been reincorporating in Bermuda so this particular piece of legislation doesn't single out Bermuda, but its trying to prevent corporations from avoiding income tax by reincorporating in any foreign country,” he said.

Two tests will be applied to ensure offshore US companies have to pay income tax:

Where a “nominally foreign corporation” acquires “substantially all of the property of a US corporation and more than 80 percent of the stock of foreign corporation is held by former shareholders of the US corporation; or

Where 50 percent is substituted for 80 percent where the foreign acquiring corporation does not have substantial business activity in the host foreign country and its stock is publicly traded principally in the US.”

For companies moving offshore after September 11 last year, the changes would apply immediately. For those moving after that date, they would come into effect in the beginning of 2004.

Mr. Cox said: “The ball is in Congress' court. It is regretful if this goes through and is applied rigidly and it would be unfortunate for us and the companies that have set up here and done so well by having a competitive edge they would not otherwise have had. Our laws have not been violated and they meet strict international standards. Bermuda has not just been taking, it has been giving something back as well. What would be a set back is that Bermuda has been very innovative in allowing companies to develop reinsurance and catastrophe insurance that have helped corporations around the world. We were getting something out by them coming here, but they have been creative and created business that has helped the whole world after September 11.