POLITICS
06/17/2010 05:43 pm ET Updated May 25, 2011

Gulf Oil Spill: Rig Owner's Avoidance Of U.S. Jurisdiction Angers House Panel

The Deepwater Horizon oil-drilling rig was registered in the Marshall Islands and its owners paid taxes in Switzerland -- but when the rig blew up and sank to the bottom of the Gulf of Mexico, who came to the rescue? And who is suffering the economic and environmental damages caused by the ongoing spill?

Those were among the combative question raised by members of a House committee on Thursday at a hearing about foreign-flagged vessels operating in the Gulf.

Mississippi Democratic Rep. Gene Taylor was particularly irritated. "I'm just curious, how long did it take the Marshall Islands Coast Guard to show up when that rig caught on fire?" he asked rhetorically.

Pointing out that the rig was built in Korea, he asked: "And how long did it take the Korean Coast Guard to show up?"

Transocean, the company that owned the rig, was officially headquartered in Switzerland in order to avoid U.S. taxes. "I guess the Swiss Coast Guard showed up when this vessel exploded?" Taylor asked.

The burden, Taylor said, of course fell to the United States, "the country that didn't get to build the rig, that did not inspect the rig, that did not get the taxes for the rig."

Rep. James Oberstar (D-Minn.), chairman of the House transportation committee, said things need to change. "My view after this tragedy is that we need to Americanize the vessels operating in the US economic zone," he said. He noted appreciatively that some Republican colleagues feel the same way.

Indeed, Rep. John Mica (R-Fla.) had just concluded: "I think most of us would like to see every ship that operates" in the Gulf "is American flagged, American staffed and American built."

Coast Guard Adm. Kevin Cook defended the prevalence of foreign-flagged vessels off American shores, saying that international inspection standards are now comparable with U.S. standards -- and that the Coast Guard does a quick double-check of vessels (including drilling rigs) that have already been inspected under the auspices of foreign countries.

But David Hilzenrath of the Washington Post recently reported that the Marshall Islands allows the owners of vessels flying its flag to pick their inspectors from among the private organizations that perform such services. The owners also pay those organizations for those services. Hilzenrath noted with understatement:

Allowing companies to choose their own watchdogs is hardly unique to the oil business. The same approach applies when corporations hire accounting firms to audit their financial statements and when bond issuers pay ratings agencies such as Moody's and Standard & Poor's to grade their bonds. Those arrangements have been criticized as potentially contributing to accounting frauds and the subprime mortgage crisis.

Rep. Taylor was considerably more blunt, contentiously asking the Coast Guard admiral: "I'm just curious, given the amount of corruption around the world... what guarantee do you have that they actually performed those safety inspections before the Coast Guard signed off on them?"

Meanwhile, Martin Sullivan, contributing editor of Tax Analysts, has calculated just how much money Transocean saved by avoiding U.S. taxes. The grand total since 2002: $1.88 billion.

Sullivan writes that Transocean is in reality headquartered in the Houston area "but moved their legal domiciles first to the Cayman Islands and then to Switzerland to avoid U.S. tax."

Sullivan writes:

In December 2008 Transocean changed the place of incorporation of its parent holding company from the Cayman Islands to Switzerland. In a proxy statement mailed to shareholders the day after the 2008 presidential election, the company explained that it believed the move would ''substantially lower our tax risk related to possible tax legislation changes.'' As reported by the Houston Business Journal (July 24, 2009), the move from island tax havens to Switzerland by Transocean and other Houston-area corporations was a reaction to a possible crackdown on offshore avoidance by the incoming Obama administration."

Sullivan outlines two ways Obama could roll back the tax breaks to Transocean and other oil service companies. And he concludes that "eliminating future tax benefits for expatriate corporations in the oil industry would be consistent with the president's goals of tilting tax benefits away from fossil fuels and of raising revenue by suppressing aggressive tax avoidance by U.S. multinationals using shell companies in tax havens."