The views expressed in any article published in this blog are the author's own and do not necessarily reflect the views of Joseph Foster or Bob Lupoli.

Friday, April 1, 2011

GE & Taxes or GE & NO Taxes – a disgrace!

Joe: GE, Exon, and others paid no taxes and yet some corporations paid 35% & 40% some of the highest rates in the world. On the one hand, corporations have been allowed to live forever legally, they also have freedom of expression, in other words contribute money directly to political causes now – same as the public/private unions. Corporations should then pay taxes as immortal individuals or pay taxes at least the same as us mortals on income. I strongly disagree with the Jamie Dimon's comments about it being a mistake to force corp’s to pay increased taxes, since they would be passed on to consumers ( I am for low taxes but not NO TAXES!). There is likely lot’s of truth in this however the price increases that didn’t get passed on might result in the lowering of the outrageous salaries, perks, and golden parachutes business executives currently receive. By the way see GE’s response below.  –Bob

What The Top U.S. Companies Pay In Taxes
Christopher Helman, 04.01.10, 03:00 PM EDT
How can it be that you pay more to the IRS than General Electric?
HOUSTON -- As you work on your taxes this month, here's something to raise your hackles: Some of the world's biggest, most profitable corporations enjoy a far lower tax rate than you do--that is, if they pay taxes at all.
The most egregious example is General Electric ( GE - news - people ). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.
Avoiding taxes is nothing new for General Electric. In 2008 its effective tax rate was 5.3%; in 2007 it was 15%. The marginal U.S. corporate rate is 35%.
How did this happen? It's complicated. GE's tax return is the largest the IRS deals with each year--some 24,000 pages if printed out. Its annual report filed with the Securities and Exchange Commission weighs in at more than 700 pages.
Inside you'll find that GE in effect consists of two divisions: General Electric Capital and everything else. The everything else--maker of engines, power plants, TV shows and the like--would have paid a 22% tax rate if it was a standalone company.
It's GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. (posting a $6.5 billion loss in 2009), and make lots of money overseas (a $4.3 billion gain). Not only do the U.S. losses balance out the overseas gains, but GE can defer taxes on that overseas income indefinitely. The timing of big deductions for depreciation in GE Capital's equipment leasing business also provides a tax benefit, as will loan losses left over from the credit crunch.
But it's the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals "put costs in high-tax countries and profits in low-tax countries," says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. "When you add in state taxes, the U.S. has the highest tax burden among industrialized countries," says Hodge. In contrast, China's rate is just 25%; Ireland's is 12.5%.
Corporations are getting smarter, not just about doing more business in low-tax countries, but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, like patents and software.
As a result, figures tax economist Martin Sullivan, companies are keeping some $28 billion a year out of the clutches of the U.S. Treasury by engaging in so-called transfer pricing arrangements, where, say, Microsoft's ( MSFT - news - people ) overseas subsidiaries license software to its U.S. parent company in return for handsome royalties (that get taxed at those lower overseas rates).
"Corporations are paying lower amounts of their profits in taxes now than in the past," says Douglas Shackelford, who teaches tax law at the University of North Carolina at Chapel Hill. "Other countries have been lowering their rates, but not the U.S."
Mind you, not all global megacorps enjoy such low tax rates. Try to muster some pity for Big Oil. ExxonMobil ( XOM - news - people ) in its 2009 annual report to the SEC, recorded a larger income tax expense than any other U.S. company last year, some $17.6 billion, or 47% of pretax earnings. Exxon's peers Chevron ( CVX - news - people ) and ConocoPhillips ( COP - news - people ) likewise recorded similarly high effective tax rates. The oil companies are oddities among the multinationals because many of the oil-rich countries where they do business levy even higher taxes than the U.S.
Exxon tries to limit the tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda and the Cayman Islands that (legally) shelter the cash flow from operations in the likes of Angola, Azerbaijan and Abu Dhabi. Exxon has tens of billions in earnings permanently reinvested overseas. Likewise, GE has $84 billion in overseas income parked indefinitely outside the U.S.
Though Exxon's financial statement's don't show any net income tax liability owed to Uncle Sam, a company spokesman insists that once its final tax bill is figured, Exxon will owe a "substantial 2009 tax liability." How substantial? "That's not something we're required to disclose, nor do we."
Naturally the Obama administration wants to put an end to this. It has proposed doing away with tax deferrals on overseas income. If the plan passes, a U.S. company that pays a 25% tax on profits in China would have to pay an additional 10% income tax to Uncle Sam to bring it up to the 35% corporate rate. "Eliminating deferrals would put U.S. companies on an unlevel playing field," says the Tax Foundation's Hodge, "especially if competing with the likes of Germany, which only taxes companies on domestic operations."
Hewlett-Packard ( HPQ - news - people ) and others among the top 25 state in their annual reports that if Obama's tax measures pass it would mean a certain tax hike, probably amounting to billions of dollars.
Would no more tax holiday for GE really end up helping Mr. and Mrs. Taxpayer? Doubtful. "The average Joe should be in favor of lower corporate taxes," says Hodge, "because ultimately they are paying the corporate income tax. Either as workers, getting lower wages and fewer jobs, or as consumers, paying higher prices, or as retirees, getting lower dividends and earnings on their investments."
In the same vein, JPMorgan Chase ( JPM - news - people ) Chief Executive Jamie Dimon has spoken out against an Obama proposal to levy a special tax on banks to recoup bailout costs. "Using tax policy to punish people is a bad idea," said Dimon. "All businesses tend to pass costs on to customers."

GE and Taxes


Update: March 28, 2011: Our story, “More on GE and Taxes,” provides the latest update.
Recently, some news stories have suggested that GE owes no income tax or questioned why GE’s consolidated tax rate in the last few years has been lower than historical levels and lower than the U.S. statutory rate. These stories have grossly simplified the facts concerning GE’s recent tax rates. An article in today’s New York Times (“At GE on Tax Day, Billions of Reasons to Smile”) presents a particularly distorted and misleading account of GE tax payments. A few facts about GE missing from the Times story:
  • GE pays what it owes under the law and is scrupulous about its compliance with tax obligations in all jurisdictions. We are committed to acting with integrity in relation to our tax obligations. At the same time, we have a responsibility to our shareholders to reduce our tax costs as the law allows.
  • Significant losses at GE Capital during the financial crisis, largely in the United States, reduced GE’s overall tax rate below historic levels the past few years. Those losses and the subsequent reduction in taxes owed is not a “tax avoidance” strategy. Taking out GE Capital makes GE’s effective tax rate 21% over the past several years. GE’s consolidated (or overall) effective tax rate prior to the financial crisis was in the teens to more than 20%.
GE’s industrial tax rate averages well above 20% historically. In 2010, the tax rate for GE’s Industrial businesses was 17%, lower than historical levels due largely to settlements in routine tax audits that reduced our rate by almost 5 points. Excluding the benefit from audit resolutions for previously booked taxes, and restructuring and environmental charges, GE’s Industrial tax rate would have been about 23% — in line with historical averages
  • GE’s tax rate will be higher in 2011. In 2011, we expect a higher tax rate as GE Capital continues to recover, the one-time factors that reduced 2010 are not expected to repeat, and because we expect higher taxes on the sale of NBCU.
  • GE paid almost $2.7 billion in cash taxes in 2010 on a consolidated basis (almost 19% of pretax income from continuing operations).
  • GE paid significant U.S. income tax in 2010 and in total from 2006-2010. Over the past 10 years, GE has paid almost $23 billion of corporate income taxes to governments around the world, making it one of the highest payers of corporate income taxes. As disclosed in the cash flow statements of the 10-K, we paid over $14 billion of income taxes to governments around the world over the past 5 years.
  • A tax “benefit” is not a refund or a rebate. GE did not receive payment back from the government as a result of the tax benefit. The “tax benefit” reported in our financial statements was the “U.S. current tax provision on continuing operations” which is a book accounting concept and is not the same as our cash tax liability or cash tax payments. There was a benefit in our current tax provision because we didn’t end up owing taxes we had accrued in prior years. This tax benefit resulted from reversing the taxes we had accrued in prior years, but much of this benefit was offset by increases in our tax liability for future years.
  • The Times erroneously suggests GE makes use of tax “loopholes” or “innovative accounting.” Our accounting and tax positions fully comply with all applicable rules and regulations and are based on sound public policy. Virtually all major industrialized countries tax only domestic, not foreign business income. In the United States, there is a similar concept, called deferral. Deferral for active non-U.S. financial services income has been a long-standing feature of U.S. law, except for a brief period of time. Due to government budget constraints, it is now subject to periodic expiration, but it has been renewed by the Congress and U.S. Presidents with strong bipartisan support six times. GE supports this sound policy, which is aligned with international norms and is vital for U.S. competitiveness.
Here are some other facts about GE’s taxes:
  • In addition to corporate income taxes, GE pays many other taxes including payroll taxes on the wages of our employees, property taxes, sales and use and value added taxes. These so-called “indirect” taxes are accounted for as part of GE’s operating expenses but are a significant source of funding for U.S. federal, state and local and foreign governments.
  • Over the past decade, GE’s global growth has increased, as reflected in the percentage of our global revenue and income — and this results in lower taxes from operations in countries with lower tax rates than in the U.S. While GE has been, and continues to be, one of America’s leading exporters, competing globally often requires a local presence and, in many cases, local business partners.
  • GE competes against strong global companies, many of which are headquartered outside the U.S. It is essential that the U.S. tax system remains competitive, including on financial services. Reducing the rate of income tax on global operations helps GE stay competitive in non U.S. markets and global success, in turn, increases U.S. exports and jobs.
  • Since 2009, GE has announced the creation of more than 6,300 new U.S. manufacturing jobs, which will bring to nearly 50,000 the number of GE employees working to produce American-made goods the company sells around the world as part of its $17 billion-per-year in U.S. exports.

No comments:

Post a Comment