WASHINGTON - The White House acknowledged yesterday that while President Bush was serving on the board of Harken Energy Corp. in 1989, the company created an offshore subsidiary, which could have helped it avoid paying U.S. taxes.

The revelation comes as Congress is engaged in debate over how to crack down on companies that move offices abroad to avoid corporate taxes or to skirt U.S. regulations.

What Harken did was legal and is common practice for international corporations, analysts say. And it is not clear whether Bush was involved in the decision to create the overseas subsidiary.

Still, Democrats were quick to argue that the news could further weaken the president's credibility as he responds to a series of corporate scandals that have shaken investors.

The revelation about Harken comes after other occasions on which the president acknowledged that, while he was an executive in Texas, he or his company engaged in some of the practices that lawmakers are trying to eliminate as they seek to curb corporate abuses.

Bush said yesterday, "We ought to look at people who are trying to avoid U.S. taxes as a problem."

He added, "I think American companies ought to pay taxes here and be good citizens."

Asked about Harken's subsidiary, Bush said only, "I think there was an issue over an arrangement with Bahrain, a drilling venture there, which I opposed, as you may recall, when I was a director of the company."

The White House confirmed that Harken created a subsidiary in 1989 in the Cayman Islands, which has served as a tax shelter for some U.S. companies. The subsidiary was set up to help manage a contract Harken had signed with Bahrain to drill off the coast of that Arab nation.

Lawmakers in both parties have expressed support for various proposals to limit the ability of companies to shift headquarters abroad to evade taxes.

Their chief concern is a series of cases in which corporations - including Tyco International and Fruit of the Loom - have moved their nominal headquarters to Bermuda, the Cayman Islands or other overseas locales. Though most of their employees stay in the United States, the companies can avoid U.S. taxes by reincorporating in a tax haven.

The Harken case differs somewhat, analysts say, because the company was not moving its headquarters; rather, it was opening only a subsidiary abroad. But analysts said the intent was essentially the same - to avoid U.S. taxes on foreign income or to sidestep U.S. labor or litigation rules.

Neither Harken nor Bush has been found to have done anything illegal. But Bush has been put in an awkward position as he has tried to portray himself as a forceful opponent of questionable corporate practices.

More than a decade ago, for example, he or Harken took part in some of the actions targeted by the corporate reform bill he signed into law Tuesday. While he was a director at Harken, the company was accused of overstating profits and was forced by the Securities and Exchange Commission to revise its reported profits.

Bush himself was investigated by the SEC about his sale of Harken stock in 1990, two months before Harken reported a bigger-than-expected loss and its share price tumbled. The SEC chose to take no action against Bush.

Bush also accepted loans from his own company, a step that was severely restricted in the law signed this week.

Asked about Harken's offshore subsidiary, Senate Majority Leader Tom Daschle, a South Dakota Democrat, said, "If it is true, I think it gets harder and harder to take his position on corporate accountability seriously."

"If there is any question about this Cayman matter," Daschle said, "I think that it's important for them to ensure that people know exactly what happened."

Bush's spokesman, Ari Fleischer, pointed out that the Harken subsidiary did not make any money, because the company found no oil off Bahrain.

Fleischer added, "If they had produced any oil in Bahrain and sold it in the United States, it would have, of course, been taxable in the United States."

But Jon Kyle Cartwright, an energy analyst at Raymond James, noted that it would be "extremely unusual to produce oil in Bahrain and bring it to the U.S. to sell it."

The purpose of an oil company's creation of an offshore subsidiary, Cartwright said, is to avoid U.S. taxes and U.S. regulations when the company sells to other nations.

He said it is "very common" for oil companies and other large firms to establish foreign subsidiaries, especially to compete in international markets.

Copyright © 2002, The Baltimore Sun

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