A recent allegation in a shareholder lawsuit against Tyco International Ltd. TYC.N accuses the conglomerate of diverting millions of dollars worth of rebate checks offshore to avoid paying U.S. income taxes.
The allegation is contained in a securities fraud complaint filed against Tyco and its outside auditor, PricewaterhouseCoopers LLP in U.S. District Court in New Hampshire.
The law firm Milberg Weiss Bershad Hynes & Lerach LLP, representing a pension fund burned by the collapse of Tyco’s stock last year, filed the 328-page complaint late last month.
One witness claims, for example, that Tyco’s director of global transportation instructed his company to send refund checks for volume discounts to a Tyco affiliate in the Bahamas called World Services Inc., according to the lawsuit.
The witness also said that even though his company provided transportation services for only a small fraction of Tyco’s overall business, his company paid millions of dollars of rebates to non-U.S. Tyco entities, the complaint stated.
“In an apparent attempt to evade U.S. income tax on such rebates, Tyco directed companies to remit periodic rebate checks to Tyco entities domiciled outside the U.S., even the companies (that) billed and transacted with U.S. Tyco entities domiciled in the U.S.,” according to the lawsuit.
Tyco declined to comment on the suit.
In its annual report, Tyco recently disclosed that tax authorities, including the Internal Revenue Service, have raised issues and proposed tax deficiencies at Tyco.
Tyco, however, has denied a published report that it is in settlement talks with the IRS over more than $1 billion in unpaid taxes.
Though its key operations are based in the United States, Tyco is domiciled in Bermuda. The tax haven gives the maker of everything from diapers to fire sprinklers an effective tax rate well below that of U.S.-based diversified manufacturers.
Tyco shares fell more than 70 percent last year when former senior executives were charged with looting the company out of $600 million through unauthorized compensation and fraudulent stock sales. Persistent accounting worries also weighed heavily on the stock.
A forensic accounting investigation overseen by attorney David Boies cleared Tyco of fraud late last year, but conceded numerous accounting errors and a pattern of aggressive accounting moves designed to inflate results took place under former Tyco chairman Dennis Kozlowski.
Meanwhile, Tyco’s current management team has come under fire for staying in Bermuda. The AFL-CIO recently called on Tyco Chief Executive Edward Breen to move back to the United States.
Under Kozlowski, Tyco moved offshore to Bermuda in 1997 through a reverse merger with burglar alarm firm ADT Ltd. This put all non-U.S. income out of the reach of the IRS. Tyco also has used a Luxembourg finance subsidiary, Tyco International Group (TIG), to help finance the conglomerate’s debt by borrowing billions and reloaning the money to Tyco units in the United States.
This Luxembourg affiliate has helped Tyco cut its tax liability because the interest U.S. units paid on the loans was not taxed in Luxembourg, but tax deductible stateside.
Tyco’s effective tax rate, 18.5 percent last fall, is expected to climb this year into the 20s this year as Breen’s management team employs more conservative strategies.
Tyco shares, down 14 percent this year, shed 55 cents, or 3.7 percent, at $14.63 in afternoon trade on the New York Stock Exchange.
By Tim McLaughlin, Reuters
