Each month, millions of Americans send a check to Ocwen Financial Corp., a little-known giant in the lucrative if unglamorous business of processing and servicing home mortgages.
Handling loan payments, modifying soured mortgages and foreclosing on borrowers is a profitable line of work. But Ocwen’s success has been turbocharged by its subsidiaries in an unlikely offshore tax haven: the United States Virgin Islands. It is a slice of paradise that some experts consider the nation’s one and only, officially sanctioned, full-blown offshore tax shelter.
Tax shelters are perfectly legal and certainly commonplace, but the recent merger of Burger King and Tim Hortons, the Canadian coffee and doughnut chain, has sparked public anger about U.S. companies lowering their tax bills by moving profits abroad. What’s lost in the debate, however, is that Congress—both directly and indirectly—not only tolerates but actually encourages corporations to take advantage of these arrangements. And that’s especially true if the tax haven in question is an American territory.
Ocwen, whose name is new co spelled backward, handles more loans of all stripes than any other nonbank company. It is a $10 trillion universe whose lucrative subprime corner Ocwen dominates. By snapping up hundreds of billions of dollars of rights to process mortgages that banks have dumped in recent years amid regulatory scrutiny and tighter capital requirements, Ocwen now touches more than 2.7 million loans—worth $435.1 billion, the most of any non-bank servicer.
What’s a company like this doing in the U.S. Virgin Islands? With the blessing of the U.S. Treasury and Congress, the islands offer a 90 percent reduction in U.S. corporate and personal income taxes. Much of corporate America already pays federal taxes well below the statutory 35 percent rate. But in the U.S. Virgin Islands, the average rate is just 3.37 percent.
Ocwen, which opened subsidiaries on the island of St. Croix in late 2012, will receive the tax breaks for 30 years, until 2042, potentially saving billions of dollars.
As tax havens go, the U.S. Virgin Islands is pretty much middling. Only a handful of multinationals, including Walgreen, FedEx and Avis Budget Group, report having U.S. Virgin Islands subsidiaries in their financial filings, and none of them meet the conditions to benefit from the 90 percent tax break. The territory doesn’t even crack the top dozen offshore tax havens most frequented by corporate America, according to data from Citizens for Tax Justice, a liberal think tank. (The Netherlands, Bermuda, Cayman Islands and Ireland head the list for havens with the most foreign profits booked there. Delaware, a massive onshore refuge for corporate America, offers state tax savings. Puerto Rico, a U.S. territory, offers incentives but not on the scale of those in the Virgin Islands.)
But the islands have been very good to Ocwen, the only publicly traded U.S. corporation taking advantage of its tax incentives, according to official island records. How much did Ocwen pay in U.S. corporate income taxes last year, its first full year of operation inside a 200-year-old stone building in Frederiksted, one of two towns on St. Croix? The answer for Ocwen, as for nearly all American corporations, is shrouded in mystery.
The reason: Corporations keep two sets of books—one publicly available financial statements for shareholders and the Securities and Exchange Commission (SEC); the other nonpublic tax returns filed to the Internal Revenue Service. Thanks to accounting regulations that are separate from tax computation regulations, the two books usually tell very different stories—perfectly legally.
A spokesman for Ocwen said the company paid 11.9 percent in taxes on $352.4 million in pretax profits, compared with 29.7 percent on $257.5 million in pretax profits for 2012—a hefty saving that will be much appreciated by shareholders, to whom management has a fiduciary obligation. (In its SEC filings, the company puts its 2013 savings on U.S. federal and other foreign taxes at $109.9 million, though it’s not clear how that is calculated.)
Two corporate accounting experts who scrutinized the numbers with Newsweek put the figure for Ocwen’s effective tax rate much lower.