Why GE, Apple and Google Will Pay a Lower Tax Rate Than You

Includes: AAPL, BRK.A, BRK.B, GE, GM, GOOG
by: Zvi Bar
Before most of us collected all the necessary W-2s, 1099s and K-1s, the New York Times revealed that mega-conglomerate General Electric Co. (NYSE:GE), which made over $14 billion in income in 2010 ($5 billion within the U.S. alone), will pay nothing in federal income taxes. Of course, they did have to pay an army of lobbyists and accountants to help achieve this goal, each making more than the average American, and they did earn all those large carry over losses though GE Capital’s irrational exuberance.
Well, maybe we should, but also maybe GE did pay some income tax. According to GE’s income statements, GE stated that it paid income taxes totaling $1.05 billion. That would be a fairly low tax rate, at around 7.5%, but still over a billion dollars away from zero. To be fair to the New York Times, the provision could be made up of foreign and state taxes, and state taxes paid are deductible.
GE Was in the Red but is Now Black and Green
GE has responded that the difference between what it paid and the prevailing tax rate is primarily made up of GE Capital losses from big financial bets that failed. In total, GE Capital racked up about $30 billion dollars in losses during the financial crisis. To some of us, losing $30 billion dollars would be a bad thing, and we may even go bankrupt, but after receiving a bridge loan from Berkshire Hathaway (BRK-a), going forward, those losses will shield GE from a significant tax burden. Incidentally, Berkshire paid a nearly 30% tax rate on about $19 billion in income.
One must also consider GE getting-on board the President’s green job and technology push. Those green initiatives are helping out in spades, as so very much that GE Industrial makes, such as solar cells, wind turbines and GE Lighting’s new, expensive light bulbs qualify for breaks. The company expects to spend approximately $10 billion over the next 5 years on these ‘ecomagination’ products.
And it isn’t just what GE is making, but also what they are buying. GE has stated that it will buy as many as 11,000 of the General Motors (NYSE:GM) electric car, the Chevrolet Volt, in 2011 alone (roughly half the year’s anticipated production) and a total of 25,000 by 2015. Hey, someone had to buy them and it does not look like it was going to be the average American consumer.
Further, by providing GE with tax breaks for such green initiatives, the government can at least temporarily help ensure the sustainability of GM, yet another company with green deductions and substantial losses to carry forward. One must presume that GM will also refrain from paying a high rate of income tax in the coming years, should they continue to find themselves profitable.
Offshore Tax Techniques
Another reason that GE kept its tax bill low is that it is making and keeping a larger and faster growing segment of total revenue overseas. The corporate tax rates in the U.S. are higher than most other first world nations. The U.S. does not tax profit earned and kept overseas until the money is transferred into the U.S., though the sad and obvious consequence of such a rule is that corporations are reluctant to ever repatriate income.
This is why so many larger U.S. companies maintain so much cash outside the county; it is simply bad business to send it home. For example, in 2010, Apple Inc. (NASDAQ:AAPL) reported that it has over $30 billion in cash maintained overseas. Apple partially earned this money from international sales, but largely by holding various intellectual property patents within foreign holding company subsidiaries so that the cash leaves the U.S. as a tax-deductible business expense. Similarly, we also learned that Google Inc. (NASDAQ:GOOG) uses practices with names such as the DutchSandwich and DoubleIrish to funnel the company’s revenue to countries with lower tax rates. Through these techniques, GOOG was able to have a tax rate of about 20% for 2010, even without losing $30 billion in years past like GE.
This money and these tax revenues stay out of the U.S. because of common sense. Some have argued that providing an amnesty period might allow for a significant level of repatriation to occur over a short period of time, while others believe that repositioning the U.S. tax rate more in line with the global average would make these companies less inclined to DoubleIrish their income. Nonetheless, it appears that neither concept will be utilized in the near future. Watch as more and more companies reorganize subsidiaries to hold high margin segments overseas, forcing the government to look elsewhere for the tax revenue it craves.

Disclosure: I am long GE.
Additional disclosure: I purchased my GE shares in the spring of 2009.

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