GE and the power of iterative journalism

By Felix Salmon
April 4, 2011
David Kocieniewski splashed a bombshell of a story across the front page; its current headline, online, is "GE’s Strategies Let It Avoid Taxes Altogether":

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On March 25, the NYT’s David Kocieniewski splashed a bombshell of a story across the front page; its current headline, online, is “GE’s Strategies Let It Avoid Taxes Altogether”:

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

Cue a massive scurrying sound, as dozens of journalists around the country started talking to GE, trying to work out whether or not the NYT allegations were actually correct. GE’s own PR operation was far from helpful in this regard, simultaneously claiming that GE did make “significant US federal income tax payments” while telling AFP that “GE did not pay US federal taxes last year because we did not owe any”. The @GEpublicaffairs Twitter account, in particular, became a case study in how not to communicate in the age of social media.

Now, after literally months of work, Allan Sloan and Jeff Gerth of Fortune and ProPublica have come along to adjudicate the issue. Squeezing months of work into just a couple of weeks is a neat trick, which isn’t nearly as clever as the way that GE pays single-digit income taxes despite a corporate tax rate of 35% — it just so happens that Sloan and Gerth were working on a GE taxes story anyway, so they’d already done a lot of the legwork needed to get to the bottom of the matter when the NYT story came out.

The verdict? The NYT got the truth right, but the facts wrong. GE hasn’t actually filed its tax return for 2010 yet, and when it does it will pay some unknown amount in US income taxes. This admission was dragged painfully and reluctantly out of GE’s secretive tax department by Sloan and Gerth, and was not available to Kocieniewski; probably were it not for Kocieniewski’s article, GE would never have revealed it.

What we have here, then, is a classic example of the power of iterative journalism. In the wake of a big story, further important details nearly always emerge. But in this case, the NYT was the worst possible place for those details to be published and the story to iterate: the paper was far too busy formally standing by its story and failing to engage GE’s PR spin in public. So it’s great that Sloan and Gerth — both veteran financial journalists who aren’t daunted by obscure 3,000-page leasing handbooks — were perfectly positioned to pick up the story and carry it forwards.

The big picture, here, is just as scandalous as Kocieniewski made it out to be. GE can, at the margin, raise or lower its tax bill by billions of dollars at a stroke, simply by declaring overseas profits to be indefinitely invested abroad. It epitomizes the revolving door between the IRS and private industry — the head of GE’s tax department, for instance, is a former Treasury tax official. It has its very own US tax loophole — the “active finance exemption”. It uses the American Jobs Creation Act of 2004 to save hundreds of millions of dollars in taxes every year by moving jobs to Ireland. And so on and so forth.

So let’s see more cases like this one, where one big publication picks up another outlet’s ball and runs with it. Historically, media outlets have chased exclusives at the cost of enlightenment. If they can all pull in the same direction, as here, the results can be fantastic.

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Comments
10 comments so far

Re: GE’s supposedly not paying income tax..
Consider this;
According to online data, GE has roughly 287,000 employees worldwide. Assuming a modest average salary of $40,000 US per year, and a modest income tax rate of 25% on gross income, that works out to $2.87 billion US that GE’s economic activity directly contributes to Government income tax coffers each year. Roughly 3 billion USD each year, OK? Then, assume that each of those employees also pays (maybe) some property tax, and (possibly), some sort of VAT or GST, or sales tax on purchases. Probably that works out to at least another big slug of funds – somewhere between 1 and 3 billion USD also. Then, consider associated *multipliers*, (what the economists call them), that result from 287,000 folks having paying jobs making actual stuff.
“Corporate Income Tax” is a laughably stupid concept. I predict that, in the future, national governments will probably start **paying** companies to locate in their silly little nation-states. Oh, wait! Looks like the little governments are already doing that, aren’t they?
You mainstream-media people are really missing it.
- Rus.

Posted by rusfuture | Report as abusive

I don’t know why it’s scandalous. Every company plays the tax-regime-arbitrage game using transfer pricing and other common tricks. There’s really no way to stop it in a multi-national corporation. It’s really an argument for a low corporate tax rate with few-to-no special exemptions or deductions.

Posted by right | Report as abusive

“GE can, at the margin, raise or lower its tax bill by billions of dollars at a stroke, simply by declaring overseas profits to be indefinitely invested abroad”

One of the things that makes this topic give off more heat than light is the confusion of GAAP and tax numbers and concepts. You’re doing the same thing here: the attestation that profits are indefinitely invested abroad is a GAAP concept, and has nothing to do w/ the tax liability. If the profits are repatriated by a foreign subsidiary, they’re taxed by the US when received by the US. For GAAP, how do we reflect that possible future liability? Well, we have this “indefinitely invested abroad” concept. If the company thinks it won’t dividend the earnings back to the US corp, then that profit won’t be taxed and we don’t have to record a tax liability for the tax that would be due on it if it were repatriated.

Posted by jpe12 | Report as abusive

I’ll also note that I don’t really see why the active financing exception is seen as a “loophole.” Take companies X and Y, where X is a manufacturing company and Y is a bank. Both open foreign subsidiaries in country C and begin operations. W/o the active financing exception (which is really an exception to an exception, but I’ll spare everyone the gory details of that), X is able to defer tax on its income but Y has to pay US tax on all its foreign source income. The effect of the AF exception, then, is that banks and finance corps aren’t singled out for special treatment. It guarantees that all companies w/ foreign source income, regardless of sector, are treated equally.

There may be good policy reasons that they shouldn’t be treated equally w/ other sorts of companies, but regardless the AF exception isn’t a special loophole; it just puts banks etal on the same footing as other companies.

Posted by jpe12 | Report as abusive

The real scandal here is the financial illiteracy of many business journalists like Felix. “The NYT got the truth right, but the facts wrong.” – - No, they were dead wrong and showed, like you, that they have no inkling what the difference, or that a difference even exists, between GAAP and tax accounting.

Posted by TinyOne | Report as abusive

This is only news to the journalists, and hardly a “bombshell”. If someone would just read the GE financials, say for the past 15 yrs, they would see that the GE American operations hardly paid any income taxes. It’s perfectly legal, and very effective and aggressive tax planning.

The real story should be about the US tax codes, not GE. Do your job, journalists.

Posted by dealjunkie | Report as abusive

It’s true that the real scandal is what has happened to the US tax code since Reagan’s reform in 1986. However, GE crying that it is at a tax disadvantage with major multinationals based in other countries is really crocodile tears, as Felix points out.

I’ve read Alan Sloan for many years with pleasure, but was very disappointed in this one. He really did nothing more than state the obvious, which I found a rather amazing result given his months of investigation. Unlike Felix, I really don’t believe that his report added substantially to the discussion.

Posted by Curmudgeon | Report as abusive

Felix,

In your mind what tax rate (if any) should a U.S. headquartered multinational pay on profits that are honestly earned overseas?

Lets look at Coke instead of GE. In 2010 KO booked a tax expence of 2.4 billion on total income before tax of 14.2 billion for an effective rate of roughly 17% or half the 35% top rate. http://finance.yahoo.com/q/is?s=KO&annua l

They were able to do that because KO produces, distributes, markets and sells most of their soda-pop profits overseas. What claim does the U.S. Treasury have resulting from an Indian national buying a Coke bottled in India sold in India and enjoyed in India?

(In my mind the answer is none)

From all the links provided it looks like GE does bend over backwards to minimize their tax burden but all global companies based in the U.S. are going to “under pay” if you look at global income and U.S. taxes paid.

Posted by y2kurtus | Report as abusive

The big tragedy in all of this is that American companies are incentivized tax-wise to never reinvest their overseas profits back home, ever. As long as the profit never comes back to our shores, it is safe.

Is it any wonder that American companies have been incredible job creation machines everywhere but in America?

Posted by DanHess | Report as abusive

At least some of the comments here have provided some comic relief. Using rusfutre’s logic, I should quit making money because I will just have to pay tax on it if I stay in business. GE is not in business to do anything but make a profit. The corporation does not create jobs like doling out favors. It makes a profit on those jobs and in the process uses US resources to operate. Since far more of those 287,000 “global” jobs are outside the US than inside, we don’t get the 2.87 billion as calculated. We would be better off if GE paid corporate tax at 35% of $5 billion and let the workers spend their dollars in our economy.

This is what we get when we gave the average joe a 401k tax shelter. Everybody thinks he’s a mogul. sheesh.

Posted by LA_Crystal | Report as abusive
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