America is GE’s tax haven

By David Cay Johnston
August 23, 2011

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

Washington politicians say high corporate tax rates are driving U.S. companies to invest offshore where tax rates are lower. But that is not General Electric’s experience.

GE’s disclosures show that over the last decade it paid much lower tax rates in America than offshore, just the opposite of the Washington political mantra. Even more puzzling, the U.S. corporate giant chooses to take more of its profits in other lands despite the higher tax rates there.

Given that GE has a roughly 1,000-person tax department dedicated to paying as little as possible in taxes, what the disclosures show is that something other than tax policy is driving GE’s business decisions.

The law gives companies a great deal of latitude in deciding how to arrange where they report profits from multinational transactions. GE won’t elaborate on why it takes so much of its profit in higher tax jurisdictions offshore.

HIGHER RATES ABROAD

From 2001 through 2010, GE’s total American corporate tax burden averaged 9.4 percent of its profits in American corporate income taxes compared to its 17.9 percent foreign tax rate.

GE’s accounting for taxes, both current and deferred, shows that its American tax rate is just a bit more than half its foreign rate and only about a quarter of the statutory 35 percent rate set by Congress.

Gary Sheffer, GE’s top spokesman, insists that the average 9.4 percent rate over 10 years is misleading because GE suffered big losses in its finance unit that lowered its 2010 American taxes.

“GE’s tax rate was lower than normal in 2010,” Sheffer advised me, because “we lost billions of dollars in GE Capital, our financial arm, during the global financial crisis. Our tax rate will be higher in 2011 as GE Capital recovers.”

But that anomalous year pales compared to the long-term trends.

Break the first decade of this century in two and you can see the trend clearly.

From 2001 through 2005, GE paid almost identical tax rates on its profits, 19.3 percent in the U.S. and 19.7 percent offshore. During those five years GE reported 56.1 percent of its profits in the United States.

But for 2006 through 2010 a number of significant changes show up in the fine print of GE’s 10-K disclosures.

FALL OF 28.3 PCT

First, the share of profits taken in the U.S. fell by half to 28.3 percent. On the surface that fits the Washington political debate that high taxes are driving capital and profits offshore.

But during those same years GE’s offshore tax burden was 28 percentage points higher than its American rate. GE reported tax rates of 16.7 percent on offshore profits, compared to minus 11.5 percent on U.S. profits.

During those five years GE reported $26.6 billion in U.S. profits, but its accounting shows a negative $3 billion tax expense. Offshore the company made $67.3 billion and its taxes by the same measure came to $11.3 billion.

Of that $3 billion negative tax burden over five years, GE relied heavily on business tax credits that Sheffer described as “widely available” and included “the credit for manufacturing energy-efficient appliances in the U.S., the credit for research performed in the U.S., and the credit for energy produced from renewable sources.”

Those business credits, first disclosed in 2006, saved GE almost $2.3 billion. Even without them GE would have reported a tax burden for those five years of minus $794 million or minus 3 percent in the United States. Despite this, GE keeps taking more of its profits offshore where it pays higher taxes, suggesting tax rates are not as crucial an issue as U.S. leaders assert.

Here is another way to look at the disclosures: In 2001 GE’s American tax rate was a third higher than its foreign rate. Its American corporate income tax rate was 28.6 percent, compared to 21.1 percent on foreign profits.

STUDY IN CONTRASTS

In every year since then, GE’s domestic tax rate has been much smaller than in 2001. It reported negative tax liabilities in four of the next nine years.

Offshore, however, GE reported a positive tax rate every year, always in double digits.

Significantly, in 2010 — the year of Sheffer’s focus in response to my questions about the longer period — GE’s offshore tax rate was 22.9 percent, a higher rate than in 2001 and the second highest rate since 2001.

During the past decade GE’s state tax rate also slipped, but not by much. The rate was 3.3 percent in the first half of the decade, but just 2.7 percent in the second half.

Yet another way to look at taxes is the company’s worldwide accounting for taxes, which blends American, offshore and state burdens. Back in 2001 it was 28.3 percent of global profits. Every year since then it has been under 20 percent.  The rate was negative in 2009 and in single digits in 2008 and 2010, thanks to negative tax rates in the United States for those three years.

All these numbers show the same basic trend line — despite higher taxes offshore and much lower domestic taxes, GE keeps taking more profits offshore. That cuts against the simplistic theme of the growing bipartisan consensus in Washington that corporate tax rates must come down.

These facts all raise the question of whether our elected leaders in both parties will stop memorizing talking points and get to studying data points so we get reality-based tax policy. That means paying attention to nuance, including those business tax credits GE relies on so heavily, as well as posted tax rates.

Congress may be blind to such facts, though, because of the money GE spends to influence Washington. Last year GE spent $39.3 million lobbying Congress, roughly $73,000 for every senator and representative. That’s four times what it spent back when its American tax rates, and its share of profits taken in America, were both much higher.

3 comments

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WE DEPEND ON GE FOR SO MUCH. I HOPE MY GE STOCK DOES BETTER.

Posted by lakemusic | Report as abusive

DAVID,
YOU SHOULD ASK GE, WHY THEY ARE USING MELLON BANK LUXEMBOURG FISCAL AGENTE TO HANDLE NOTES.APPARENTLY ITALIAN LEGISLATION HAS MANY INTERPRETATIONS.

Posted by xuande | Report as abusive

Wow!

Great research!

Presumably GE pays at a higher rate and allocates more to offshore because totality of laws and regulations (effective trade barriers like VATs?) of the countries involved make amounts paid optimal or necessary for GE. The importer pays the VAT, but the importer could be a subsidiary of GE, so transfer pricing. Maybe there are offsets.

There’s got to be reasons, no doubt complicated. There are so many different kinds of taxes. And what about fees other than taxes? One man’s fee may be another man’s tax.

Also, to what extent does the public (in, say, California) make up for revenue lost in corporate income taxes not paid by corporations? Sure, that’s state, and FIT is federal, but federal funds going to states have been cut to justify lower tax rates and continuing tax loopholes. Of course, Sales Tax isn’t paid by GE, it’s paid by retail consumers (probably based on price before energy credits or rebates).

Posted by BornInUSA | Report as abusive